Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 373

Welcome to Firstlinks Edition 373

  •   2 September 2020
  • 1
  •      
  •   

Weekend market update: Following last Thursday when the NASDAQ was down 5% on the day and S&P500 down 3.5%, further falls on Friday of 1.3% and 0.8% respectively delivered the biggest pullback since June. However, both markets closed well above their lows on better-than-expected US employment data. With the tech sector now accounting for a third of the S&P500, where big tech goes, so does the market. The ASX200 started the week at 6,079 but finished at 5,925 as Australia followed Wall Street down with a 3% fall on Friday. 

***

It was an historic sign of the times last week when the company with the longest record in the Dow Jones Industrial Average (DJIA) index, ExxonMobil, was evicted and replaced by a software company, Salesforce. Amazingly, as recently as 2013, ExxonMobil was the largest company in the world. The DJIA has great significance as the first stock market index, introduced in 1896. Charles Dow chose the 12 most influential companies of the day, added up their stock prices and divided by 12. The index increased to 30 stocks in 1928 where it remains today, still carrying strong influence.

Only one company, General Electric, in the original stocks in the index even exists today, and it is no longer in the DJIA. How many of the current 30 DJIA companies listed below will drop out or cease to exist in coming decades? We think of them as a permanent part of the industrial landscape.

The DJIA currently comprises: Salesforce, Procter & Gamble, DowDuPont, Amgen, 3M, IBM, Merck, American Express, McDonald's, Boeing, Coca-Cola, Caterpillar, JPMorgan Chase, Walt Disney, Johnson & Johnson, Walmart, Home Depot, Intel, Microsoft, Honeywell, Verizon, Chevron, Cisco Systems, Travelers Cos, UnitedHealth Group, Goldman Sachs, Nike, Visa, Apple, Walgreens Boots.

Many companies decline or disappear over time, and 'set-and-forget' investing is more problematic than ever.

A better representation of the broad US economy and now more-frequently quoted is the S&P500 index, and the sector weightings below confirm this rapid change of fortunes. Technology is the big winner and energy is the big loser. Any fund manager on the wrong side of that trade should no longer have a job.

Two substantial changes this week by central banks show how they can support the economy without lowering interest rates. Australia's Reserve Bank increased the size of the Term Funding Facility (TFF) used as a low cost funding source by banks, supposedly to finance business loans. Total funds available at a fixed rate of 0.25% for three years are now $200 billion, currently drawn to $52 billion. With bank coffers already full from retail term deposits (the savings rate rose from 6% to 20% in this week's National Accounts), we can safely expect no funding problems for our banks for many years.

In the US, the Fed signalled rates close to zero for many years as it relaxed its inflation target. It forces investors into other asset classes to achieve decent returns and will further support the incredible run in tech stocks.

The fires of the superannuation debate continue to burn as we covered two weeks ago. Paul Keating turned up the gas this week by claiming the Liberal Party wants to end compulsory super:

“Not take a chink out of it, but to actually destroy it. They intend to do this in two ways. That is, they want to drain money out of the bottom of the system, and stop money coming into the top of the system ... This malarky they talk of, ‘if they take it in super, they won’t get it in wages’, there’s been no wages growth for eight years and there’s not going to be."

As another Labor ex-PM, Kevin Rudd, also weighed in, Senator Jane Hume took to the airwaves, referring to Labor opening a crypt (clearly a reference to dead bodies) to bring out former leaders to support the super system. The arguments have a long way to play out.

In a hectic week, we also saw the final vestiges of the once-dominant bank position in wealth management sold off when NAB disposed of MLC to IOOF, and the capital raising from retail investors (a subject we have covered here and here) had the usual twist. In raising $1 billion overall, IOOF would double its capital base at $3.50 a share, a discount of over 20% to the $4.51 price at the time of the issue. IOOF is only looking for $50 million in the retail SPP, but as the shares closed on Wednesday at $3.53, smaller investors are not missing much this time.

Then the new chair of AMP, Debra Hazelton, wasted no time putting her stamp on the business by announcing a complete portfolio review "to ensure we appropriately assess all options to maximise shareholder value in a considered and disciplined manner.” Everything for sale at a price.

Here's a personal footnote. About 35 years ago, when I was running New Issues at Commonwealth Bank, many of our bond counterparties were Japanese, and we decided we should hire someone who could speak Japanese to assist in negotiations. We advertised widely and a school teacher who taught Japanese applied. She had no financial markets experience but was clearly smart and she worked with me in Sydney for a couple of years.

Then the bank transferred her to the Tokyo office, where a few years later, she became Treasurer of the local office. I visited her there on business, and she kindly showed me around the bars and karaoke rooms. Later, she returned to Sydney to head the office of Mizuho Bank.

