• Christopher Hall

Equities Desk - Monthly Summary - July 2019


Economy and Indices

The ASX (Top 200) shares are near their all-time highs – levels not seen since before the GFC some 11 to 12 years ago.

The driving forces then were strong Chinese growth rates, roaring commodities prices with the upwards trajectory set by the low interest rates in the US in the aftermath of the market crash or 2000, the ‘Tech Wreck’, and the US war efforts post September 11. Those years of low-interest rates lead to the prosperous markets that we know ended in the GFC.

Today the markets are still fuelled, by now even lower, interest rates and investor’s competition for growth and returns at any cost. This pursuit of growth and returns has seen the prices of investments with strong dividend yields or growth prospects chased up to very high prices. This is what analysts call ‘PE expansion’ – where the price of shares goes up beyond levels that can be justified by the company’s earnings (or profit) growth.

The markets’ expectations of interest rate movements have now brought forward another interest rate cut from the Reserve Bank of Australia (RBA). What was previously expected to be September has now moved earlier to a drop in August this year. Plus another interest rate cut down to 0.75% by Christmas.

These unprecedented low interest rates potentially push the PE expansion further – which is the main driving of pushing share prices higher still. Albeit at unjustifiable levels on most valuations basis.

Hear more on this topic in this podcast with Rudi from FNArena.

The most interesting insight this month:

The ASX 200 has been more polarised by large winners and large losers that I’ve ever witnessed before.

As the Australian share market sits near all-time highs it has partially been powered by ‘tax-loss selling’ running towards the end of financial year. July marks the start of the financial year, it also marks the end of tax-loss selling.

Tax-loss selling is where an investor sells and asset that are trading at a loss. This sale creates a capital loss that can off-set a capital gain realised on other investments.

For example an investor might have bought Afterpay Touch (APY) and sold the shares for a large gain this financial year. At the same time, their AMP shares have created a loss. By selling the AMP (AMP) shares before 30 June, the losses on AMP can reduce the income-tax payable on the profits from APY.

The majority of the ASX 200 was either up more than 10% or down more than 10% this year. This is surprising for a year when the ASX 200 index (XJO) is up only 7.13% for the financial year. The very broad range of returns for most of the market emphasises the significant difference between aspects of the market, the ‘right’ shares and the ‘wrong’ shares.

With interest rates lower and the chances of the PE expansions having an even greater impact on markets in the year ahead highlights the increased risk of even broader ranges of returns for the next 12 months.

See Gary Glover’s table separating the winners and losing companies this financial year in this interview.

Leading Sectors This Month

  1. Metals and Mining +5.6%

  2. Communications (Telcos) +5.4%

  3. Health Care + 3.9%

Lagging Sectors this month

  1. Information Technology -4.6%

  2. Energy -4.2%

  3. Consumer Staples (Grocers) -3.5%

The leaders and laggards are very similar to last months’ leaders and laggards – partly influenced by Tax-loss selling described above.

Segments this Month

In a complete reversal from last month’s rankings, but continuing the pattern we noted in the last few days of last month was the largest companies leading and the smallest lagging.

For a month where the market is up +2.4% the range was significant with:

  • Blue chips (Top 20) were up +3.6%,

  • Emerging Companies (smallest group) up +1%

  • Small caps were hte worst down – 0.3%

For the FY19:

Blue Chips + 9.12%

Mid caps flat for the year

Small caps down 0.45%

Emerging Companies -4.8%

The story of the small and mid caps is significantly different from the annuals figures above. As noted in the most interesting observation this month above, there has been an abnormally broad ranges of large gains and losses within the Australian Market.

Market Trends and Leaders

Last month’s pattern continues as defensives such as Property companies (REITs), gold miners and utilities/ bond proxies have been the best performers over the last few weeks.

Other leading groups are software companies and those with international exposure, or earning in foreign currencies that benefits from the falling Australian dollar.

Podcasts:

We regularly interview industry exports on numerous topics available in the Podcast playlist here.

  1. Anywhere but Cash – the driving force behind the market with Rudi Filapek-Vandyck

  2. The great divide – looking at the winners and losers on the ASX this financial year with Gary Glover

  3. How and why the Australian market has been outperforming global markets with Rudi Filapek-Vandyck

  4. Global Value Fund (GVF)’s Miles Staude and Emma Davidson update on markets and an insight into why Listed Investment Companies have been left behind in this market rally.


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