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The Australian Core Portfolio is designed for investors looking for a Core Equities Portfolio exposure to high quality ASX listed securities, seeking both capital growth and dividend income, selected on quality, value and momentum factors.
The Australian Income Portfolio is designed for investors looking for an Income Portfolio exposure to high quality ASX listed securities paying a high, sustainable dividend yield.
- There were no changes to the portfolios this month.
- There were no dividends accrued this month (on an ex-dividend basis).
- The forecast net yield on the Income Portfolio is 4.1% (65% franked), while the Core Portfolio has a forecast net yield of 3.1% (52% franked), inclusive of the respective cash positions.
- Our current cash position in the Core Portfolio is 22.2% and in the Income Portfolio is 10.1% (21.3% when our fixed interest exposure is included).
* Inception 31st Dec 2010
Overview of Markets
International Equity Market Performance
After a stellar 2019, risk markets began the new decade in a good mood, before volatility picked up towards the end of the month. Concerns over the coronavirus outbreak checked the stock market optimism that followed the signing of a phase one trade deal between the US and China. Markets were less perturbed by the brief flare-up in tensions between the US and Iran, which de-escalated swiftly. Economic data across regions continued to show signs of improvement and, with major central banks set to remain accommodative in the coming year, near-term recession fears appear to be subsiding.
With the turn in sentiment, safe havens performed well in January. The US dollar and Japanese yen both appreciated and government bonds outperformed equity markets – US Treasuries and euro government bonds returned 2.4% and 2.5% respectively. In a month where equities were down, the S&P 500 continued its leadership of major stock markets and was flat over the month. Emerging market equities were most affected by the coronavirus outbreak and fell 4.7%.
The signing of a phase one trade deal between the US and China on 15 January was welcome news, representing a thawing in tensions, but it is important to remember that significant tariffs will remain in place and that the structural issues to be tackled in the next phase are not likely to be resolved easily. The agreement means the US will suspend its next planned round of tariffs, as well as cutting the existing tariff rates on around US$110 billion of Chinese imports from 15% to 7.5%. In exchange, China has committed to boost its imports from the US by around US$200 billion over the next two years; allow greater access to its markets for financial services companies; enforce intellectual property protections; and be more transparent in its currency management practices.
The key now will be to watch upcoming economic data releases to see whether global businesses feel empowered by the deal to restore investment plans that were postponed in 2019. We do not expect a vigorous bounce back in activity, since ongoing trade concerns, coupled with the uncertainty caused by the presidential election in November, are likely to keep firms hesitant.
The US economy grew at an annualised pace of 2.1% in the final quarter of 2019 and broadly remains on solid footing. Manufacturing remains weak, with the December release of the Institute for Supply Management’s (ISM) manufacturing survey showing that the sector continues to contract. However, the services side of the economy remains resilient, and the ISM non-manufacturing survey picked up 1.1 points to 55.0 in December. And the consumer, the bedrock of the US economy, is still in good shape, with confidence rising significantly in January.
Growth in jobs (non-farm payrolls) moderated in December. The three-month average pace of job growth now sits at 184,000 per month. This is well above the 100,000 that we would generally regard as concerning however, the number of job openings warrants monitoring since it fell significantly in November.
With the economy evolving broadly in line with the Federal Reserve’s outlook of moderate economic growth and a strong labour market, the decision to keep the key interest rate unchanged at the January meeting came as no surprise to markets.
Growth in the Eurozone remains positive but tepid, at 0.1% in the final quarter of 2019. The consumer remains supported by a healthy labour market – unemployment in the region fell 0.1 percentage point in December to 7.4%.
More encouragingly, the manufacturing side of the economy showed a significant rebound. Should international trade improve on the back of the phase one trade deal, then the manufacturing hubs of Germany and Italy, which both have about a fifth of their employment in manufacturing, stand to benefit.
Christine Lagarde’s second meeting in charge of the European Central Bank (ECB) was a low-key affair. Policy rates were left unchanged, but, more significantly, a comprehensive review of monetary policy strategy was announced. The review will include an assessment of the monetary policy toolkit, including its effectiveness and potential side effects, how the ECB approaches price stability, and environmental sustainability. Importantly, we do not believe the review will conclude that negative interest rates should be reversed.
Lagarde also reiterated her call for more fiscal stimulus, in particular to countries more able to borrow than others, saying a good fiscal support would give much more effect to our monetary policy.
The UK officially exited the EU on 31 January 2020. But those hoping that this marks the curtain call for this long Brexit performance will surely be left disappointed. The UK and EU will now need to negotiate a new free trade agreement during the 11 months of transition. As a result, talk and risk of a hard Brexit will persist to some degree, and may intensify by mid-year.
Economic data deteriorated notably ahead of the December election, but there has been some rebound in the subsequent data. Employment grew by 208,000 in the three months to November. The flash purchasing managers’ index releases for January, the first major data points since the election, pointed to a sharp improvement in both manufacturing and services, with the composite rising from 49.3 to 52.4.
This was sufficient for the Bank of England to judge that interest rates should be kept on hold. We believe interest rates will be held at 0.75% as the downside risks to global growth fade and the domestic economy is supported by a sizeable fiscal tailwind.
