It's not getting any easier to invest, with the US economy growing quickly in the midst of trade wars and rising interest rates. The rest of the world is performing more modestly, and is more worried by US developments than the Americans.
Australia's doing better than we realise, with expansion of our resource exports, and population growth supportive of our economy, if not our stock market.
The easy gains in markets are past - we are confronted by rising world interest rates in conjunction with already elevated asset prices. Managing risk and avoiding complacency will be key.
Growth stocks are most expensive relative to their net present value, while value stocks have been depressed in relative terms. Markets are overpricing growth and underpricing stability.
2. 2
Investment Strategy 3Q18 : Prelude
The US Economy is running hot, supporting strength in the
global economy despite the risks of a trade war. This
momentum is forecast to wane in 2019 as the US hits full
capacity. Higher inflation has been forcing the Fed to tap
the brakes faster than markets had hoped, suggesting that
the risk of a mild US recession appears to be building in the
background.
Surging US corporate earnings have justified higher US
share prices but complacency appears to be creeping into
other markets including Australian shares. Growth in
Australian corporate earnings (ex-Mining) is frustratingly
tepid at below 5% on aggregate.
Investors can’t afford to take their eye off the ball in 2018,
especially with so many geo-political unknowns in the mix.
Our Investment Strategy remains cautious overall, but we
continue to identify pockets of opportunity amongst the
noise.
3. 3
The Global economy
The Australian economy
Markets & Investment Strategy
Best Ideas
Appendices
Key market metrics, Asset allocation, International Investing, Morgans overview
Data Sources: IRESS, Morgans, Factset, Morningstar unless otherwise noted.
Agenda
4. 44
The Global economy
The global economy enjoys good momentum in 2018 despite the prospect of a trade war. However
global growth is at risk of losing momentum in 2019, in line with the outlook for the US economy.
5. 5
Global economics : How long can the US run hot for?
Federal Reserve economic projections Exceptional US growth has been
helped by domestic investment,
particularly in Oil & Gas.
Inflation is expected to run above-
trend for at least for the next couple
of years.
Higher interest rates are expected to
slow the US economy in 2019, albeit
to levels still above trend.
The Fed has been lifting interest rates
faster than it originally expected, and
far faster than markets had hoped.
In only a few years, markets are
transitioning from near-zero interest
rates near zero to around the long-
term average of about 3.4%.
Notes : Changes shown relative to March quarter projections
Source : US Federal Reserve
The Fed is running the US at full capacity which is starting to
generate a little inflation. Faster than expected rate normalisation
increases the risk of an uncontrolled slowdown (recession) if the
Fed fails to balance growth and employment against inflation.
6. 6
Global economics : US Trade war or trade bargain
WTO World tariff profiles 2017
Poorly informed public debate would
suggest that the USA has recently
embarked upon a "Trade War“
against other important members of
the WTO.
Closer examination shows that the
US has a far lower average trade
weighted import tariff than China.
The US President is seeking to
redress this imbalance and his
actions have brought China to the
negotiating table.
Trump may be opening a trading
bargain for investors rather than
beginning a prolonged trade war.
7. 7
Global economics : European constitutional risks to a strong recovery
Eurozone PMI and GDP
We don’t expect Brexit contagion to spread. Arguably Europe has
more to lose than the UK if it turns a political issue into an
Economic one.
The Euro Area economy is growing
almost as fast as it was in the period of
great prosperity before the GFC (2006)
Growth should accelerate to 2.5% in
2018, with inflation of only 1.2%.
Very high unemployment at 9% leaves
plenty of capacity grow versus the US at
full employment.
This supports strong appreciation of the
Euro over both the USD and AUD.
The incoming Italian populist government
have drafted plans to rescue the Italian
economy which include scenarios of both
remaining and staying within the Euro.
These issues aren’t going away, and
their detail will emerge again as Italy
bargains with the rest of the Euro area in
coming months.
8. 88
The Australian economy
Conditions in the Australian economy are better then they feel, helped by booming minerals export
revenue. Nonetheless, the RBA is n no hurry to lift rates while labour capacity remains underutilised.
9. 9
3
4
5
6
7
8
9
10
Feb-98 Feb-01 Feb-04 Feb-07 Feb-10 Feb-13 Feb-16
Underemployment (%) Unemployment (%)
Australia : Robust growth with rates on hold
We’re optimistic that Australian growth
will rise to 3.0% in 2018, ahead of
market expectations.
However a high rate of
underemployment is expected to keep
wages growth subdued.
The RBA will be in no hurry to lift rates
while labour capacity remains
underutilised.
We think interest rates will remain
anchored at 1.5% until 2020
Inflation expectations are still well
anchored, but this can’t go on
indefinitely.
10. 10
Australia : Confidence has lagged a more robust reality
NAB Business conditions and confidence Westpac Consumer confidence
Business and consumer confidence have broadly lagged more robust trading conditions.
