17 April 2024
Elston Quarterly Portfolio Update Q2 2024
In this video, Portfolio Manager David Seager provides his perspective on the key questions discussed in the recent quarterly asset allocation meeting. Read more
14th January 2016 - Asset Management, Private Wealth
A strong rebound in the last quarter of 2015 for Australian equities masked some wild price swings during the period that included a late Christmas rally of 8% as end of year buying and short covering saw the S&P ASX 200 index post nine straight days of gains as stocks prices were ramped higher. The rally has however been short lived as 2016 started with eight straight days of losses, wiping out all those gains from the “Santa Rally”.
While we didn’t see the need to address the “rally”, it’s important to consider some of the reasons market commentators and media analysts have suggested for the sharp decline experienced so far this year. Some of these issues are important for markets going forward, but others we feel are simply short term market obsessions which won’t impact company profits and distributions in the medium term.
What does the market commentary around China really mean when analysts and articles state “China is slowing”? The rate of growth in China is indeed slowing, but the economy is still growing, albeit at a more sustainable rate. In 2007, GDP in China was $US 3,524 billion and growing at an unsustainable 14.2%, while in 2014 growth had “fallen” to 7.3% but the economy had almost tripled to $US 10,352 billion. Officials are targeting growth of 7% for the current year, but even if it grows by “only” 6-6.5%, the increase on a $US 10 trillion economy is much greater in absolute terms than 14% on a $US 3 trillion economy.
As China has progressed from a developing economy to being the world’s second largest, policy makers are looking to transition the economy from one driven by construction and industrial production to a more balanced developed economy where the consumer and services sectors make up a much larger proportion of overall economic activity. This has been a deliberate and sensible policy, one followed by other countries as they transitioned from developing to developed economies – the US, Japan, Taiwan and Korea are all good examples. Perhaps more important than the numbers above, in 2007 GDP per capita was $US 2,675 which by 2014 had risen to $US 7,591. This is an important investment thematic for us as we see the increased wealth and spending power of the middle class in China as being a key driver of growth going forward. If your wealth tripled in seven years, you would be a lot more confident and inclined to spend and invest.
While the mix of Australian industries benefiting from the rise of China will change to increasingly include sectors like education, financial services, property and tourism, our low cost minerals and energy producers will continue to participate from the development of a much larger economy.
On a total return basis in Aussie dollar terms, the Australian S&P ASX 300 Index actually outperformed the US S&P500 in 2015. Despite perceptions that rising interest rates in general are a negative for asset prices, in the US, interest rates are going up because sustained growth has returned (albeit at relatively low levels) and economic conditions are normalising. We see both the increasing robustness of the US economy and the return to a more normalised interest rate environment as a clear positive. While a rising rate environment will make things more difficult for companies within the US, a strong and growing US economy is a much needed lynchpin for global growth as a whole.
In the post GFC environment, we think people have forgotten how large an impact the US economy has, and the impact on the world economy as a whole of a return to more robust US growth (and given policy settings are still very accommodative we see increasing growth as likely) may have been underestimated.
Oil is already down 15% this calendar year and shows no immediate sign of turning around. While this is obviously a negative for energy stocks, low cost producers, such as Oilsearch and those with strong balance sheets like Woodside, will benefit from the removal of high cost producers from the market. What has driven the extreme fall in the oil price has been the reluctance of low cost producers such as the Saudis to reduce their production in conjunction with the delay in high cost US and Canadian production being shut down. OPEC and the Saudis in particular are looking at protecting market share. The low cost of capital and the relatively healthy balance sheets of US shale producers going into the drop in prices has also meant that they have tried to hold on and keep producing longer than many expected, despite prices dropping below their cost of production.
Contrary to many reports (particularly around China), oil demand has continued to increase to record levels, but it has been outstripped by supply. We are already starting to see this correct, as the number of producing wells in the US has been falling since May. This is expected to start hitting production numbers in Q1, 2016 and we expect oil prices to stabilise and recover when this occurs.
On the flipside, it is important to also remember that a low energy price is hugely beneficial for the rest of the economy, particularly the consumer. Studies have shown that with a lag, consumers do spend their extra disposable income after fuel prices fall. This windfall should start to benefit retailers and consumer companies over 2016.
