Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 465

Welcome to Firstlinks Edition 465 with weekend update

  •   7 July 2022
  • 3
  •      
  •   

The Weekend Edition includes a market update plus Morningstar adds links to two highlights from the week. 

Weekend market update

On Friday in the US, both the S&P500 and NASDAQ were flat, moving around 0.1%.

From AAP Netdesk: The Australian sharemarket gained ground for a fourth day in five sessions on Friday, although its early gains ebbed in the afternoon. The benchmark S&P/ASX200 index closed up 30 points on the day, or 0.5%, to 6,678. For the week, the index was up 2.1%, its best weekly performance since the week ending March 18. It's still down 10.3% for the year after an 8.9% selloff in June.

The energy sector led the market on Friday, climbing 2.1% after oil prices rebounded from a two-day sharp decline. Woodside Energy gained 1.7% and Santos climbed 2.3%. The materials sector closed Friday up 1.2%, with BHP adding 0.7% to $39.22, Rio Tinto up 0.3% and Fortescue up 0.6%. The big banks were down, with CBA falling 0.5% to $92.59 and ANZ dropping 0.4% to $27.70. Magellan Financial Group dipped 3% to $11.90 after the wealth manager reported $5.2 billion in net outflows during the June quarter, leaving it with $61.3 billion in funds under management. Tech stocks gained 0.8%, with Xero adding 1.6% and Dicker Data up 1.0%. The Australian dollar was buying 68.20 US cents.

From Shane Oliver, AMP Capital: Sharemarkets mostly rose over the last week on hopes that central banks will be able to tame inflation without causing a recession. However, it was messy with Eurozone shares – where the risk of recession is greatest – first making a new bear market low earlier in the week.  

The beat goes on with rising interest rates but there was nothing really new over the last week. The minutes from the last Fed meeting were hawkish – referring to a “significant risk...[that] elevated inflation could become entrenched”, that the “outlook warranted moving to a restrictive stance” and that it saw a 50 or 75bps hike as being appropriate in July. 

The hawkish pivot a month or so ago by central banks including the Reserve Bank has seen market expectations for longer-term inflation fall. Various indicators suggest that inflation pressures in the US may have peaked and if so this is positive sign for other countries including Australia as the US is leading other countries by about six months on inflation.

                                                              ***

Into a new financial year, many thanks to over 700 retirees who completed our survey on their retirement experiences, including thousands of comments. We have split the results into two articles: the first gives tips on how to make the most of a retirement, and the second shows the full results of the survey including charts. With so many comments across nine questions, highly informative but too numerous to put in one article, Leisa Bell has summarised the results into a downloadable document. It's worth taking the time to scroll through them, I found them fascinating.

***

Behind the markets for last financial year delivering a fall in the S&P/ASX200 of 10% and a drop in the US S&P500 of nearly 20% lies every individual's personal experience. The US Treasury bond index lost 11%, offering none of the traditional bond protection. Even those who default into a balanced super fund will suffer their first negative returns since the GFC. Each investor must now decide whether to sit on their portfolio, sell to avoid further falls or invest more in bargain opportunities.

Howard Marks recently spoke about current market conditions on a Goldman Sachs podcast, saying:

“First of all, what is risk? It's the probability of a negative event in the future. What do we know about that? What does the past tell us about that? The past has relevance, but it's not absolute. I don't think risk can be measured. I don't think the past is absolutely applicable. In fact, the big money is lost at the juncture when the past stops being applicable, which happens eventually."

The last six months feels like one of those junctures. We learn from the past but we are guessing about the future. Mark Delaney, CIO at Australia's biggest super fund, AustralianSuper, released a statement explaining a loss of 2.7% in its main balanced fund for last financial year. The same option was up 20.4% the previous year and 9.3% per annum in the last decade, a period of excellent returns for default super fund investors. It will be a long time before another decade is as good.

