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- There were no changes to the model portfolios this month.
- The following dividends were accrued this month. Income Portfolio: QBE (28cps), ARF (3.38cps) and SKI (8cps). Core Portfolio: CSL (123cps), RHC (60cps), AMC (29.8cps), BHP (78.1cps), RI (338.7cps) and S32 (9.6cps).
- The forecast net yield on the Income Portfolio is 4.7%, while the Core Portfolio has a forecast net yield of 3.9%.
- Our cash position in the Core and Income Portfolios is 20.2% and 21.3% respectively.
* Inception 31st Dec 2010
Overview of Markets
International Equity Market Performance
International equities were up 1.3% for the month of March, with the quarter booking a gain of 12.5% for the MSCI All-Country Total Return Index (incl. dividends) as markets continued to recover a substantial amount of the losses incurred in the latter stages of 2018. The new year has brought with it a new wave of optimism, with equities and credit rallying strongly across the world. The sell-off in equities and credit in the final quarter of last year was caused predominantly by concerns about the potential for an escalation in the trade war between the US and China, fears that higher interest rates could hurt the US economy, and broader worries about a slowdown in global growth. US markets were up on average 1.5% for the month, marginally outperforming international markets. The Nasdaq was the key outperformer, up 2.6% for the month and up 16.5% for the quarter, while the S&P500 was up 1.8% for the month and up 13.1% for the quarter, in US$ terms. The Dow was the worst performer, flat for the month, and up 11.2% for the quarter.
European markets were up on average 1.7% for the month and were up on average 10.2% for the quarter to 31 March, underperforming International and US markets for the quarter. The UK’s FTSE 100 was the worst performing European index for the quarter, up 8.2%, as the ongoing uncertainty around Brexit persisted. The French CAC40 was up 13.1% for the quarter, while the German DAX was up 9.2%. Asia Pacific markets were down on average 0.1% for the month, with TOPIX the key underperformer. Asia Pacific markets were up on average 7.4% for the quarter, with Honk Kong the best performing market. Emerging Markets were down on average 0.8% for the month with the Shanghai composite the strongest market, while Emerging Markets were up on average 10.3% for the quarter.
For the 12 months to 31 March 2019, the NASDAQ is still the best performing developed market index, up 9.4%, followed by the Dow Jones, while the Turkish market is the worst performer, down 18.4%.
In many ways, the weakness in Q4 set the stage for the recovery in equity markets this quarter. The Federal Reserve (Fed) reacted to the market weakness and weaker global growth by becoming more patient. Much of the rally this year has been built on market expectations that the Fed now won’t raise interest rates again at any point in the next few years—in fact, the next move expected from the Fed by the bond market is now a cut, with 10-year Treasury yields down to 2.4%. The sharp fall in the US stock market late last year was probably also a factor in deterring the US administration from further increasing tariffs on China over the quarter. So the stock market decline last year helped to reduce two of the major risks that had caused it in the first place.
The key questions, then, are: will the Fed now be as dovish as expected, and will the US administration become more confrontational in its trade policy now that equity markets have rallied? In addition, if the Fed does cut rates, as the market now expects, will it be because the worries about a slowdown in global growth that plagued markets late last year prove to have been warranted?
On interest rates, there is some reason for optimism. Despite the recovery in markets, commentary from some key Fed officials suggests that the US central bank is considering changing the way it responds to inflation. The brief version of their argument is that, with inflation having stood below 2% for most of the last decade, perhaps it should be allowed to run above 2% for a while so that inflation averages 2% over an as-yet unspecified period of time, rather than the punch bowl being taken away from the party as soon as inflation picks up above target.
Time will tell whether the Fed will act pre-emptively to support activity in the coming months. In the meantime, a more dovish Fed, combined with the news that quantitative tightening will end in September, has supported fixed income markets this year, from government bonds to credit.
On trade, while some progress seems to have been made this quarter between the US and China, there is still uncertainty as to how the negotiations will evolve. Some of the underlying tension is unlikely to be resolved easily given that the US and China are ultimately competing with each other in several key industries, such as technology. In addition, even if an ongoing truce can be agreed between the US and China, there is no guarantee that the US administration won’t turn towards a more confrontational trade policy with Europe.
So, on monetary policy and trade there are reasons for optimism, but also some risks given a fairly optimistic outcome on both fronts is now already priced in.
For the recovery in markets to continue, the weakness in global growth will also have to recede, extending what has already been a very long economic expansion by historical standards. On this front, the data in the first quarter was more mixed.
The weakness in the global economy has been most stark in the manufacturing and export sectors. Eurozone industrial production is down 2.5% since its peak in December 2017. Korean and Taiwanese exports both declined about 8% year on year (y/y) in March. While it is tempting to blame this global manufacturing and export slowdown on the trade war, softer Chinese domestic demand has also been a contributor. Again, on this front there are reasons for optimism, but also some caution. China’s non-manufacturing purchasing managers’ index (PMI) increased to 54.8 in March, while its manufacturing PMI rebounded to slightly over 50, indicating a return to expansion. On the other hand, China’s imports declined 5.2% y/y in US dollar terms in February having grown by 27% y/y in July last year.
