Category: Stock Markets

Analysis of major stock markets around the world.

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7 golden rules for SMSF investors

I found myself nodding in agreement when I read this list from Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital. I have added my comments in italics.

Investing during times of market stress and volatility can be difficult. For this reason it’s useful for SMSF investors to keep a key set of things – call them rules – in mind.

1. Be aware that there is always a cycle
The historical experience of investment markets – be they bonds, shares, property or infrastructure – constantly reminds us they go through cyclical phases of good times and bad. Some are short term, such as occasional corrections. Some are medium term, such as those that relate to the three to five year business cycle. Some are longer, such as the secular swings seen over 10 to 20 year periods in shares. But all eventually contain the seeds of their own reversal. The trouble with cycles is that they can throw investors out of a well thought out investment strategy that aims to take advantage of long term returns and can cause problems for investors when they are in or close to retirement. In saying this, cycles can also create opportunities.

Most important is to identify the long-term, secular trends that may last several decades and position your portfolio to take advantage of this. Examples of secular trends are the ageing population in developed countries; the rapidly expanding middle-class in India and China; and global warming. Sectors that may benefit from them are Health Care and Consumables.

2. Invest for the long term
The best way for most investors to avoid losing at investments is to invest for the long term. Get a long term plan that suits your level of wealth, age and tolerance of volatility and stick to it. This may involve a high exposure to shares and property when you are young or have plenty of funds to invest when you are in retirement and still have your day to day needs covered. Alternatively if you can’t afford to take a long term approach or can’t tolerate short term volatility then it is worth considering investing in funds that use strategies like dynamic asset allocation to target a particular goal – be that in relation to a return level or cash flow. Such approaches are also worth considering if you want to try and take advantage of the opportunities that volatility in investment markets through up.

Invest for the LONG term, otherwise invest in low-risk assets (cash and near cash) and not clever strategies.

3. Turn down the noise and focus on the right asset mix
The combination of too much information has turned investing into a daily soap opera – as we go from worrying about one thing after another. Once you have worked out a strategy that is right for you, it’s important to turn down the noise on the information flow surrounding investment markets. This also involves keeping your investment strategy relatively simple – lots of time can be wasted on fretting over individual shares or managed funds – which is just a distraction from making sure you have the right asset mix as it’s your asset allocation that will mainly drive the return you will get.

True.

4. Buy low, sell high
One reality of investing is that the price you pay for an investment or asset matters a lot in terms of the return you will get. It stands to reason that the cheaper you buy an asset the higher its prospective return will be and vice versa, all other things being equal. If you do have to trade or move your investments around then remember to buy when markets are down and sell when they are up.

Very important but this requires loads of patience, waiting for the right time to invest in the market.

5. Beware the crowd and a herd mentality
The issue with crowds is that eventually everyone who wants to buy will do so and then the only way is down (and vice versa during periods of panic). As Warren Buffet once said the key is to “be fearful when others are greedy and greedy when others are fearful”.

This is simply a repeat of Buy Low Sell High.

6. Diversify
This is a no brainer. Don’t put all your eggs in one basket as the old saying goes. Unfortunately, plenty do. Through last decade many questioned the value of holding global shares in their investment portfolios as Australian shares were doing so well. Interestingly, for the last five or so years global shares have been far better performers and have proven their worth.It appears that common approaches in SMSF funds are to have one or two high-yielding and popular shares and a term deposit. This could potentially leave an investor very exposed to either a very low return oif something goes wrong in the high -yield share that they’re invested in. By the same token, don’t over diversify with multiple – say greater than 30 – shares and/or managed funds as this may just add complexity without any real benefit.

Diversify into asset classes, geographic areas and strategies that have low correlation but don’t diversify into asset classes that offer negative real returns (after tax and inflation) or high risk relative to low returns.

7. Focus on investments offering sustainable cash flow
This is very important. There’s been lots of investments over the decades that have been sold on false promises of high returns or low risk (for example, many technological stocks in the 1990s, resources stocks periodically and the sub-prime asset-back securities of last decade). If it looks dodgy, hard to understand or has to be based on obscure valuation measures to stack up, then it’s best to stay away. There is no such thing as a free lunch in investing – if an investment looks too good to be true in terms of the return and risk on offer, then it probably is. By contrast, assets that generate sustainable cash flows (profits, rents, interest payments) and don’t rely on excessive gearing or financial engineering are more likely to deliver.

