Quarterly Newsletter - April 2011

Major Indices   (as of 3/4/2011)

 
Currency
(AUD)
Interest Rate(%)
Share Index
* PE ratio
(historical)
GDP (2010) IMF
GDP Forecast (2011) IMF
Population
(m=million)
Foreign Surplus (Debt) %GDP
Australia
1.00
4.75
All Ords
4,954
17.05
3.0
3.5
22m
2010 - (5.0)
USA (Dollar)
1.04
0.25
S&P 500
1,332
19.50
3.3
2.9
300m
2010 - *(14.5)
Largest USD deficit, 14.5 trillion
Japan (Yen)
87
0.1
Nikkei 225
9,708
24.87
2.4
1.8
127m (declining)
China (Yuan)
6.80
6.06
CSI 300
3,272
Hang Seng
23,801
China
15.49
Hong Kong
18.75
10.5
9.6
1,350m
2011 - USD 2.8 Trillion, 5.1% GDP, number 1 largest surplus in the world
India (Rupee)
46
6.75
BSE 200
2,384
?
9.4
8.4
1,150m
2009 - USD 277 billion surplus
Europe (Euro)
0.73
1.00
DJ Stoxx 50
2,962
17.05
1.4
(Germany)
1.6
(Germany)
725m (declining)
 
UK (pound)
0.65
0.50
FTSE 100
6,009
?
1.2
2.1
60m
 
Global
N/A
 
 
16.47
3.0
3.5
6,200m
 

* PE ratios (based on historical earnings)
*NB: (14.5) refers to the % of GDP required to pay the interest on the national debt.
US 10 Yr Bond Rate – 3.5%    US 30 Yr Bond Rate – 4.5%
Source: Bloomberg

Commodities

Oil - Nymex (USD/barrel) 108
Natural Gas (per million mbtu) 4.36
Coal-thermal ($/tonne) 142
Uranium (USD/pound) 62
Gold (USD/ounce) 1,429
Wheat (cents/bushel) 525
 
Iron Ore ($/tonne) spot price 179
Copper (USD/pound) 4.26
Nickel (USD/pound) 11.70
Zinc (USD/pound) 1.08
Aluminium (USD/pound) 1.17
Corn (cents/bushel) 736
  [www.kitco.com]
Source : Kitco, quotemarkets

 

Leading Indicators

Baltic Dry Index (BDI) April 1,530
US Retail Sales Forecast
(USD Trillion)
April (forecast)
390
(neutral)
May (forecast)
395
June (forecast)
385
U.S. Retail Sales

UN Food Price Index

CBRE Commodities Price Index
Food and Commodity prices rising strongly in 2010-2011


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.
US long term bonds rates have been steady.

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.

Commodities
Oil has moved up sharply over the quarter to USD 108 on Middle East troubles, and Natural Gas also increased slightly over the quarter. This has, as usual, pulled up virtually all the commodity prices quite strongly.
Gold has continued its stellar bull run and is currently $1,429 per ounce.
Copper and the other base metals were steady with Nickel rising nicely.
Iron Ore and Coal prices rose further, having previously doubled from the old contract prices and Iron Ore now sells on the Spot market at a great price of $179/ tonne. Great for Australia and BHP, and Rio.
Soft commodities were significantly higher again lead by corn, with wheat dropping back somewhat

Australian house prices
Australian home price were steady but still grossly overvalued and probably held up thanks to the mining boom in Australia. See article below.

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.

  • Aggressive and Growth investors should cash up a bit and lock in some profits
  • Keep some Cash or safe fixed interest. At least 30% for Growth clients, 40% for Moderate Clients and 60% for conservative clients. As Australian rates rise it may pay to hold more cash.
  • Avoid US and Euro/UK currency.
  • Avoid Bonds (they perform poorly when interest rates start to rise)
  • Be cautious or don’t buy overvalued Australian residential property.
  • Invest in countries with currency surpluses and positive GDP (eg; China)
  • Hold some commodities or resources companies as well as soft commodities.
  • Hold some Emerging markets shares

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
Ireland
Greece
Spain
Debt
€180 billion
€950 billion
Interest rate
7.0
9.5
12.0
6.0
Cause
Has slow growth, anaemic productivity, large budget deficits and poor domestic savings.
Excessive dependence on the financial sector, poor lending, a property bubble and an increasingly generous welfare state.
Bloated public sector and an uncompetitive economy
Low productivity, high unemployment, an inflexible labour market and a banking system with large exposures to property and European sovereigns
NB: Italy and Belgium may soon join the PIGS

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?

  France Germany England
Amount Exposed(Lent) millions USD 510 410 324

 

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.

Likely outcomes:

  1. The European Central Bank (ECB) and continues to buy Bonds and bailout the PIGS, however unless the PIGS act fast to improve their debt this will be unsustainable.
  2. The ECB just prints money – will massively devalue the Euro (LIKELY)
  3. Individual countries are left to fail (Possible but unlikely as too many countries involved now)
  4. The Chinese may use their 2.7 Trillion in Surplus to buy Bonds of the PIGS (Unlikely as the Chinese know that Europe is a basket case)

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).

