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- There were no changes to the model portfolios this month.
- The following dividends were accrued this month. Income Portfolio: No dividends accrued. Core Portfolio: AMC (16.8cps).
- The forecast net yield on the Income Portfolio is 4.7%, while the Core Portfolio has a forecast net yield of 3.8%, inclusive of the respective cash positions.
- 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
After a strong first quarter, risk assets continued their rally in April. International equities were up 3.5% for the month of April, with the quarter booking a gain of 8.1% for the MSCI All-Country Total Return Index (incl. dividends). This year’s rebound has been driven by accommodative central banks, the expectation of a recovery in Chinese growth, and the anticipation of a resolution to Sino-American trade negotiations. Further support for the markets came from a solid start to the Q1 US earnings season. After earnings expectations had been revised sharply lower since the beginning of the year, with Q1 2019 estimates even falling into negative territory, companies were able to deliver positive surprises.
US markets were up on average 3.7% for the month, marginally outperforming international markets. The Nasdaq was once again the key outperformer, up 4.7% for the month and up 11.2% for the quarter, while the S&P500 was up 3.9% for the month and up 8.9% for the quarter, in US$ terms. The Dow was the worst performer, up 2.6% for the month, and up 6.4% for the quarter.
European markets were up on average 4.5% for the month and were up on average 9.6% for the quarter to 30 April, outperforming International and US markets for the quarter. The UK’s FTSE 100 was the worst performing European index for the quarter, up 6.4%, as the ongoing uncertainty around Brexit persisted. The French CAC40 was up 11.9% for the quarter, while the German DAX was up 10.5%. Asia Pacific markets were up on average 3.7% for the month, with TOPIX the key underperformer. Asia Pacific markets were up on average 5.8% for the quarter, with the Nikkei, the best performing market. Emerging Markets were up on average 2.1% for the month with the Shanghai composite the weakest market, while Emerging Markets were up on average 3.8% for the quarter.
For the 12 months to 30 April 2019, the NASDAQ is still the best performing developed market index, up 14.6%, followed by Brazil, while the South Korean market is the worst performer, down 12.4%.
The government shutdown and cold weather in January and February distorted economic data in the US at the beginning of the year, leading to increased recession fears in the market. The March labour market report helped to calm near-term recession fears. The 196,000 payroll gain exceeded consensus and was much better than the 33,000 gain reported in February. The unemployment rate stayed at 3.8%, which confirms the view that the 10-year economic expansion is losing momentum but not faltering. Wage growth of 3.3% year on year (y/y) can be viewed as positive in two ways. First, it is high enough to support real wage growth and therefore consumption, and second, it is not too high to raise concerns about rising inflationary pressure at the Federal Reserve (Fed). The disinflationary trend in consumer prices continues to be a headache for the central bank. Core CPI was lower than expected at 2.0% y/y in March, and has continued to trend down since the high of 2.4% in July 2018. The relationship between inflation and unemployment—the Phillips curve—continues to be broken.
Meanwhile, purchasing managers’ indices (PMIs) showed diverging momentum in the US economy. While the Institute for Supply Management’s manufacturing index surprisingly increased to 55.3 for March, the non-manufacturing index decreased to 56.1 after the boom-like reading of 59.7 in the previous month. However, index levels for both sectors of the economy correspond with an economy growing at or slightly above trend, and not with an economy heading into recession.
The first estimate of US Q1 GDP growth was much higher than expected at 3.2% annualised. This indicates that the US economy is still growing at an above-trend pace. However, investors should take this surprisingly strong showing with a pinch of salt. Of the 3.2% growth in Q1, 0.7% came from rising inventories and 1.0% came from improving trade, but real domestic final demand has decelerated. Trade is a notoriously volatile component of GDP, and elevated inventories tend to correct in future quarters, so it seems likely that real GDP growth in the coming quarters will be lower. Let’s not forget the fading tailwind from fiscal stimulus that sets in next quarter. The US economy is still on course to slow from above-trend to trend growth by the end of the year.
