Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 416

Welcome to Firstlinks Edition 416 with weekend update

  •   15 July 2021
  • 3

The Weekend Edition includes a market update plus Morningstar adds free links to two of its most popular articles from the week, including stock-specific ideas. You can check previous editions here and contributors are here.

Weekend market update

From AAP Netdesk: The ASX gained 1% in a week in which local and overseas investment groups tried to swoop on stocks they considered cheap. Sydney Airport and Spark Infrastructure have so far resisted offers, while Seven Group gained majority ownership of Boral. Meanwhile, US second-quarter earnings season will continue to attract attention next week. The four largest US lenders reported this week and posted a combined $US33 billion in profits. The benchmark S&P/ASX200 index on Friday closed up 0.2%, just short of its record close, 7,386. BHP shares notched a record high of $51.91.

From Shane Oliver, AMP Capital: Share markets were buffeted by concerns about higher inflation and rising coronavirus cases over the past week. US shares fell 1% through the week (S&P 500 down 0.8% on Friday) and European shares fell 0.8%. However, Japanese shares rose 0.2%, Chinese shares rose 0.5% and Australia benefitted from the rally in US shares at the end of the previous week. The gain in Australian shares came despite bad news on lockdowns and was led by utility, material, retail and industrial shares. Bond yields continued to fall. While iron ore prices rose, metal prices fell as did the oil price as OPEC and the UAE closed in on a deal to boost production. The $A fell as the $US rose.


Noise. It causes such basic errors in our decision-making (including investing) that a new book from three top-selling US authors is called: 'Noise: A Flaw in Human Judgement'. The examples in the book include wide variations in prison sentences for the same crime and insurance assessors awarding different damages for the same event.

Two key points in the book include:

"First, judgement is difficult because the world is a complicated, uncertain place. This complexity is obvious in the judiciary and holds in most other situations requiring professional judgement … Disagreement is unavoidable wherever judgement is involved. Second, the extent of these disagreements is much greater than we expect." 

The authors are no less than Daniel Kahneman, author of the wonderful Thinking, Fast and Slow, Cass R Sunstein, author of the famous Nudge and Olivier Sibony of You're About to Make a Terrible Mistake. That's an impressive trio spending 454 pages on noise.

So with all this noise hitting us every day, we should be forgiven for wondering what the heck is going on in financial markets. Rising virus cases with a new strain amid all-time market highs. Falling long-term bond rates amid rising inflation. Loss-making companies valued in the billions. We have witnessed a year of incredible stockmarket returns, despite headlines on one day saying (see below) 'the Dow's best week since 1938' and '16 million Americans have lost jobs'. As the book says, "the world is a complicated, uncertain place."

Source: CNBC and Seeking Alpha

It's a strange time when Elon Musk gains profile by tweeting inciteful messages about nothing, while Warren Buffett's insightful thoughts are criticised because he's 'old school'.

Amid this noise, here are the returns (complied by BetaShares) from various stockmarkets as the pandemic has dominated every new bulletin for the year:

  • Everyone's a winner but the US, driven by big tech, was up 41% versus Australia's 28%.  
  • The worst-performing global sector was that 'safe harbour' in tough times, utilities, up only 13%, and the goods we all need, consumer staples, only 18%. Technology topped the charts at 45%.
  • And we are told about Japan's slow growth due to a declining population, up 31%, and 'old industry' Europe up 30%.

The Morningstar chart below places this in a long-term context. In fact, the 30-year average annual returns across Australian equities (9.8%), international equities (8.3%), A-REITs (8.6%) and international fixed interest (7.6%) are surprisingly close. What is not close is the risk involved to achieve those returns, as shown in the standard deviations below. They confirm the cost of the superior equity returns is a need for risk tolerance.

We lead this week with a look at the noise which is distorting asset values with suggestions on how to react. There is an extreme valuation disconnect, suggesting something 'old' and 'new' is happening, where each side does not even speak the same language, never mind have different interpretations. Find out why some young fish don't even realise they are in water.

Then in our white paper section from AMP Capital, Shane Oliver suggests five ways to turn down the noise, saying it is more difficult than ever in a digital age with rapid dissemination of news and opinion.

Last week's article by former leading super consultant, Don Ezra, on his own retirement spending has been viewed over 12,000 times, and many readers offered their own take on not running out of money in retirement. 

Tracy Li with Matt Reynolds focus on the main cloud which hangs over big tech companies, the threat of regulatory restrictions on their business. US President Joe Biden has been talking about new rules this week. Tracy's experience in banking and the internet gives us the best summary of the risks I have read.

Still on technology companies, Tim Davies offers three reasons why investors should look for weaknesses in share prices to buy, focussing more on the positives than short-term negatives. 

David Knox takes a critical look at the way the Intergenerational report places a cost on superannuation. It's an important argument as influential voices seek to control the growth of super. 

There is no more important sector in Australian stockmarkets than the banks, especially the Big Four, and Tariq Chotani picks favourites including the vital factor to watch for. Some have it, some don't.

