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What we learned this week 1 Oct 14

30 September 2014  |  News

learn1. Australian bonds poor performers

Australian bonds are the worst performers in the world this month, reeling from a double whammy of a plunging currency and falling US Treasury prices.

Government debt due in 10 years and longer tumbled 7.5 per cent in US dollar terms through Sept. 23, the biggest loss of 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The figure accounts for a more than 5 per cent decline in the local currency against the dollar and the slide in bond prices. Treasuries of similar maturity dropped 2.5 per cent.

Reserve Bank of Australia governor Glenn Stevens has sought a weaker currency for more than a year to spur economic growth, and now the international investors who hold 68 per cent of the nation’s debt are suffering the consequences. Slowing expansion in China, the biggest buyer of Australia’s exports, may drive further Aussie losses, Samsung Asset Management Co said. The greenback’s rally has cancelled out losses for overseas buyers of US debt.

2. Strong activity is being predicted in market for building houses

Brickworks managing director Lindsay Partridge said the company is heading toward the best market conditions it has faced in more than a decade as the building products group reported a 20.7 per cent jump in full-year net profit to $102.8 million.

The nation’s biggest brick maker reported a 10.5 per cent jump in revenue for the year ended July 31 to $670.3 million, driven by strong volume increases in the Austral Bricks and Austral Masonry businesses.

“The first half of financial year 2015 is likely to be the strongest market for more than a decade for our Building Products Group, with many customers reporting order banks that extend for up to a year,” Mr Partridge said.

“This optimistic outlook is tempered by the very competitive nature of some markets where Brickworks operates.”

3. The global economy is still weak.

IT HAS been a consistent theme of this blog in recent months that global growth has been slowing, a fact some investors may have missed in the good news about American GDP. The latest confirmation came from the World Trade Organisation, which cut its forecast for trade growth this year from 4.6% to 3.1% and for 2015 from 5.3% to 4%. The WTO doesn't forecast economic growth directly; it takes its lead from other international organisations (Rabo Bank reckons the IMF is set to reduce its growth forecast in the next few weeks).

What is interesting from the WTO announcement is that even the revised forecast relies on a bit of optimism. Actual trade growth in the first half of the year was just 1.8%; the organisation is relying on a rebound in the second half. The first half regional numbers were revealing; Asia increased its exports by 4.2% but its imports by just 2.1%. In effect, it has been gaining market share. North America was more balanced, increasing exports by 3.3% and imports by 3%. Europe was predictably sluggish, increasing exports by 1.2% and imports by 1.9%. The real weakness came in South America which suffered a 0.8% fall in exports and a 3.4% decline in imports.

All told, developed economies provided the biggest share of demand; their imports rose 2.6% while those of developing economies increased by just 0.5%. In export terms, the developed economies continued to lose market share; their exports grew 1.6%, while those of developing economies grew 2.1%.

Sluggish growth in 2014 would confirm the recent trend. After a phenomenal rebound in 2010, trade growth slowed to 2.3% in 2012 and 2.2% in 2013. So what is going on? Part of the problem is the slowdown in emerging market growth detailed in a recent issue. In turn, this may be related to slowing Chinese demand for commodities (incidentally, Goldman cut its Chinese GDP forecast for 2015 from 7.6% to 7.1%); commodity prices have been very weak recently, with the widely-followed Bloomberg index dropping 12% since the end of June. Then there may be specific problems this year; the winter weather that seems to have hit US first quarter growth; the Japanese sales tax rise; the sanctions tit-for-tat between the west and Russia.

4. A sharp slowing of global trade is the problem.

The World Trade Organisation released its latest forecasts for global trade on Tuesday and it is not a pretty picture. The WTO’s economists have lowered their forecasts sharply. They now expect global trade volumes to grow just 3.1 per cent this year, down from the 4.7 per cent they predicted in the spring. The main reasons for the gloom should be familiar by now: the slow recovery in those all-important developed economies and the return of geopolitical threats such as the Ukraine crisis.

This downgrade was pretty sharp from the WTO but I wouldn’t be surprised if there are more to come in the months ahead.

  1. Global trade in the first six months of the year actually grew at an incredibly slow 1.8 per cent. That means that to hit its 3.1 per cent forecast for 2014 the WTO is counting on a major rebound in the second half of the year. Some countries like the US and China have reported some reasonably good monthly trade numbers over the summer. But is it going to last?


  1. European demand just doesn’t seem to be recovering. That matters because European imports represent almost a third of global merchandise imports. So if European companies and consumers are not buying, that hurts global trade.


5. Value investing can be effective

If you survived the Global Financial Crisis by owning high dividend-paying stocks give yourself a pat on the back. Owning Aussie banks, for example, has produced extraordinary returns. The combination of large capital gains and fat dividends has produced a lollapalooza effect for investors who kept their head during the worst economic period for many countries since the Great Depression.

Just because something has worked in the past, though, doesn't mean it will in the future.

As value investors we seek to buy a dollar's worth of intrinsic value for less than a dollar, and preferably far less. Buying Commonwealth Bank in March 2009 on a low multiple of its net assets was a perfect example. The share price has tripled since then as Australia's economy has powered ahead thanks to low interest rates and China's demand for our exports.

The bigger the difference between our estimate of intrinsic value and the current share price the better the protection against the unexpected. That's straightforward enough isn't it?

Not really. Value investing is simple, but it's not easy. The "simple" part of the process is actually the valuation; working out what a stock is worth.

Some companies are more complex than others but if you focus on good businesses with decent managers, and don't tackle complex structures where your abilities might be overstretched, there are plenty of stocks to keep you busy.

6. Question marks over Australian mining companies

Japanese trading giant Mitsui says Australia’s lagging productivity fails to justify its high mining wages, while tipping a modest rebound in heavily depressed iron ore and coal prices by the end of the year.

Mitsui, which has ploughed $14 billion into investments in Australia in the past decade, also forecast the huge iron ore supply glut would likely correct by the end of the decade, possibly as early as 2017.

Mitsui Australia boss Yasushi Takahashi stressed the importance of ­executing deeper cost cuts at Mitsui’s Australian operations, which include iron ore, coal, and liquefied natural gas.

“It’s an inconvenient truth but Australia’s high wages are not supported by an equally high productivity,” Mr Takahashi said. “The biggest subject we are tackling right now with our joint venture partners is to improve productivity to match up with high costs.”

7. Curbs on home loans may be in the offing

Reserve Bank of Australia governor Glenn Stevens has bristled at suggestions he plans to introduce 1970s-style limits on home loans.

As investment buyers and their banks brace for what may become the toughest regulatory controls in more than a decade, Mr Stevens downplayed the likely impact and risk of using so-called ­macro-prudential policy tools.

“The worst that could happen is it doesn’t have that big an effect,” he said.

The Reserve Bank on Wednesday said for the first time it was working with the Australian Prudential Regulation Authority on “further steps” to reinforce safe lending by banks for housing.

Regulators have all but ruled out more concrete measures – such as New Zealand-style loan-to-valuation limits – for fear of pushing first-time buyers from the market, but have left the door open to moves such as increasing capital requirements for banks on certain classes of loans.

Critics say the shift towards measures which until now have been largely shunned by the central bank are evidence official interest rates are too low and hark back to the pre-1980s era when credit was rationed.



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