January saw the outbreak of the latest coronavirus, originating in Wuhan, China. At the time of writing, more than 17,000 people have contracted the disease, with 362 confirmed fatalities. In comparison, the SARS outbreak of 2003 infected over 8,000 people, with 774 deaths. Increased travel over the Lunar New Year celebrations is likely to have aided the spread of the disease, and 26 countries outside of China have now reported cases.
As we are still in the early stages of the outbreak, and given the incubation period of up to 14 days (before symptoms present), it is hard to gauge exactly how the situation will develop and the subsequent economic impact. It is likely that this will be a near-term drag on growth in China and its neighbours, as infrastructure networks shut down and more people remain at home. A concerted policy response from the Chinese authorities seems likely, which may assist a recovery in the coming quarters. The prospect of a weaker global economy in the near term and associated weaker demand for oil led to an 11.9% fall in the price of Brent crude oil over the month.
The outbreak comes at a time when economic data suggests that the Chinese economy is stabilising in response to accommodative monetary and fiscal policy. China grew at 6.0% year on year (y/y) in the fourth quarter of 2019. December retail sales continued to grow at 8.0% y/y, while industrial production picked up 0.7 percentage points to 6.9% y/y.
The S&P/ASX 200 Accumulation Index rallied during January, up 5.0%, outperforming its global counterparts.
November housing finance data showed that the value of housing lending to owner-occupiers (ex-refinancing) was up by a solid 1.8% in November, with a large rise in investor lending. Australian consumer sentiment in January fell by 1.8% and is around its lowest levels since mid-2015.
The CBA PMI’s weakened for services (to 48.9) and fell slightly for manufacturing (to 49.1). Skilled vacancies according to the Department of Employment and Workplace relations rose by 0.6%, which was in line with the surprisingly good December employment data. Employment increased by 28.9K in December, driven by part-time jobs (+29.2K) while full-time jobs fell by 300. The unexpected strength in jobs growth pushed the unemployment rate down to 5.1% (from 5.2% last month), which is the lowest unemployment rate since March 2019.
The December quarter inflation data showed that the RBA’s preferred measure of “core” inflation – the “trimmed mean inflation index” rose by 0.4% with annual growth remaining unchanged at 1.6% (see chart below). While this is in line with the RBA’s forecasts, inflation is still stuck well below the RBA’s 2-3% target (and has been undershooting the target since 2014). The solid December employment data and this week’s inflation numbers gives the RBA some breathing space for now with the central bank not cutting the cash rate at the February meeting. However, there is still the need for more stimulus in Australia and we expect more rate cuts this year – with another rate cut in March or April with the cash rate expected to reach 0.25% over the next 6 months.
The sectors which led the Index higher over the month were Health Care (up 12.0%), Information Technology (up 11.1%) and Consumer Staples (up 8.2%). The worst performing sectors were Utilities (down 0.6%), Energy (down 0.7%) and Resources (down 0.7%).
ASX200 Best and Worst
Within the larger cap ASX100, the best performing stocks in January were Afterpay (APT), Magellan Financial (MFG) and Link Administration (LNK). The worst performing stocks in the ASX100 for January were Treasury Wine Estate (TWE), NIB Holdings (NIB) and CIMIC (CIM).
Within the ASX200, the best performing stocks in January were Polynovo (PNV), Afterpay (APT) and Silver Lake Resources (SLR). Nearmap (NEA), Treasury Wine Estate (TWE) and Western Areas (WSA) were the three worst performing stocks in the ASX200 for January.
The Core portfolio underperformed the ASX200 Accumulation index for the month of January by 1.1%, while the Income portfolio outperformed by 0.4%. The Core portfolio was 1.5% ahead of the benchmark for the rolling quarter to January, while the Income portfolio was 0.2% below the benchmark.
The Core portfolio has underperformed the benchmark ASX200 Accumulation Index for the 12 months to 31 January 2020 by 4.6%, while the Income portfolio has underperformed by 1.8%.
NB: Prior to March 2013, the performance of the portfolios was calculated assuming an equal weighting to each stock.
Note that it is not unusual for the Income portfolio, which is defensive in nature, to outperform the market during bear markets and underperform during bull markets. On the other hand, the Model portfolio is expected to outperform its benchmark in all market conditions over the long term.
Australian Core Portfolio
The Core Portfolio underperformed the benchmark ASX200 Accumulation Index for the month of January primarily as a result of our exposure to Sydney Airport (SYD), South32 (S32) and Rio Tinto (RIO). Key contributors were Charter Hall (CHC), CSL (CSL) and Ansell (ANN). Our large cash position also held the portfolio back in January.
The Income Portfolio outperformed the benchmark ASX200 Accumulation Index for the month of January primarily as a result of our exposure Magellan Financial (MFG), Charter Hall Group (CHC) and Wesfarmers (WES). Key detractors were Alumina (AWC), AGL Energy (AGL) and our cash and fixed interest holdings.
In the charts below, we have distinguished the Miners separately from the Materials GICs sector and the Banks from the Financials GICs sector. We remain underweight Banks in both portfolios.
Warning: This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate to your particular investment objectives, financial situtation or particular needs. Prior to making any investment decision, you should assess, or seek advice from your adviser, on whether any relevant part of this report is appropriate to your financial circumstances and investment objectives.