Most important. Invest in businesses with strong brands, patents or other competitive advantages that give them the ability to generate stable earnings over the long-term. Invest in stocks that you are likely to never sell but leave to the kids in your will. Occasionally you may sell one that falters but this should not affect long-term performance if you are well diversified.

Final thoughts

Investing is not easy and given the psychological traps that we are all susceptible to – in particular the tendency to over-react to the current state of investment markets – a good approach is to simply seek the advice of a coach such as a financial adviser.

Short-termism is the biggest danger to your investment portfolio. Too often I see investors do the exact opposite of what they should: buy high, when everyone else is buying, and sell low when everyone is a seller. Your best approach is to regularly consult an investment specialist.

Source: SMSF Suite – 7 golden rules for SMSF investors to keep in mind

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JP Morgan earnings dip but stock rallies

First of the financial heavyweights to report first-quarter (Q1) earnings this week, JP Morgan (JPM) reported a 7 percent fall in earnings per share ($1.36) compared to the first quarter of last year ($1.46). The fall was largely attributable to a 90 percent increase in provision for credit losses for the quarter, to $1.8 billion, primarily from a sharp increase in net charge-offs in the Consumer division but also exposure to Oil & Gas and Metals & Mining in Investment Banking.

Tier 1 Capital (CET1) improved to 11.8% (Q1 2015: 10.7%) of risk-weighted assets, while Leverage (SLR) improved to 6.6% (Q1 2015: 5.7%).

The dividend was held at 44 cents (Q1 2015: 40 cents), increasing the payout ratio to a modest 32% from 27% in Q1 2015.

The monthly chart shows long-term Momentum is slowing, with JPM forming a broad top above $54. Declining peaks since August 2015 warn of a primary down-trend and breach of $54 would confirm, offering a target of $40*.

JP Morgan Chase

* Target calculation: 55 – ( 70 – 55 ) = 40

The market responded well to ‘positive’ news that JPM beat its earnings estimate, boosting the stock by 4.6%. This is a game we will see a lot more of this year: give really low guidance if you expect a bad quarter. When the result comes out, the gullible will focus on the fact that you beat your estimate rather than that your earnings are falling. This chart from Zero Hedge shows the rising percentage of companies guiding next quarter earnings below consensus:
Earnings Guidance

Don’t be mis-led by the latest ‘froth’. The reality for the banking sector is net interest margins are near record lows and credit losses are rising.

Major US Banks Net Interest Margins

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RBA leaves official cash rate at 2pc

Jens Meyer quotes RBA governor Glenn Stevens:

While the decision to keep rates unchanged was widely expected, analysts were speculating that the governor would show some concern about the recent steep rise in the Australian dollar’s exchange rate, which gained nearly 12 per cent from its January lows to a peak of US77.23¢ last week.

Mr Stevens duly added a paragraph to this month’s statement, noting that the currency had appreciated “somewhat”.

“In part, this [the recent rise] reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role,” he said, referring to recent monetary easing by other central banks including the Bank of Japan and the European Central Bank, as well as the decision by the US Federal Reserve to reduce the pace of interest rate hikes.

“Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy,” he added.

But anyone hoping for a stronger “jawbone” was disappointed and the Australian dollar shot up by about half a cent to the day’s high of US76.32¢, before falling back in late trade to around US76¢.

Central banks around the globe are destabilizing financial markets and the RBA responds with a polite acknowledgement at the end of its statement. Someone please tell the governor: If you want to run with the big dogs, you’ve got to learn to pee high.

Source: RBA leaves official cash rate at 2pc

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Where oil goes, stocks will follow

Where oil goes, stocks will follow. Crude oil prices are the canary in the coalmine at present. June 2016 Light Crude futures retreated from resistance at $43/barrel. Breach of medium-term support at $38 warns of another test of primary support at $32/barrel. Failure of support at $32 would offer a target of $22/barrel*, while respect of support would suggest that a bottom is forming.

June 2016 Light Crude Futures

* Target calculation: 32 – ( 42 – 32 ) = 22

The ASX started Monday with an early rally but ran into a spate of selling before the close. ASX 200 follow-through below 5000 would warn of a test of primary support at 4750. Declining 21-day Twiggs Money Flow, below zero, indicates medium-term selling pressure. Failure of primary support would reaffirm the long-term target of 4000*.