Delaney said of the results:

"After more than 10 years of economic growth our outlook suggests a possible shift from economic expansion to slowdown in the coming years. In response, we have started to readjust to a more defensive strategy, as conditions become less supportive of growth asset classes such as shares."

He's a bit late to the game if he has just "started to readjust" as the signs were there in late 2021, as described in our editorials.

We all have different risk appetites and ways to think about investing. I have a friend who I've known for 40 years and he's been consistent in his strategy. He cares only about the income from his portfolio, and this is far less volatile than share prices. When CIMIC (formerly Leighton) was recently fully acquired by its German owner, he received a large cash payment which he wants to reinvest. What's his reaction to the recent sell off? "Shares are for sale at a discount. It's fantastic," he told me last week.

Most investors nursing losses are not so happy, and this neat graphic from CommSec shows how the year unfolded to deliver the 10% loss in the ASX200. It highlights how poorly the year ended.

Hugh Dive of Atlas records the Dogs of the ASX each year, and here are the major losers. Wasn't everyone wearing gloves (Ansell), buying respiratory aids (Fisher & Paykel Healthcare) and buying pizza (Domino's) in the pandemic? AfterPay and BNPL rivals were replacing credit cards, Xero was driving business efficiency, job search was moving to Seek, Reece was riding the property boom. Hard to imagine anyone picked these 10 dogs during 2021.

The first-time, often younger, investors who jumped into the market in 2021 without the gains from prior years have found investing is difficult. It seemed like easy pickings when everything was up, from tech, Bitcoin, BNPL, online retail, NFTs, property. Interest rates lower than we'll ever see again pushed up the price of everything, and newbies bought on every tip in town. Now, late entrants to the greatest companies in the world are watching the red numbers with Amazon off 35% and Alphabet 22% in the June quarter.

For example, some tech-themed ETFs launched in Australia during the hype were ETFS Semiconductor (SEMI), down 33% last FY, BetaShares Crypto Innovators (CRYP) down 71% and Cosmos Global Digital Miners (DIGA), down 76%.

The debate is whether the losses suffered by younger people with a few thousand invested matters to them over the long term, as it is part of an investing journey and they have not lost much in dollar terms. Rob Arnott and Research Affiliates hold a view that is counter to traditional advice about risk appetite by age.

" ... we are told that the young are tolerant of risk and that, as retirement approaches, the average investor becomes intolerant of downside risk, fleeing after a serious drawdown ... Conventional wisdom suggests a percentage allocation to equities which is '100 minus your age' and the notion that the young can bear more risk than those of us who are middle aged (or older!). True, the young have more time to recover losses, but what losses are more insidious for retirees than inflation sapping the real income of a bond centric portfolio?

If young workers have to deal with their volatile young human capital over a long horizon - with a heightened need to cash out when the portfolio values are depressed - then it makes even more sense for younger workers to begin with a less risky portfolio. This also helps shape their risk tolerance so that their attitudes about investing and riskbearing are not poisoned by a bad early experience."

It's not a conventional view and bonds have not performed the protective role Arnott is writing about, but it's a legitimate challenge to the argument that equity exposure should reduce with age. Certainly, my mate, now in his 70s and fully exposed to equities, does not follow convention.

Our articles take the discussion further.

In this week's interview, Chris Demasi presents the case for ignoring short-term market falls when great long-term compounders are available at fair prices. This is not an argument to invest in just anything but the Amazons, Microsofts and Alphabets of the world that have strong future earnings. And he includes an Australian company in his portfolio.  

Marcus Padley says investors should embrace the opportunities that come with fear in the market, and he describes five steps he has gone through in the recent selloff to decide the best way to respond.

Then Ian Rogers chronicles the end of Volt Bank, which was one of the challenger banks that seemed more likely to survive. Volt did not fail due bad loans, but the current predicament facing many startups as capital becomes harder to access. It shows the benefits of scale of the majors and the difficult regulatory environment for new players.