Then Francyne Mu says that in her years of studying the ability of management to focus on a business, 'pure play' and 'best-in-class' companies are better at managing a range of risks than less-focussed conglomerates. 

We have covered the Your Future, Your Super legislation in detail, such as here and here, including doubts about the way it works. But the legislation has received a far more optimistic interpretation in other places, such as Jessica Irvine in the SMH. She wrote: 

"I ran the numbers for my super balance of about $300,000 and calculated that if I invested it in the MySuper option of the best-performing fund (and made no further contributions and the 6-year net return was replicated each year) it would be worth about $1.3 million in 20 years. If I invested in the worst fund, it would be worth only $700,000."

Wouldn't it be great if we could ask a super fund or fund manager that had done well in the previous six years to back-date our application. It's such a shame when we actually invest, we don't know which fund will do best in the only time that matters ... the future.

Two bonus articles from Morningstar for the weekend as selected by Editorial Manager Emma Rapaport

Ethereum has the potential to revolutionise the entire financial landscape, but this cryptocurrency is a high-risk investment asset writes Amy Arnott. And Lewis Jackson speaks to investors about Vanguard's platform fee change. Head of personal investor Balaji Gopal said the new fee structure is designed to help investors make “smart, long term choices” but it could also make small contributions more expensive.

The Comment of the Week must come from my school economics teacher, Paul Coghlan, after my editorial on the need to give students more investing skills. Paul wrote: 

"As the teacher who taught you Economics at Randwick BHS back in the mid 1970s, I offer a few observations based on teaching the discipline for almost fifty years. Before the introduction of Business Studies, Economics was the most popular Social Science of the HSC offerings. Prior to this, it became apparent at the HSC marking centre that there was an increasingly long tail of students who simply could not attain a reasonable level of economic literacy. For many students and probably some teachers, Economics had become too challenging. Rather than dumb down Economics, the new easier and more descriptive Business Studies course was offered. A fellow teacher described the new course as being “a mile wide and a foot deep”. The fact that a diminishing, though more able cohort, was studying Economics, meant that it was far more favourably scaled for the UAI was sometimes overlooked by teachers advising students on course offerings in Years 11 & 12."

Don't forget our Education Centre which is brimming with updates on listed investments (see links below), including a new monthly report from Chi-X.

I will be presenting a webinar for the Australian Shareholders' Association on Tuesday 20 July 2021, as shown below. See here for more details.

Graham Hand, Managing Editor


Latest updates

PDF version of Firstlinks Newsletter

Australian ETF Review from BetaShares

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Monthly market update on listed bonds and hybrids from ASX

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

LIC (LMI) Monthly Review from Independent Investment Research

Monthly Funds Report from Chi-X

Monthly Investment Products update from ASX

Plus updates and announcements on the Sponsor Noticeboard on our website


July 16, 2021

Add "valuation of assets" (in my example, PPOR houses); to those wide variations.

Case in point, my house was worth $X and I spent $Y and a smaller $Z amount (a nice sized shed and fully independent electricity generation via a ton of solar panels) on the renovations, I've been in it for over 10 years and bought it for $X. It is in pretty good condition and has been maintained well. I told them what I had spent on things and the bank did a recent valuation on it at, you guessed it, exactly $X+Y, because full solar and a large shed obviously costs nothing...

So according to the bank, I have made no money on my house in 10 years, despite it being in a great location, renovating it pretty nicely (not overcapitalising) and comparable sales for properties such as my own going for at least what they valued it at, if not more. I thought "Who on earth is the valuer ? Because he's lousy at his job".

This is purely a financial calculation from my point of view, not emotionally driven at all. My logic is that "it is worth more than that because of what I have done to it and the value I have added to it".

Yet smaller (yes, newer) houses on half the size of land in my modest, middle class, middle ring suburb are going for some 25% over and above my valuation...

Business valuation, yes, that's more difficult, but a house that you do something to, that's a little bit easier, you would think...

July 18, 2021

Hi Chris, I know nothing about the current bank valuation practice. The last time I obtained a mortgage was more than 20 years ago. I am wondering if the valuation is purely for bank lending purpose and therefore conservative. Have you looked at your council rate notice and noticed how low the land value is compared to the house prices in the area? I suspect there might be a connection between the land value and bank valuation. Maybe the bank value reflects the land value and building cost and doesn’t not reflect housing supply and demand? Pure speculation on my part.

July 15, 2021

I didn't discover economics until my first year of uni when I immediately switched majors. Subsequently, it has been a useless degree, but as a way to think, it has been excellent. I think Russ Roberts at EconTalk sums it up best; economics is really about how to get the most out of life. We should try not to limit its scope to financial economics, either.

As a final point, IMO, investing principles are best taught at home. It isn't that difficult when distilled into its key components, but it does take some dedication. Superannuation funds are a great buffer for the everyday joe, but one doesn't learn so much without understanding the underlying mechanics of a portfolio.


Leave a Comment:


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.


Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.



© 2021 Morningstar, Inc. All rights reserved.

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.

Website Development by Master Publisher.