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Cuffelinks Newsletter Edition 239

  •   9 February 2018

Mike Tyson, the former heavyweight boxing champion, once said about his opponent's plan: "Everyone has a plan, until they get punched in the mouth."

Markets can have the same impact. Investors put in place a long-term strategy, where they should expect a 10% fall in share prices to occur every couple of years, then along come the media headlines and people panic.

For example, Leigh Sales opened the ABC's 7.30 programme on Tuesday by saying the Dow Jones Industrial Average (DJIA) had "tumbled" overnight and, "It was the biggest fall in a single day." She then interviewed Jason Steed, Managing Director of JP Morgan, who added, "It was one of the sharpest sell-offs ... The severity of the move is a stand-out feature." [BTW, I'm a big ABC fan].

The size of a fall should be measured in percentages, not points. As Ashley Owen notes, the DJIA was down 4% and there have been 37 larger daily falls since 1980. In October 1987, the index fell 508 points which was down 22.6% on one day. Now the index is 25,000, 1,000 points is only 4%. Here's the DJIA for the last 12 months. In the so-called tumble, it gave back January's gain.

Source: Yahoo Finance, 7 February 2018

Investors should have been expecting a pull back and a rise in volatility, and we've written about it regularly. Global shares (hedged) rose 19% in 2017 and need to build a solid foundation based on corporate earnings and economic growth. Investors should welcome better buying levels.

Choosing a time to go more global

During the holidays, I was cleaning out a cupboard when I unearthed a newsletter from a large retail fund dated January 1998. The front page heading said, "It's time to go global."

I realised we have been saying this for at least 20 years. It notes 80% of Coca-Cola's business is outside the US, Australia makes up less than 2% of global sharemarkets, and "allocating funds by these arbitrary geographical boundaries is an unsatisfactory investment approach." We should invest in the best companies regardless of where they are located, especially when Australia is poorly represented in many growing sectors.

In recent years, these messages have gained traction, but the domestic bias is still strong. Pension SMSFs in particular love the high yields and franking credits of our banks and Telstra, and rely heavily on cash and term deposits. For example, there is no reliable data on SMSF allocations to global shares, as they use funds or trusts for global exposure, not direct investments into stockmarkets. Global is probably less than 10% of assets, but ETF, LIC and managed fund flow data show a solid move to global equities.


Source: Class Limited Benchmark Report

This week, two articles on the recent market fall, two on SMSFs and two on aged care.

Ashley Owen draws on his decades of managing portfolios to advise how to react when the market falls, while Vinay Kolhatkar checks the CAPE ratio for a benchmark on how expensive the market is and what its designer, Robert Shiller, is saying at the moment.

Mark Ellem warns SMSF trustees to take action on recent changes to super rules, including CGT relief, while Liam Shorte shows SMSFs are not suitable for everyone.

Aged care issues will hit all of us at some point, and Rachel Lane tells the good and not so good, and Assyat David reports on a survey which shows we often wait until there is a medical crisis before taking action. And who knew that most aged care initiatives are taken by the family, not the person receiving the care? Look out for the kids!

With resources back on the radar, IIR gives a guide to the outlook for many small to medium-sized stocks not usually in the limelight.

This week's Sponsor White Paper from Martin Currie Australia (aligned to Legg Mason) looks at what equity strategies worked last year and what's expected to do well in 2018. We also attach the S&P Dow Jones Indices Report on volatility and correlation data to give context to the recent moves.

Graham Hand, Managing Editor


Edition 239 | 9 Feb 2018 | Editorial | Newsletter



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