As the new chair of AMP, Debra replaces David Murray who was CEO at Commonwealth Bank when we hired her. Best wishes to my former colleague in her challenging new role.  

Back to investing basics ...

This week's edition includes a couple of articles which experienced investors can share with those who may be at an earlier stage in their investing journey.

Thomas Philips was asked by a friend to draw on his many years of investing and provide a simple guide based on what he had learned. Such was the enthusiastic reaction that we felt it warranted a larger audience. Likewise, Robin Bowerman looks at inexperienced investors entering the stock market for the first time and warns about their speculating.

Emma Rapaport delves into a new report on investing by SMSF trustees during the pandemic, summarising changes in five key charts. Then Peter Moussa offers his strategies for the uncertain markets we are facing, with some ideas more suitable for a sophisticated investor.

The combination of market and legislative changes, early super withdrawals, people working longer and contribution levels is having a profound impact on retirement savings. Erinn Cullinane and Nick Callil create specific examples to show how much longer people may need to work if super balances do not meet retirement needs.

A change of pace to Michael Collins on the nature of US-China relations and the extent to which a new 'cold war' may eventuate, then Mark Mitchell says the role that fixed interest played in portfolios has completely changed. How much can it protect falls in stock markets?

This week's White Paper from Vanguard looks at whether active equity managers can be cloned using inexpensive factors that drive stock market returns. If returns can be mimicked by simple factor strategies, often available using ETFs, investors may lower costs and demand more from their managers.

Graham Hand, Managing Editor

Latest updates

PDF version of Firstlinks Newsletter

Australian ETF Review from Bell Potter

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

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

Latest LIC Quarterly Report from Bell Potter

Plus updates and announcements on the Sponsor Noticeboard on our website

 

banner

Most viewed in recent weeks

Super changes, the Budget and 2021 versus 2022

Josh Frydenberg's third budget contained changes to superannuation and other rules but their effective date is expected to be 1 July 2022. Take care not to confuse them with changes due on 1 July 2021.

Noel's share winners and loser plus budget reality check

Among the share success stories is a poor personal experience as Telstra's service needs improving. Plus why the new budget announcements on downsizing and buying a home don't deserve the super hype.

Grantham interview on the coming day of reckoning

Jeremy Grantham has seen it all before, with bubbles every 15 years or so. The higher you go, the longer and greater the fall. You can have a high-priced asset or a high-yielding asset, but not both at the same time.

Whoyagonnacall? 10 unspoken risks buying off-the-plan

All new apartment buildings have defects, and inexperienced owners assume someone else will fix them. But developers and builders will not volunteer to spend time and money unless someone fights them. Part 1

Buffett says stock picking is too hard for most investors

Warren Buffett explained why he believes most investors should not pick stocks but simply own an S&P 500 index fund. "There's a lot more to picking stocks than figuring out what’s going to be a wonderful industry."

Should investors brace for uncomfortably high inflation?

The global recession came quickly and deeply but it has given way to a strong rebound. What are the lessons for investors, how should a portfolio change and what role will inflation play?

Latest Updates

Exchange traded products

ETFs are the Marvel of listed galaxies, even with star WAR

Until 2018, LICs and LITs dominated ETFs, much like the Star Wars franchise was the most lucrative in the world until Marvel came along. Now ETFs are double their rivals, just as Marvel conquered Star Wars.

Shares

Four leading tech stocks now look cheap

There are few opportunities to buy tech heavyweights at attractive prices. In Morningstar’s view, four global leaders are trading at decent discounts to their fair values, indicating potential for upside.

Shares

Why copper prices are at all-time highs

Known as Dr Copper for the uncanny way its price anticipates future economic activity, copper has hit all-time highs. What are the forces at play and strategies to benefit from the electric metal’s strength?

Economy

Baby bust: will infertility shape Australia's future?

In 1961, Australian women had 3.5 children on average but by 2018, this figure stood at just 1.7. Falling fertility creates a shift in demographics and the ratio of retirees to working-age people.

SMSF strategies

The Ultimate SMSF EOFY Checklist 2021

The end of FY2021 means rules and regulations to check for members of public super funds and SMSFs. Take advantage of opportunities but also avoid a knock on the door. Here are 25 items to check.

Economy

How long will the bad inflation news last?

The answer to whether the US inflation increase will prove temporary or permanent depends on the rates of growth of the quantity of money. It needs to be brought down to about 0.3% a month, and that's a problem.

Economy

The ‘cosmic’ forces leading the US to Modern Monetary Theory

If the world’s largest economy adopted a true MMT framework, the investment implications would be enormous. Economic growth would be materially greater but inflation and interest rates would also be much higher.

Sponsors

Alliances

© 2021 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.

Website Development by Master Publisher.