May has not been a great month for stocks locally, while Wall Street has been ‘whoopying it up’ going in and out of record territory. The S&P/ASX 200 index is down around 2.8% for the month, but it has faced some headwinds such as the following:
- Oil prices are fighting gravity and the OPEC meeting did not help;
- Iron ore prices are coming off highs that no one expected to be sustained;
- The bank levy and the credit rating downgrades for our smaller banks hit the index;
- Mixed economic data and Cyclone Debbie is likely to give us a low to even negative economic growth number for the March quarter next month; and
- Earnings revelations lately, especially from the banks, weren’t as good as expected.
But my analysis says the slightly bad news — economically, earnings-wise and geopolitically — now gets better as the year goes on, and so this stock price slide is another buying opportunity.
In today’s video, Marty Switzer and George Boubouras discuss the market during May, the Fund’s performance, the month ahead, and more!
From our Investment Adviser: Portfolio update
Over May, the performance of the portfolio was modestly behind the index which is down about 2.8% for the month. Overseas, the market continues to be concerned over political issues in the US. Although corporate profitability showed good growth, some activity indicators are indicating that a slowdown in growth is occurring. The bond market continues to remain firm, implying lower growth and subdued inflation going forward. While they may rise, interest rates remain generally low, giving support to the broader market.
The Australian market was a relative underperformer over the month, due largely to poor performances from the resource and banking sectors. Resources and banks make up a big share of the Australian market compared to the overseas indices. Resources have been impacted by lower commodity prices (especially iron ore), while the banks have been impacted by several issues.
The fund is overweight the banking sector and is attracted to the high grossed up yields on offer, which are around 8-10%. We believe that these yields are broadly sustainable.
The Government imposed a tax on the large four banks, targeting banking transactions turnover. We believe that ultimately this tax will be passed on by the banks and that their profits will not be significantly impacted.
Also, the market remains concerned over the level of the housing market and the exposure all the banks have to this in their lending portfolios. With employment remaining solid and interest rates remaining low, a large decline in housing values is unlikely in the near term. We remain comfortable with the bank weightings.
The shares that contributed the most to the portfolio over the month were Fairfax, Caltex and Spark Infrastructure.
Fairfax has attracted another bidder for the company and a positive outcome for investors now looks much more certain.
Caltex is recovering after losing the Woolworths contract and the environment looks positive for petrol marketing margins as competition appears to be easing. A large cost cutting plan is also being formulated by the company.
Spark Infrastructure announced a positive regulatory outcome and is also benefiting from an unusual occurrence in the shopping centre stocks. With Amazon likely to enter the Australian market, investors appear unwilling to bid up the shopping mall owners, which are the traditional beneficiaries of lower interest rates. The fear is that the malls’ tenants, the retailers, will no longer be able to pay the high rents historically asked by the malls. Instead, investors have focussed their buying on areas not impacted by the likely structural retail changes, including the infrastructure stocks and utilities, of which Spark is one.
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Chairman, Switzer Asset Management