Quarterly Newsletter - April 2011
Major Indices (as of 3/4/2011)
* PE ratios (based on historical
Commentary – Past 3 months
Third Quarter 10/11 financial year saw most share markets globally move slightly upwards (and further rises in commodity and food prices) as global confidence was generally unshaken despite turmoil in the middle East and the nuclear disaster and earthquake/tsunami in Japan.
Not surprisingly share markets in Japan were lower, and India retraced some of its previous stellar gains. The Australian market rose steadily.
Global share market Price to Earnings (PE) ratios are about the same and are generally at fair value or in some cases still a bit high. China is well valued.
Global exports are steady and economists are still predicting not much change for 2011.
US employment is flat still hovering at around 10% unemployed, and Australia around 4.5% unemployed, improving slightly.
China and India continue to do well. An IMF GDP forecast for 2011 of 9.6% and 8.4% growth respectively is quite incredible in the current world climate.
Europe has temporarily recovered somewhat as the world press has been focusing on the uprisings in the Middle East and earthquake/tsunami/nuclear disaster in Japan. However the sovereign debt problems are still a worry for Europe.
The Baltic Dry Index (BDI) has recently recovered after a bad down period (where it troughed at 1,035) to 1,530, hopefully a sign recovery will continue.
US retail sales forecasts are higher after a slightly weak 3 months.
Global GDP is still low in all the western countries (especially bad in Europe and UK) with most of them hovering around 0-3.0%, apparently coming out of recession, with hopes for world growth in 2011 to reach 3.5% (IMFs Sept 2010 forecast).
It is definitely a two speed world - the slow developed and booming developing economies.
Global Interest Rates have continued to increase
only in the emerging economies such as China, India, and also in the
Philippines this past 3 months.
Currencies over the quarter were summarized by a weakening in the Japanese Yen, some Euro recovery, and a further strengthening in the Aussie dollar to fresh highs. The Australian dollar (AUD) rose compared to most major currencies and reached 1.04 to the US dollar.
Australian house prices
Baltic Dry Index (blue) vs Oil (red)
Commentary – Forecast next 6 months
I expect the emerging economies to continue to do well and the oil and resource economies.
Europe is still to be avoided on debt concerns.
The Baltic Dry Shipping Index is low but finally rising again.
US Retail sales forecasts are too rise. This is suggesting a continued, but weak, US recovery.
Share markets are likely to move sideways or slightly higher in the next few months assuming global recovery continues and the fear and issues around the European Debt Crisis start to subside. Middle East wars may change this.
Most markets PE ratios are fair or slightly overvalued and China is looking cheap if you look at their growth and undervalued currency.
Investors that hold significant cash should still be patient for now and only enter the market gradually or on large dips or phase back into the market over time; however investors who have been aggressively placed to benefit from the recovery should continue to cash up somewhat and lock in some profits just in case there is a second leg down to the GFC.
Inflation is becoming a global concern and it would be wise to hold some commodities in your portfolio. Ideally a mixture of soft (food) and hard(energy/resource) commodities to hedge against the rising cost of living(inflation).
The Euro should be avoided as should any currency where the country has excessive debt levels as at last the world has begun to realize the huge problems it faces with many countries heavily in debt and no real solution to fix their trade deficits.
The emerging economies that are well managed and have strong trade surpluses and current account balances such as China and a lot of SE Asia, as well and parts of Africa and South America will continue to flourish. Their currencies will strengthen, and they will continue to buy commodities such as iron ore and copper to build cities to house their rising urbanization and affluence.
That is, we will see the wealth and currencies of the Western economies (excluding Japan) decline whilst the well managed emerging economies becoming increasingly wealthy. In effect a massive transfer from West to East.
What to do?
Continue to be cautious.
US employment improves dramatically- world economy strengthening
US employers hired workers at the fastest pace in nine months in February, and the jobless rate slipped to a nearly two-year low of 8.9 per cent from its previous levels around 10% during the GFC, showing the economy is finally kicking into a higher gear.
Oil price spikes on Middle East unrest
Oil has risen from US $90 per barrel 3 months ago to now $108 per barrel (peaking above USD 120) as a result of unrest in Saudi Arabia. First there was the people uprising and overthrowing of the Mubarak Government in Egypt, followed by Tunisia. Then came uprisings in Yemen and Libya, including Western air strikes of Libyan missile bases, and unrest spreading throughout the Arabic world as the people rise up against years of corrupt dictatorships.