The Chinese authorities are now stimulating domestic demand with a package of tax cuts, infrastructure investment and measures designed to support bank credit growth. This should lead to a stabilisation in Chinese growth. On the other hand, the magnitude of credit expansion is likely to be less significant than the last time global manufacturing went through a weak patch, in 2015-16. Chinese stimulus may therefore be less effective at boosting exports across the rest of Asia and Europe than in the past. The manufacturing business surveys for March so far show little sign of an improvement in the outlook, with the eurozone manufacturing PMI declining to 47.5 and the new export orders component declining to 44.8. Korea and Taiwan’s manufacturing PMIs did improve in March, but only to around 49. Readings below 50 indicate continued weakness ahead.
Australia’s ASX200 Accumulation Index (including dividends) was up 0.7% for the month of March underperforming global markets. For the quarter ended 31 March 2019 the accumulation index was up 10.9% while for the 12 months ending 31 March 2019 the index was up 12.1%, well ahead of the MSCI Global Accumulation Index, and ahead of the US indices which were up, on average 8.1%.
Australian jobs data added nothing to the debate about whether to cut rates or not. Unemployment fell, but this was due to reduced labour market participation. Employment slowed but this was after a huge surge in January so could just be noise. That said skilled job vacancies fell again in February consistent with falling ANZ job ads in pointing to slower jobs growth ahead. And the labour market is a lagging indicator. Australian job vacancies rose 1.4% over the 3 months to February suggesting the jobs market is still strong and growing but momentum has slowed from 5.2% quarter-on-quarter a year ago and annual growth at +9.9% year-on-year is slowest in 2 years, indicating that jobs growth is likely to slow.
Meanwhile growth in private credit remained modest in February with investor credit stalling and slowing to a record low of just 0.9% year-on-year. There was a bit of good news with a rise in the CBA’s composite business conditions PMI for March, but this looks like normal volatility and at a reading of 50 it remains very weak.
Household wealth is reported by the ABS to have gone backwards in the December quarter by 2.1% as house prices and share markets fell. Since then share markets have bounced back but house prices have continued to fall. With the RBA estimating that each 10% decline in net housing wealth knocks around 1% off consumer spending, falling house prices will act as a significant drag on consumer spending in the year ahead.
10 of the 12 sectors in the Australian market were stronger in March, with Property, Consumer Staples, Telecoms and Mining the key contributors. The Energy and Financials ex Property sectors were the key detractors. For the March quarter, all 12 sectors were higher, with the Technology, Mining and Materials sectors the biggest contributors.
The Resources, Info Tech and Property Trust sectors have had the best returns (capital gains plus dividends) in the 12 months to 31 March 2019. Only the Banks recorded negative returns over the past year.
Small cap stocks (exASX100) outperformed large cap stocks (ASX100) in March. Very large cap stocks (ASX20) are trending just above large cap stocks and have performed better during the recent market correction and recovery.
ASX200 Best and Worst
Bellamy’s Australia (BAL), Wisetech Global (WTC) and Lynas Corporation (LYC) were the three best performing stocks in the ASX200 for March. Eclipx Group (ECX), Ardent Leisure Group (ALG) and New Hope Corporation (NHC) were the three worst performing stocks in the ASX200 for March.
The Core portfolio outperformed the ASX200 Accumulation index for the month of March, by 1.3%, while the Income portfolio outperformed by 0.8%. The Income portfolio was 2.2% ahead of the benchmark for the rolling quarter to March, while the Core portfolio was in line. The Core portfolio has outperformed the benchmark ASX200 Accumulation Index for the 12 months to 31 March 2019, up 14.7%, with 2.7% of outperformance relative to the benchmark, while the Income portfolio is up 17.8% for the 12 months, 5.7% ahead of the benchmark. Both portfolios have significantly outperformed the benchmark on two, three and five year timeframes, on both absolute and risk adjusted measures.
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.
Both portfolios have significantly outperformed the benchmark on two, three and five year timeframes, on both absolute and risk adjusted measures.
Patersons Australian Core Portfolio
The Core Portfolio outperformed the benchmark ASX200 Accumulation Index for the month of March as a result of our exposures to Property, specifically Charter Hall (CHC). The portfolio also benefited from our overweight position Resources, specifically RIO Tinto (RIO) and BHP Group (BHP). Our exposures to Banks have hurt performance, with ANZ Banking Group (ANZ) the biggest detractor, along with Commonwealth Bank (CBA). Our exposure to Woodside Petroleum (WPL) also detracted during the month.
The Income Portfolio outperformed the benchmark ASX200 Accumulation Index for the month of March as a result of our exposure to Property in the form of Charter Hall (CHC and Arena REIT (ARF). Telstra (TLS), Coles Group (COL), Magellan (MFG) and Wesfarmers (WES) were other key contributors. Our exposure to Banks also impacted performance in the Income portfolio, with ANZ Banking Group (ANZ), Commonwealth Banks (CBA) and Westpac (WBC) all lower for the month.
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.