• Christopher Hall

Monthly summary January 2019


Welcome to the markets of 2019.

Economy and Indices

Markets are down slightly over the last month - 1%.

Leading industry groups

  1. Utilities +4.8%

  2. Metals and Mining + 3.2%

  3. Health Care +2.5%

This group is an interesting mix of defensives (Utilities and Health Care), being companies whose income is less dependent on market cycles; the opposite being mining shares whose market prices are cyclical.

On further inspection, we see that the leading and dominant mining companies this month have been gold miners, driven by two factors:

  1. AUD is down against the USD ~$0.02

  2. Gold is up substantially this month ~8%

What’s even more interesting is that over the last year, Gold is up +10% and the AUD is down -9.2%, showing that while the share market didn’t move too much over the last month, these two markets did.

Bottom industry groups

  1. Telcomms -5.3%

  2. Consumer Discretionary (Retail) -3%

Industry Sectors

After a significant drop in the market, like has happened since September 2018, it pays to look at the companies that have performed since then and not at the standard rolling 12 months.

The reason for focussing on performance ‘after’ is because clearly what was ‘before’ has been corrected, or put another way, proven not to be ‘right’.

Leaders

It's not surprising that we see Metals and Mining performing the best +4%. Again from the falling USD (more bang for the same mining efforts in AUD) and the strength of gold prices this month.

Second place goes to Utilities losing -2% in the market rot since September 2018. Since Utilities are a defensive play and less likely to be impacted by the market cycles, this is also of little surprise.

Third Place goes to Property – 5.5% since September. As noted last month a lot of this strength is off the back of three main factors:

  • Some take-over bids

  • Being defensively placed (less volatile assets and steady income streams)

  • Some reporting +10-15% rental increases in a ‘low growth’ environment

Laggards

Retail companies make up a large portion of the Consumer Discretionary segment, down -11.1% since September 2018. Looking into some retailers’ financials there was steady growth in August and September of ~2%, then October was down -16% for what seemed to be little reason. Couple that with market rot, economic concerns and other headlines you want to throw into the mix, Australian Retailers have been hit hard.

An interesting note is that this seems to be a more significant hit than the ‘Amazon is here’ scare from 12 months ago. Amazon has little impact on most Australian retailers, but the economic sentiment has had a real impact. Important to note here, there was no change to the RBA’s interest rates and no real changes to unemployment, being the two main external factors we expect to influence Retail companies.

Energy is down -14% since September which is reasonably strong considering the oil price in AUD has fallen -38% since the start of October 2018. On a similar time frame, Energy is down -22%, still comparably stronger.

Telecommunications

Down -15%.

For a change, not all of this can be blamed on Telstra (TLS), as TLS is down only -7.3% compared to the overall market down -8.6%. This means the rest of the Telecommunications sector has performed poorly:

  • REA Group (REA) -17.2%

  • TPG (TPM) -24%

  • Carsales.com (CAR) -29%

Energy

Energy companies have been strong performers for almost two years off the back of rising oil prices – although the gains since March this year have all been given up now since the fall from September.

Health Care (CSL, COH etc) have performed well this calendar year, however since the market topped in early September, Health Cares have fallen the most – quickly followed by:

  • Consumer Discretionary

  • Energy

  • Industrials

Both Health Care and Industrials had some of the high-flying companies or Market Darlings. These companies were running hot before September, trading at what is traditionally deemed ‘expensive’ - through a calculation of their annual earnings compared to the company’s total worth (price to earnings ratio or ‘PE’).

To justify the high PE, or high share price, many investors had priced these companies to perfection. Meaning their expectations were nothing short of perfection and if the companies (and global economies, interest rates etc.) didn’t keep reporting perfect growth numbers, the share prices would tumble – which they have - in a way, the bigger they are, the harder they fall, and such was the case for many top performers in October.

Segments (large, mid, small etc):

Following the textbook pattern, the smallest companies have been hit the hardest, and the largest hit the least – the Telco breakdown above is a perfect example.

Since September highs:

  1. The group of the smallest companies (Emerging Companies) have fallen the most: -25.4%

  2. Mid-caps (holding a bunch of mining, Energy, mining services and Industrial companies have fallen -14%

  3. The overall Market (ASX Top 200) is down -9.6%

  4. Whereas the Top 20, the Bluechips, are down around -6.2%

We would not expect to see much deviation from this pattern until the new driving economic forces, market leaders and thematics, are established enough to identify apart from the overall market gyrations – or what many just call a ‘Bear Market’.

Summary

2018 was full of expensive shares.

Those of you who have been clients for a few years will know that we were scant on investment opportunities within the share market, citing expensive prices and more justifiable investments elsewhere being Alternatives, Fixed Interest and other asset classes where possible.

If we have entered a ‘Bear Market’, then the last 120 years of statistics indicate we’re expecting to have another nine months of more volatile market gyrations, maybe more, maybe less.

For the avoidance of doubt we should note that the sky is not falling. We’re not running around in panic. If you poll your neighbours, you’ll be hard pressed to find anyone digging up their lawn to grow potatoes or a veggie patch.

Markets rise and fall with the emotions of the investors who participate in them. Although the underlying tone of our human nature is to strive for better, to pursue a greater existence, we’re not going back to the Stone Age and I don’t know anyone who wants to. Furthermore, history tells us that the generations that preceded us thought the same. In other words, in the long-run markets go up.

Putting that philosophical approach aside, just as you replaced your VHS with DVDs and your smart-phone replaced the physical button flip-phone, 2018’s market leaders will be replaced with 2019’s market leaders. That is where we will focus our attention and that is where the investment opportunities lie ahead.

I’m looking forward to the year ahead and making the most of all the themes behind the new market leaders.


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