The “PIGS'' (Portugal, Ireland, Greece and Spain) are in a bad debt
Europe’s debt crisis is dominated by the PIGS. Combined these four countries owe Banks about 2.2 Trillion USD.
Portugal, Greece and Spain had a property bubble caused by low interest rates and English and other buyers borrowing to by an investment property in Southern Europe. Then the GFC hit and those investors withdrew suddenly leaving a severe crisis.
Similar to what happened in Dubai, who is being saved by Abu Dabi.
The PIGS are being held afloat by bailouts mostly from France, Germany, and England but for how much longer?
Stronger countries that move to support weaker countries by financing bailouts do so at the risk of damaging their own credit quality and ability to raise funds. As concerns about the peripheral countries have increased, interest rates for Germany and France, which would have to bear the burden of supporting others, have risen. Europe increasingly resembles mountaineers roped together. As the members fall one by one, the survival of the stronger ones is increasingly threatened.
I think the likely result will be the massive printing of new Euros by the ECB, and a large fall in the Euro valuation. Likewise the US may suffer a similar fate.
This means as investors it is very wise to avoid the currencies of indebted countries such as Europe and USA. Invest in countries with a surplus such as China.
Jim Rogers (World renowned investor) speaks
Thursday, January 27, 2011
"I see more inflation and more currency turmoil as we go forward. There are huge debt imbalances in the world. U.S. is the largest debtor nation in the world and all the assets are in Asia. The largest creditors in the world are China, Korea, Japan, Taiwan, Hong Kong, Singapore – this is where the assets are and the debts are in the West. Those imbalances have to be resolved. They frequently lead to more currency turmoil. We’ll see more inflation, we’ll see more governments fall. We just saw Tunisia fall – more are coming because the world is going to continue to have these problems, and especially inflation that is going to cause more social unrest."
Australian cities - The least affordable in the (English Speaking Western) World
According to the Demographia International Housing Affordability Survey, which ranked 325 markets by affordability, Sydney was listed as the second least affordable city in the world, and Melbourne as the world's 5th least affordable city. Brisbane ranked 23rd.
Least Affordability International cities by Ranking out of 325 cities surveyed in USA, Canada, UK, Ireland, Australia and New Zealand and includes Hong Kong city. Top 33 unaffordable cities listed only.
(The Sept 2010 Survey Rankings by Demographia is based on Median Multiple - calculated by the Median Property Price divided by Median Household Income pa).
NB: A multiple around 3 or below is considered affordable and over 5 is considered unaffordable. Eg: Sydney at 9.6 is unaffordable, Tampa Florida at 3.1 is affordable.
NB: Where a city can be considered an exception to this valuation method is where the majority (>50%) of buyers are global and from regions of high incomes. This can explain why a large multiple can be maintained. Cities you may wish to consider for this exception can arguably include New York, London, Shanghai, Tokyo, and Sydney; however this is highly debatable as where do you stop. Do you except Hong Kong, Singapore etc? I don’t think any cities should be excepted, as no global cities have greater than 50% of foreign buyers. Perhaps some suburbs of some cities can exist with a higher multiple due to global buyers, but not the entire city. Also a suburb may appear expensive on price, but have a reasonable multiple (and hence be affordable), if it has a very high median household income.
US-based geographer and author Joel Kotkin from Demographia, said that even after the housing bubble implosion in the US and Britain beginning in 2008, the ratio of home prices to incomes has grown in major cities such as Los Angeles, San Francisco, Boston, London, Toronto and Vancouver.
Hong Kong was ranked the Number 1 least affordable city followed by Sydney at number 2 out of the 325 cities surveyed in USA, Canada, UK, Ireland, Australia and New Zealand and includes Hong Kong city.
"Perhaps most remarkable has been the shift in Australia, once the exemplar of modestly priced, high-quality, middle-class housing, to now the most unaffordable housing market in the English-speaking world," he said. "The real issue is affordability and Australia has gone from a middle-class paradise in that regard into a more stratified society - just as we find in Britain and parts of the US."
