Category: 2020

18 December 2020

• History indicates that the US share markets are kinder to Democratic Presidents than under Republican Presidents.
• The most important thing is to stay invested, because the share market rises under almost every President.
• Although the Biden Administration will probably have to deal with a hostile Senate, it can still accomplish many of its policy objectives by executive actions and some bipartisan cooperation.
• Presidential policies usually have more impact on individual sectors than on the market as a whole, so we think that the probable winning sectors are:
  • Pollution control and environmental restoration
  • Construction
  • Building materials
  • Railroads
  • Battery minerals producers
  • Renewable energy utilities and equipment manufacturers… [read more]

13 November 2020

• The ANZ, NAB and WBC results for the September half-year suggest that their bad loan problems will be smaller than expected, because loan deferrals are falling faster than feared.
• NAB had the best underlying result.
• Banking sector profits are likely to bottom in FY21, then recover at 10% to 15% pa for the next two years, taking dividends to about 4.5% fully franked.
• Risks to this scenario include more outbreaks in Australia and renewed economic downturns in the US and Europe.
• We continue to believe that, although the banks will recover over the next two years, they will underperform the market in the long term.

NAB had the best underlying earnings for the year ended 30 September 2020, in terms of a rising net interest margin and solid profits before provision charges… [read more]

15 November 2020

The Bank of Japan’s regular Financial Stability Report helps Arminius update our investment view on Japan. Because the country has suffered very few coronavirus deaths, the Japanese economy will recover very quickly from the lockdowns in the first half of this year. Consensus forecasts are for GDP to fall by -5% in 2020, but to rebound with +3% growth in 2021. Most importantly, the average Japanese company carries very little debt – many have a net cash position. Corporate Japan’s leverage to the East Asian economies will cause a sharp improvement in profits. Therefore we recommend maintaining a high exposure to the Japanese share market… [read more]

20 October 2020

The US share market is the biggest in the world, accounting for 60% of total market capitalization. (The Australian share market is only 2%.) Therefore, when investors in the US are getting scared, the rest of the world sits up and pays attention.

The chart below shows how investors have become increasingly worried about the outcome of the next US Presidential election. The VIX (for “Volatility Index”) measures investor fear by measuring how much investors are willing to pay in order to buy option protection against downside risk in the US share market. Investors can buy or sell futures contracts on the VIX index. Each futures contract has a specified maturity date in every month. The higher the price of buying a futures contract, the higher the perceived risk that the market will fall before that month’s contract matures… [read more]

30 September 2020

China is a major factor in Australia’s economic recovery because China buys more than a third of our exports. This is why global investors like to use the Australian dollar as a proxy for the Chinese economy – if China does well, Australia will benefit, so our dollar will rise (provided that the Australian government does not provoke any more trade retaliation).

August marked a sharp improvement in China’s economy. Exports leaped 9.5% year-on-year, after a 7.2% rise in July. The rapid resurgence is partly due to Western companies re-stocking their supply chains after the COVID-19 disruptions of the first half of the year. It is also due to Western consumers’ recent spending spree on electronic goods for entertainment or home offices… [read more]

 

15 September 2020

Twice a year we summarise the half-year and full-year results of the companies in the ALCE portfolio. Although the COVID-19 pandemic has affected some of the results for the June 2020 half year, the companies in the portfolio remain strong. Several – e.g. APA, Amcor, BWP, Spark NZ, Steadfast, and Waypoint – have not been materially affected by the pandemic. Others – e.g. ASX, Coles, and Wesfarmers – have done very well in recent months.

Power utility AGL unsettled investors with a net profit which was lower than expected, but it also promised dividends which were higher than expected. The main problem was that lower demand caused a drop in wholesale electricity prices, at the same time as the expiry of old gas contracts brought higher gas prices. AGL customer demand rose 1% despite the 2% decline in market demand. The 51c final dividend meant that the FY20 dividend was cut by 18% to 98c, but management indicated that for the next two years the company would pay a special dividend to top up the payout ratio from 75% at present to 100%… [read more]

22 July 2020

• The economic consequences of the COVID-19 pandemic in the US are expected to trigger a fall in the US dollar against major global currencies over the next four years. By 2024 the Australian dollar could rise as high as $0.84 (US 84 cents)
• The fall in the US dollar (USD) will be probably be associated with rising inflation in the US, from the present level of less than 2% to as high as 5%. This does not mean there will be worldwide inflation – other countries will be able to decide how much inflation they allow in their economies.
• We recommend that Australian investors reduce their exposure to Australian companies which derive a large part of their revenues in US dollars, such as the global healthcare groups. The rise in the Australian dollar (AUD) against the US dollar reduces the AUD value of USD profits.
• Australian investors should also reduce their exposure to the broad US market. At its low point in March 2020, the AUD had fallen -44.7% against the USD since the highs of July 2011, boosting the AUD value of US equities. This effect is about to go into reverse… [read more]

18 June 2020

Bank profits have been falling since 2015, but the latest half-year was particularly dismal. Loan growth was weak even before COVID-19 arrived on the scene, and the banks were already paying hefty remediation charges for their crimes against their clients. Are the COVID-19 loan impairment charges going to be the straw that breaks the camel’s back… [read more]

9 June 2020

The Chinese economy has stalled. The manufacturing PMI for May was an anaemic 50.6, a touch worse than April’s 50.8. The PMI is a dispersion index, which means that figures above 50.0 indicate expansion, and figures below 50.0 indicate contraction. So manufacturing growth is only just in positive territory. Trivium’s National Business Indicator tells the same story. In the first week of June it had reached 87.8%, compared to 85.3% a month earlier. In particular, new export orders remain very weak as the rest of the world struggles with COVID-19… [read more]

5 May 2020

Warren Buffett provided a couple of surprises at Saturday’s annual meeting of Berkshire Hathaway.

First, he admitted that he had made a mistake in owning airline shares, because the industry was unlikely to bounce back quickly, so he sold out of all four big US airlines in April… [read more]