ASX 200

* Target calculation: 5000 – ( 6000 – 5000 ) = 4000

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Australia’s banks are ‘too big to get sick’: APRA

Sally Rose at The Age quotes APRA’s executive general manager of supervision and support, Charles Littrell:

“Australia has taken a big national bet on the rise of Asia, in particular on the rise of China, from a developing country to developed status,” Mr Littrell said.

He described APRA’s stance of forcing the banks to hold higher levels of equity than they might like as an “insurance policy” against that bet.

“Most of Australia does business on the basis that China is going to continue to rise relatively smoothly and that the Communist government can manage macroeconomic policy. At APRA we are not so convinced,” he told an Australian Centre for Financial Studies event in Melbourne on Friday.

“Australia’s economy has done absolutely brilliantly well for a really long time, but it is brittle: this could all go away quite rapidly. Our aspiration for the major banks is that they are not accelerants in that situation, but shock absorbers.”

Too big to get sick
The financial system inquiry chaired by David Murray said Australia’s banks should be “unquestionably strong” compared to global banks because of Australia’s reliance on international funding for its growth; APRA has said strength will be determined on a range of measures. Mr Littrell said there is plenty of focus internationally on banks that are “too big to fail”, but the relative importance to the economy of the Australian banks means they are “almost too big to get sick”.

Australian banks face three problems:

  1. Huge exposure to residential mortgages in a toppy market;
  2. Low capital reserves against those assets compared to international competitors; and
  3. Reliance on volatile wholesale funding in international markets which, like the proverbial umbrella, international lenders will want to take back when it rains.

Source: Australia’s banks are ‘too big to get sick’: APRA

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Megalogenis: Australian Panic! | MacroBusiness

From Unconventional Economist at Macrobusiness:

…..George is back, this time with The Australian Panic in a new Quarterly Essay:

The Australian Panic

In this urgent essay, George Megalogenis argues that Australia risks becoming globalisation’s next and most unnecessary victim. The next shock, whenever it comes, will find us with our economic guard down, and a political system that has shredded its authority. Megalogenis outlines the challenge for Malcolm Turnbull and his government. Our tax system is unfair and we have failed to invest in infrastructure and education. Both sides of politics are clinging defensively to an old model because it tells them a reassuring story of Australian success. But that model has been exhausted by capitalism’s extended crisis and the end of the mining boom. Trusting to the market has left us with gridlocked cities, growing inequality and a corporate sector that feels no obligation to pay tax. It is time to redraw the line between market and state.

Balancing Act is a passionate look at the politics of change and renewal, and a bold call for active government. It took World War II to provide the energy and focus for the reconstruction that laid the foundation for modern Australia. Will it take another crisis to prompt a new reconstruction?

I think George has it right this time.

Source: Megalogenis: From Australian Moment to Australian Panic! – MacroBusiness

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TPG boost

TPM

TPM is in a healthy up-trend, having recently announced a 90 percent increase in earnings for the 6 months ended 31 January 2016 compared to the same period in the previous year. But momentum has been falling since 2014, illustrated by bearish divergence on the chart above.

This excerpt from David Ramli gives a clue:

….speaking to Fairfax Media, Mr Teoh [executive chairman] acknowledged there were challenges ahead as the NBN rolls out across Australia. The NBN is set to replace Telstra’s copper network as the foundation of Australia’s fixed-line phone and internet connections. It will also slash the profit margins of telecommunications that have installed their own equipment in Telstra’s telephone exchanges because the NBN’s wholesale prices will be more expensive.

“There’s no doubt the profit is coming down but the growth is there,” he said. “In business there’s always challenges but we have to find a way to balance the impact of the NBN.”It’s an industry problem so we’re trying to balance our profits and losses and if you look at our numbers we’re still growing.”

In response Mr Teoh said he was looking to lift the sales of products that used TPG’s own infrastructure to cut down on costs. He added that TPG was speeding up the construction of its fibre-to-the-basement network, which actively competes against the NBN.

Forward dividend yield of 1.5% and PE of 26 both imply double-digit growth in earnings. This will depend on the effectiveness of TPG’s strategies to counter the NBN roll-out.