In the Eurozone, manufacturing continues to be the weak spot, with the manufacturing PMI only improving slightly to 47.8 in April. The new orders component picked up a little but remains in contractionary territory. More positively, the employment component stayed above 50, at 50.8—an indication that poor activity data has not yet had a negative impact on the labour market. The unemployment rate fell slightly to 7.7% in the March labour market report. This is consistent with relatively stable data from the service sector and the consumer. The services PMI improved to 52.5 and consumer confidence fell to only -7.9, which is lower than in the previous month (-7.2) but still far above the long term average of -11.7.
In the April meeting of the governing council, the European Central Bank (ECB) left interest rates unchanged, as expected. The ECB expects rates to remain at their present levels at least through the end of 2019, since the slower growth momentum is expected to extend further into this year. The Eurozone bank lending survey for the first quarter of 2019 suggests that overall bank lending conditions remained favourable. The new series of targeted longer-term refinancing operations (TLTROs) that the ECB announced in March will help to safeguard favourable bank lending conditions. This will be crucial for Italian and Spanish banks, which are the largest borrowers of the existing TLTRO-II. Details on the precise terms of the new TLTRO-III series will be communicated at one of the forthcoming meetings. March flash CPI in the Eurozone drifted lower to 1.4% y/y and core CPI slowed to 0.8% y/y, its lowest level for a year. This provides further justification for the ECB to remain accommodative until the inflation target is achieved.
Standard & Poor’s affirmed Italy’s BBB rating, two levels above junk, but retained a negative outlook. Although this was widely expected, it removes a major risk factor for the markets. Growth in Italy and Spain surprised to the upside and helped to lift Eurozone Q1 GDP to an annualized 1.5% growth speed, which is close to trend growth. Periphery bonds outperformed German government bonds in April.
In China, the manufacturing PMI disappointed expectations, falling back from March’s reading to 50.2 for April, but still an improvement from a multi-year low of 48.3 in January. The service sector PMI increased for March. China’s GDP grew 6.4% y/y in 1Q19, above market expectations and flat from 4Q18. Industrial production growth rose from 5.3% to 8.5% growth y/y in March, and retail sales growth inched up, delivering more evidence that fiscal and monetary stimulus is feeding through to the real economy. Monetary conditions also show signs of improvement. New yuan loans rose well above the level in February and the consensus forecast, while Q1 aggregate total social financing, at RMB 8.2 trillion, easily surpassed credit expansion in the previous years. The recent surge in credit growth and improving sentiment from a possible trade agreement between China and the US should support economic activity in the coming quarters.
Chinese equities lost some momentum in April after a strong rally in Q1, in part on worries the government might begin dialling back stimulus in light of improved growth. Although this is a fair assessment, it should also be noted that Chinese policymakers remain vigilant and will provide support if the economic data softens again. The future success of the policy measures will also depend on China’s ability to sign a trade agreement with the US administration in the coming months. China imports, at -7.6% y/y for March, still haven’t shown any major improvement, which would be a precondition for a broader recovery in economic activity in the region.
Emerging markets continue to face several challenges. Activity in the large Asian economies of Korea and Taiwan is still due to pick up. Manufacturing PMIs improved in March, but at 48.8 and 49.0 respectively, the Korean PMI and the Taiwanese PMI are still signalling continued weakness in economic activity. In particular, the new export orders sub-component continues to be depressed. Both export-dependent countries would benefit from the success of the China stimulus and a recovery in global trade.
Supply concerns and the announcement of the planned end to the US administration’s waivers on oil sanctions on Iran sent the oil price higher in April, on top of the 27% price increase in Q1. While economic activity and equity markets in net oil-exporting countries such as Russia, Saudi Arabia, Qatar, and UAE benefited from this development, it is an increasing headwind for oil-importing and inflation-prone countries. Argentina and Turkey, in particular, showed worrying signs of macroeconomic instability last month, with the Turkish lira falling by more than 5% and the Argentinian peso by more than 2.5% vs. the US dollar.
The US dollar remained relatively strong vs. most of the EM currencies, which continues to be a headwind for the region.