The big winner in terms of investment style in 2015 was momentum investing, with share price movements becoming the major driver in investment decision making. This style is also inherently short term in its horizon. At Elston, our investment philosophy is driven by the ultimate value of companies, on their earnings prospects in the medium and longer term. We believe that as the economic cycle progresses, this creates opportunities to buy quality companies at cheap prices for the benefit of investors as market conditions change. This means at times, we are investing against the consensus and we will experience periods when performance relative to the market suffers as we ignore the trendy trades that often end poorly when the music stops. However, we strongly believe that this method of investing will create value for investors over the long term.
If you would like to speak with one of our advisers for more information please contact Elston on 1300 ELSTON or email info@elston.com.au and someone will be in touch.
17 April 2024
In this video, Portfolio Manager David Seager provides his perspective on the key questions discussed in the recent quarterly asset allocation meeting. Read more
10 April 2024
Elston Portfolio Manager Gary Merkel has picked three constituents of the ASX Small Ordinaries Index in the latest Livewire article. Read more
25 March 2024
Just before Easter, Livewire asked four fundies to pick which businesses they thought had the hop on some of the others in their investment universe. Read more
18 March 2024
Following on from the reporting season, Co-Founder and Portfolio Manager Bruce Williams has provided a brief overview of the recent results and what that indicates for the portfolio positioning. Read more
31 January 2024
The Australian Financial Review has recently named Elston Australian Emerging Leaders in their top performers 2023. Read the article to find out more. Read more
18 January 2024
In this video, Portfolio Manager Leon de Wet provides his perspective on the key questions discussed in the recent quarterly asset allocation meeting. Read more
1 December 2023
HUB24 announced the launch of a new whitepaper, ‘Directing the matrix: meeting the advice needs of high net worth clients’. Read now to get insights from Elston Head of Philanthropic Services Susan Chenoweth and many other experienced advisers. Read more
8 November 2023
Investing in what you are passionate about, or even what you consume everyday, can give you an edge. Find out what local stock Elston Co-Founder Bruce Williams has in mind. Read more
13 October 2023
What should advisers think about as they move to managed portfolios? Elston Head of Adviser Services Mark Smith shared his views on how to successfully make the transition. Read more
4 October 2023
We all know Australia is the lucky country, but could it soon be the luckiest? Elston Co-founder Andrew McKie believes it may be possible, and advisers need to take heed. Read more
21 September 2023
Andrew McKie joined 5 other industry leaders at LiveWire Live 2023 as they presented their shocking prediction for the future. What did he predict? And is it good news or bad news? Read more
14 September 2023
Portfolio Manager Leon de Wet has provided a brief overview of the recent reporting season results and what that indicates for future earnings and the portfolio positioning. Read more
25 August 2023
Are our two big supermarkets worth checking out? Read the latest Livewire Markets article to see what Elston Co-Founder and Portfolio Manager Bruce Williams thinks. Read more
12 August 2023
Should investors buy AMP or bypass it? See what Elston co-founder and portfolio manager Andrew McKie thinks and find out how he’s feeling about the ASX100 in general. Read more
1 August 2023
In this video, Portfolio Manager Leon de Wet provides his perspective on the key questions discussed in the recent quarterly asset allocation meeting. Read more
31 July 2023
What makes Carsales such an attractive stock? Elston Portfolio Manager Bruce Williams examines the key drivers that are working for this digital marketplace both here and overseas. Read more
26 July 2023
Last year, some bond indices fell into a black hole. Are good returns from fixed income investing still a galaxy far, far away? Or are there brighter days on the horizon? Read more
23 July 2023
In the latest Livewire's edition of Buy Hold Sell, Andrew McKie talked about which ASX-listed stocks he would want to own (or not own) in a Goldilocks scenario. Read more
20 July 2023
Elston Co-Founder Andrew McKie sat down with Han Lee from Livewire and Rob Crookston from WILSONS to discuss how they find “quality” companies on the ASX. Read more
15 July 2023
Andrew McKie was asked to analyse three stocks that are widely perceived to have those rock-solid qualities and assess whether they have become overcrowded, and name one quality company in the recent Livewire interview. Read more
12 July 2023
If you had a spare $10,000, how would you invest it? It's an interesting hypothetical and one that Elston Portfolio Manager Leon De Wet was happy to answer for Livewrire. Read the article to see his picks. Read more