Least Affordability Ranking
City
Country
Currency
Median Multiple
Median price
(in local currency)

Median Household Income pa
(in local currency)

1
Hong Kong
China
HKD
11.4
2,580,000
225,400
2
Sydney
Australia
AUD
9.6
634,500
66,200
3
Vancouver
Canada
CND
9.5
602,000
63,100
4
Coffs Harbour
Australia
AUD
9.1
369,900
40,500
5
Melbourne
Victoria
AUD
9.0
565,000
63,100
6
Bornemouth & Dorsett
UK
Pound
8.8
225,600
25,600
7
Honolulu
Hawaii
USD
8.5
576,600
68,200
8
Sunshine Coast
Australia
AUD
8.4
455,000
54,200
9
Gold Coast
Australia
AUD
7.7
454,800
58,900
10
Plymouth & Devon
UK
Pound
7.5
188,700
25,300
11
Geelong
Australia
AUD
7.4
382,000
51,500
12
Santa Cruz
USA
USD
7.2
448,700
61,900
13
San Francisco
USA
USD
7.2
538,100
74,300
14
London city
UK
Pound
7.2
300,000
41,600
15
Woolongong
Australia
AUD
7.2
402,500
55,600
16
Victoria
Canada
CND
7.1
430,000
60,900
17
Adelaide
Australia
AUD
7.1
400,000
56,400
18
Newcastle
Australia
AUD
7.0
361,100
51,800
19
Swindon & Wiltshire
UK
Pound
6.9
192,500
27,700
20
San Jose
USA
USD
6.7
566,000
85,000
21
Mandurah
Australia
AUD
6.6
397,000
60,200
22
Bundaberg
Australia
AUD
6.6
272,000
41,500
23
Brisbane
Australia
AUD
6.6
447,500
67,900
24
Santa Barbara
USA
USD
6.5
385,000
59,400
25
San Luis
USA
USD
6.5
370,000
57,000
26
Telford & Shropshire
UK
Pound
6.5
164,600
25,300
27
E & SE London suburbs
UK
Pound
6.5
220,900
34,200
28
Taraunga
NZ
NZD
6.5
352,900
54,600
29
Abbotsford
Canada
CND
6.5
402,000
62,300
30
Warrington & Cheshire
UK
Pound
6.4
171,500
26,800
31
Aukland
NZ
NZD
6.4
448,300
69,600
32
Darwin
Australia
AUD
6.4
552,500
86,000
33
Perth
Australia
AUD
6.3
480,000
75,700
37
New York
USA
USD
6.1
389,100
63,300
91
Dublin
Ireland
Euro
4.8
228,000
48,000
155
Chicago
USA
USD
3.6
210,100
59,100
200
Tampa, Florida
USA
USD
3.1
137,400
44,400
Source : www.demographia.com


NB: The survey is based on cities in USA, Canada, UK, Ireland, Australia and New Zealand and includes Hong Kong city. I am sure if China was included then Shanghai and Beijing would have ranked very high as would have Singapore, Moscow and Tokyo.

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.

Separately, 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, or 4300 kilometers by 2060.
Perth, ranked 291, with a 6.3 ratio, based on a $480,000 houses with a median household income of $75,700, lower than the New York City areas, which scored 289 on the list..

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.
This region is undergoing rapid growth as it tries to catch up to the West. It has a large population moving out of poverty and into the middle class, and is benefitting from being close to the World’s two most booming economies of India and China.

Take the Philippines as an example.
Philippines GDP in 2010 was 7.5% with inflation controlled at 3.8%.
The demographics are great with the average age of just 22.5 yo --- and now strong Government under the Aquino administration elected in 2010 and committed to eradicate corruption. Wealth is rising rapidly as are asset prices--- the Philippine Stock Exchange rose 40% in 2010, and house prices doubled in the past 5 years. The Philippine economy is driven by a huge rise in the number of call centres similar to India, as well as Overseas Foreign Worker (OFW) remittances, and a booming property market. No wonder business is doing well with the population growing rapidly and expected to grow from 93 million now to about 140 million by 2040. Now that’s some growth!!!!

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

Superannuation Update

Recent Change to Contribution caps – applicable from July 1, 2009 (from May 2011 Budget)

Member age Concessional Non-concessional
Up to Age 49 25,000 (Indexed) 150,000
Age 50 and over- up to June 30,2012 50,000 150,000
Age 50 and over- after June 30,2012 25,000 (indexed) 150,000
Age 50 and over- after June 30,2012 and aggregate Superannuation balances below $500,000 50,000 150,000

 

Superannuation Co-contribution

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:

  1. Aged 18-70
  2. Are paid $450 or more per month before tax
  3. Work full time, part time, or casual
  4. If under 18, work more than 30 hours per week and satisfy 1), 2) and 3) above.

SG rate phased to 12% by 2019, and Cut out age increased

Income Year SG rate (%) SG cut out age (yo)
To 2012/13 9 70
2013/14 9.25 71
2014/15 9.50 72
2015/16 10.0 73
2016/17 10.5 74
2017/18 11.0 75
2018/19 11.5 75
2019/20 12.0 75


 

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 contactus@hnwfinancialadvising.com.au .

 

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 personal advice suitable to your own needs and objectives.