Australia’s ASX200 Accumulation Index (including dividends) was up 2.4% for the month of April underperforming global markets. For the quarter ended 30 April 2019 the accumulation index was up 9.3% while for the 12 months ending 30 April 2019 the index was up 10.4%, well ahead of the MSCI Global Accumulation Index, but slightly below the US indices which were up, on average 12.0%.
Australian home prices continued to slide in April with the pace of decline slowing but more cities succumbing to falls. The slowing in the pace of home price falls, along with a bounce in housing finance, a pick-up in auction clearance rates and a stabilisation in new home sales according to the HIA are positive signs, suggesting we may be getting close to the bottom. At the very least we are not seeing any of the panic/forced selling that some had feared would occur.
Meanwhile, building approvals fell back sharply in March and credit growth remained soft with lending growth to housing investors falling to a record low. Business conditions PMIs mostly rose in April, but they remain soft and well down from last year’s highs and employment components have fallen.
Along with weak consumer price inflation, producer price inflation for the March quarter was also soft, import prices fell and skilled vacancies fell again. On the positive side, export prices continued to surge in the March quarter (helped by the higher iron ore price) pushing up the terms of trade. The flow-on of this to profits and tax revenue in Canberra, along with lower welfare payments, saw a further improvement in the Federal budget, making a surplus this financial year quite likely. Which in turn may mean scope for more fiscal stimulus.
The April Reserve Bank Board minutes had a more dovish tilt compared to recent communication with detailed discussion around impacts on the economy from lower interest rates. The March jobs data was solid with employment up by 25.7K over the month, with the unemployment rate higher (but still remaining low) at 5.0%. Forward looking readings on job advertisements, vacancies and hiring intentions are slowing but not collapsing and we expect annual employment growth to decline to below 2% over the next six months with a tick up in the unemployment rate to 5.5%.
8 of the 12 sectors in the Australian market were stronger in April, with Technology, Staples, Discretionary Industrials and Healthcare the key contributors. The Mining and Property sectors were the key detractors.
For the April quarter, all 12 sectors were again higher, with the Technology, Discretionary and Industrials sectors the biggest contributors.
The Info Tech, Property Trusts and Resources sectors have had the best returns (capital gains plus dividends) in the 12 months to 30 April 2019. No sector has recorded negative returns over the past 12 months.
Small cap stocks (exASX100) outperformed large cap stocks (ASX100) in April. 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
Eclipx (ECX, Duluxgroup (DLX) and Nearmap (NEA) were the three best performing stocks in the ASX200 for April. Pilbara (PLS), Galaxy (GX) and Evolution (EVN) were the three worst performing stocks in the ASX200 for April.
The Core portfolio underperformed the ASX200 Accumulation index for the month of April, by 1.3%, while the Income portfolio outperformed by 0.3%. The Core portfolio was 0.6% ahead of the benchmark for the rolling quarter to April, while the Income portfolio outperformed by 1.2%.
The Core portfolio has outperformed the benchmark ASX200 Accumulation Index for the 12 months to 30 April 2019, by 1.1%, while the Income portfolio is up 18.3% for the 12 months, 7.9% 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 underperformed the benchmark ASX200 Accumulation Index for the month of April as a result of our exposures to Resources, specifically South32 (S32), but also due to our positions in BHP Group (BHP) and Rio Tinto (RIO). The portfolio also suffered from our exposures to Challenger (CGF), National Australia Bank (NAB), our cash position, as well as RHC, TLS, CSL, JHG and WPL. Our long held position in Duluxgroup (DLX) was rewarded with a $9.80 takeover by Nippon Paint. Our exposures to Banks in the form of ANZ Banking Group (ANZ) and Commonwealth Bank (CBA) also benefitted.
The Income Portfolio outperformed the benchmark ASX200 Accumulation Index for the month of April as a result of our continued exposure to Magellan Financial Group (MFG). Other contributors included Coles (COL), Westpac (WBC) and Commonwealth Bank (CBA). Our only exposure to Resources, in the form of Alumina (AWC) was the key detractor, along with our exposure to Property and Infrastructure.
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.