Demographia's report comes as Australian home prices are expected to show little growth in 2011, after double digit yearly growth as recently as 2010, driven by the slow pace of construction approvals, strong immigration, and an economy that hasn't experienced a recession in nearly two decades. House prices plateaued in mid-2010, amid interest rate rises and a weaker pace of sales. The national city dwelling price fell 0.2 per cent in November, to $466,000, according to RP Data-Rismark information. Six in 10 Australians live in major cities.
a report from the Department of Immigration and Citizenship calculates
that if 260,000 migrants come to Australia per year,
both Sydney and Melbourne will need to expand by 430,000 hectares,
kilometers by 2060.
Melbourne-based innovation research agency 2thinknow, which compares the social and commercial advantages of 289 cities worldwide, agreed with Demographia's assessment on Australia's affordability. "Anything [with an income-house price ratio] above 5 is a high multiple - based on two incomes and the lifestyle flexibility to have children," director Christopher Hire said.
The impact means Australian cities receive low benchmarks in the world on 2thinknow's property prices in the Innovation Cities Index. Sydney ranks among the least affordable places, with a 0 out of 5 rating, on a par with San Francisco and Hong Kong, while Melbourne, Brisbane, Adelaide, and Hobart have a rating of one.
If you still think Australian property prices are not massively overvalued take a look at the graph above. In 1981 Sydney property was around 5 times median salary and by 2011 it is almost double that at 9.6x median salary.
This suggests that prices can half or incomes per household need to double to return to reasonable valuations of say 5x median income for a premium city such as Sydney. Most global cities average closer to 3x median household income.
I think most likely is that we see a decade of no price gain and prices remain flat as incomes gradually increase. Or if interest rates increase significantly then we will see an ugly collapse of the Australian housing bubble.
Investment opportunities in South East Asia – Asean
Asean refers to the 10 countries comprising South East
Asian nations – Philippines, Laos, Singapore, Indonesia, Malaysia,
Brunei, Cambodia, Myanmar, Thailand and Vietnam.
Take the Philippines
as an example.
Philippines banks for example are doing very well. Their Non Performing Loans (NPLs) are running at a low 3.07%, and their loan books are growing strongly. The BSP’s Special Deposit Account Facility (SDA) has available 1.2 Trillion Pesos (300 billion USD) available to boost lending if required. Now, that will help the banks whose net profit margins are almost double Australia’s at around 4%. Philippines residential real estate is also strong as valuations are still cheap and demand is strong. Recently Dutch Pension Fund APG , who manages 266 billion Euros, invested billions into a Philippines property group Century Properties. APG was quoted as saying, “as a long term strategic investor APG has identified the real estate market in the Philippines as highly attractive”. Finally tourism should do well as the newly formed Asean Tourism Strategic Plan (ATSP) aims to promote Asean (SE Asia) as a single tourist destination, with a single Visa, and full airline access as from 2015.
World Food Shortage
The Jan 2011 National Geographic magazine featured a story illustrating how the world is currently not producing enough food to feed the population. By the end of 2011 the world will have close to 7 billion people. “With the population growing about 80 million each year, it is hard not to be alarmed. Right now on Earth, water tables are falling, soil is eroding, glaciers are melting, and fish stocks are vanishing. Close to a billion people go hungry each day”.
CFS’s Soft Commodities Fund will soon be available to investors on CFS First Choice. It will give investors the opportunity to invest in the companies that profit from the food production industry.
World Growth Update and Projections
Recent Change to Contribution caps – applicable from July 1, 2009 (from May 2011 Budget)
Past budget changes reversed. The Co-contribution will be 100% of the after tax contributions to a maximum of $1,000 pa. The maximum 100%v is payable if your taxable income is below $31,920 and will phase out at $61,920.
Superannuation Guarantee (SG)
Must be paid for the following workers who meet these criterions:
SG rate phased to 12% by 2019, and Cut out age increased
Addition Superannuation for Low Income workers
From July 1, 2012, the Government will pay a contribution to Superannuation to offset the 15% contributions tax up to a maximum of $500 pa for low income workers (up to $37,000).
To find out more please contact an adviser at firstname.lastname@example.org .
NB : High Net Worth Financial Advising attempts to enhance overall return for clients by investing in undervalued regions of the world and undervalued asset classes, that have positive growth stories.
NB : The contents of this newsletter does not constitute personal
advice and is general in nature, please see your adviser for
suitable to your own needs and objectives.