Campbell Harvey and Rob Arnott paint a concerning picture of the US economy. They write that the Fed was late to the game, inflation is likely to keep rising and the result of the Fed’s belated actions may push the economy into a recession.

Michael Collins explores how privacy-focused regulatory scrutiny is challenging the online-ad business that is built on the collection and dissemination of consumer data.

Morningstar tackled the increasing fears of a recession as Nicola Chand looks at Aussie miners after a commodities slump and Lewis Jackson checks why so many short sellers have descended on lithium miners

The Reserve Bank decision this week to increase the cash rate by 0.5% to 1.35% comes with the expectation of another increase next month. The decision was justified by high global inflation - boosted by supply chain restrictions and the war in Ukraine - strong demand for goods, a tight labour market and capacity constraints. But Philip Lowe expects inflation to peak late in 2022 and decline back to the 2–3% range in 2023. His comments sounded slightly more relaxed about the need for future rate rises.

Where do we stand now? We have featured this ASX chart several times over recent months, and close watchers will see a significant fall in cash rate expectations. The implied rate for early 2023 is 3.4% but it was over 4% in mid-June, a level we said was highly improbable. It still looks too high, requiring a hefty 1.55% of further increases for the rest of 2022. Lowe does not want to see what that would do to property prices.

Graham Hand

Latest updates

PDF version of Firstlinks Newsletter

IAM Capital Markets' Weekly Market Insight

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Indicative Listed Investment Company (LIC) NTA Report from Bell Potter

LIC (LMI) Monthly Review from Independent Investment Research

Plus updates and announcements on the Sponsor Noticeboard on our website

 

3 Comments
Kevin
July 10, 2022

Me again.When superannuation started under the Hawke/Keating accord and we gave up a 3% pay rise I thought super was useless,around 1986?.Some employers pocketed the 3%,some paid it.I thought leverage would be good,leverage was not allowed in super to the best of my knowledge.I thought 6 months wages would be manageable.If I got 10% on that reinvesting dividends then that 10% would be more than 3% of my wages.

Looking at it as golf then if I had half of my age in income outside of super when I retired great. As you learn more this became if I had my full age in income outside of super brilliant,eg 63 years old,63K in income.If this income increased with my age,wonderful,64K,65Ketc..

This morphed into if I pay half my age in tax,no financial worries probably.This morphed again into if I pay my age in tax then I am 18 years old again and bulletproof .

Just a different way of looking at it.

Graham Hand
July 08, 2022

Some people complain when we edit comments. We do this for many reasons, such as to maintain a civilised dialogue, to remove promotional content, the inclusion of data we do not have time to check, or whatever. Like all publications which allow comments, we will not enter into a discussion on our editing, and we are willing to remove a comment which has been edited. If anyone does not agree with this policy, then don't comment.

Kevin
July 07, 2022

I'm the same as your mate.The income is high so even if it reduced by 50% there is no problem.
The *noise* of your podcast when I bought more APA leading to more buys in Feb/ march this year,I've got over that *white line fever and adrenaline rush*. Dark chocolate Tim tams are 50% off .Tim tams win.
I found the Wal King years booklet to check my memory.Appointed chairman of Leighton Jan 1987 ,the booklet is dated 2010.From that date to 2010 $1K invested then had grown to $103K,compounding at an average rate of 21.8% per annum on a TSR basis..A very good company to own,good dividends for years.I think the Dubai miracle and growth ( that was a desert mirage) may have been the seeds of the decline.Joint ventures and takeover of Al Habtoor( ?) Engineering perhaps.
I think the only two things that could tempt me would be Computershare and FMG at $14 to average down.

 

Leave a Comment:

     
banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Welcome to Firstlinks Edition 464 with weekend update

The 2021 Census reports that Millennials are now the largest generational group in Australia. While we are increasingly secular and culturally diverse, our differences are far more accepted than the way the US is heading. And please take our short retirement survey.

  • 30 June 2022

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.