Source: TPG boosts profits 90pc

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Has the Fed short-circuited yuan falls? | MacroBusiness

Macrobusiness

Again from David Llewellyn-Smith at Macrobusiness

….we believe the dovish stance adopted by the Fed in the latest FOMC, and thereby a weak dollar, could help lower the depreciation pressure on the RMB and China’s capital outflows. This is a positive development of international policy coordination since the recent G20 meeting in Shanghai. Two scenarios are possible:

A positive one: Weak dollar -> stable RMB -> lower capital outflows from EM – > higher risk appetite globally -> weaker dollar. It’s a positive feedback loop, but it requires policy coordination between China and the US. China needs to be clear about no major devaluation, while the US needs to mind the strength of the dollar as the result of its policy moves.

And a negative one: Strong dollar -> weaker RMB -> higher capital outflows from EM -> lower risk appetite globally -> stronger dollar. It’s a negative feedback loop. In the end, it could force the Fed to postpone rate hikes, as rising market volatility and a strong dollar could hurt the recovery in the US.

This is going to require careful management on a global scale (China and US working together) to avoid a complete rout of capital markets.

Source: Has the Fed short-circuited yuan falls? – MacroBusiness

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China’s Looming Currency Crisis

The Yuan strengthened against the Dollar, breaking support at 6.50 (USDCNY) as Chinese authorities attempt to squeeze short-sellers. But the primary trend is unchanged and warns of further weakness.

USDCNY

From Anne Stevenson-Yang and Kevin Dougherty at WSJ:

After initial declines in the Chinese market to start the year, the past few weeks have seen signs of what some would call a rebound. Lending in China rose by 67% in January, iron-ore prices initially rallied by 64% and housing sales in the top four markets surged…..

Chinese authorities have been trying to bring back the old, quasisuperstitious belief in Beijing’s omnipotence. But the political desperation behind these efforts betrays a different story: that an impending currency crisis is a signal of the dream’s undoing. That’s why in China getting money out of the country is now the major preoccupation of both families and corporations.

One way to stem the crisis would be through depreciation. That would be sound policy for the people of China, but it’s a dreaded last resort for a leadership that wants, more than jobs for its people, to bolster buying power and save political face overseas. Yet history shows that holding the line on the currency is a losing strategy. Tightened liquidity causes more pain to the economy and simply delays the inevitable.

In other countries, currency crises usually followed a sudden and irreversible loss of confidence. The Asian Tigers were booming and then fell apart rapidly. Same in Russia. China faces the added difficulty of having little institutional memory and few tools to manage the economy in a time of capital scarcity. And there is no sign that capital-outflow pressure will ease.

From David Llewellyn-Smith at Macrobusiness:

The macro logic here is impeccable and Ms Ms. Stevenson-Yang knows China better than most. I actually think that Chinese officials already understand this and the current back and forth on yuan policy is them searching for a way to do it in a manageable glide slope rather than crash.

I agree that China faces a currency crisis. I lived through one in South Africa in the 1980s and recognize the signs: purchase of offshore homes, local companies bidding for offshore acquisitions, over-invoicing, local residents using ingenious methods to avoid capital controls…..

This graph of the US Dollar/South African Rand exchange rate from Wikipedia covers the early alarm in the 1980s, when the Rand fell from parity against the greenback, through to the current “Zuma-gate” when the Rand hit 15 to the Dollar in late 2015:

USDZAR 1995 to 2015

Capital controls are too late. The horse has bolted. Trying to prevent Chinese residents from moving their capital to a safer climate is as effective as herding cats. The only way depreciation can work is “shock and awe”: a massive once-off devaluation of the Yuan. Gradual weakening of the currency will simply reinforce the panic.

I shudder to think of the effects a dramatic fall in the Yuan would have on global capital markets. Chinese companies would be forced to default of USD-denominated debt. Trading partners, including the US and Europe, would be forced to respond with competing devaluations to avoid the contagion. I think (and hope) that Chinese officials have been persuaded that this is not an option.

….Which leaves capital controls, and eating through China’s $3 trillion plus of foreign reserves to support the Yuan, as the least-worst option. Or is that simply kicking the can down the road?

Source: China’s Looming Currency Crisis – WSJ

Hat tip to David Llewellyn-Smith at Macrobusiness.

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