Australia has lacked ‘animal spirits’ when it comes to investment and consumption.
12. 12
Several competing forces suggest investors should be on guard
Market friendly
Accommodative monetary
policy
Capacity for fiscal spend to
replace monetary policy
Strong global growth
Higher commodity prices
US Tax reform
Unfriendly
Global credit tightening
cycle begins
Trade protectionism
Upside risk to inflation
Instability in Washington
Stretched asset prices
Capital flight from EM
Unknowns
Disorderly capital market re-
balancing?
Emerging market debt
Potential US recession
UK’s exit from the EU
Other geo-politics
Elevated asset prices appear complacent to a wide range of prevailing risks / unknowns.
13. 13
The global cost of debt is rebounding off multi-century lows
Global nominal risk free rate, 1273-2017
The scale of co-ordinated
global monetary stimulus
enacted post-GFC was
unprecedented.
No investor alive today
has lived through the
rebalancing scenario now
unfolding in debt and
asset markets.
14. 14
The “Goldilocks scenario” drove markets in 2017
Synchronised economic growth accelerates (PMI’s) US 10-Year bond rates bounce to 5 year highs
Steady economic growth with low inflation was “just right”, meaning that Central Banks hadn’t
needed to move market friendly monetary settings for several years.
March volatility
trigger
15. 15
However smooth sailing for equity markets has come to an end
US share market volatility is bouncing off 24 year lows
Stronger US growth brings
with it inevitable pressure
on higher inflation,
impacting the outlook for
interest rates.
Upside surprise to US
inflation (wages) has
been a recent volatility
trigger, and is a theme
which will likely dominate
market attention in 2018.
16. 16
Investing styles : Ultra-low risk free rates a major influence
Equity market yield premium over 10-year bonds
Ultra-low returns on bonds
(and term deposits) have
forced income focussed
investors into higher
yielding equities.
High yield and high growth
companies have attracted
a premium, but this has
potential to unwind.
17. 17
2018 Outlook
• Markets remain well supported by entrenched global growth and low inflation. Rising
interest rates do challenge bull markets, so we’re watching inflation closely. We think that
gradual Central Bank rate normalization can avert disorderly capital market rebalancing.
• High yielders are likely to underperform versus rising rates. We’re allocating less exposure
to defensives and more exposure to late cycle exposures.
• The US economy is running hot, Asia has been stable but Australia is lagging in terms of
investment exposure appeal. Synchronized growth and a weaker US dollar will provide
strong tailwinds for commodities.
• Markets look vulnerable while valuations look stretched and while geo-politcical risks are in
play. We prefer to deploy capital at cheaper valuations during market volatility.
18. 18
Tactical recommendations
• Moderate expectations : Stretched
valuations versus below-average growth,
suggests investors need to caution against
expectations of above-higher returns.
• Avoid complacency : Resist assuming
higher risk in pursuit of diminishing returns.
This includes large cap stalwarts.
• Be opportunistic : Retain cash to protect
capital and capture opportunities during
volatility. This also applies to crystallizing
profits.
Diversify internationally : Seek relatively
compelling offshore dynamics in Europe,
Asia and the US, while domestic conditions
remain tepid.
Follow conviction : Solid returns are still
achievable in companies proving they can
still thrive in this environment.
19. 1919
Best equities ideas
High Conviction stocks we think offer the highest
risk-adjusted 12-month returns supported by a high
level of analyst confidence.
Our Equity Model Portfolios are managed by
the Morgans Investment Committee for use as
guides for various investing styles/ risk profiles.
21. 21
Morgans Model Portfolios
Pure Equity Portfolios – Relative performance Cross Asset Income Portfolio – Running yield vs Capital base
A Growth investing style has significantly
outperformed Value for an extended period, and is
likely to significantly outperform versus skewed
toward Income equities only.
We recommend a Cross Asset portfolio for
implementing Income Strategies given that rising
interest rates pose a significant headwind to Income
Strategies comprising of equities only.
22. 22
Total returns by style – MSCI Australia Indices
Momentum leaders
CSL, Aristocrat, Treasury Wines,
Bluescope, Macquarie, BHP & RIO,
Origin, Cochlear, Lend Lease, IAG,
ASX, Santos, James Hardie
Value laggards
Major Banks, Telstra, AMP, Suncorp,
QBE, Fortescue, Property REITs,
Bendigo Bank, BOQ, Orica
Significant opportunities on offer in large-cap Value laggards
23. 23
We prefer to invest during volatility when markets get oversold on
short term fear
26. 26
S&P500 / ASX Industrials key metrics
US Corporate profit
growth at +20% is
assisted by tax cuts
and strong
investment.
Earnings growth for
Aussie Industrials is
close to flat,
dragged down by
large-cap value
laggards
Flat EPS growth
makes an
extended market
multiple difficult
to justify
27. 27
Asset Allocation
Strategic Asset Allocation (SAA) is the process of allocating funds between asset classes
to balance investors’ return objectives and risk tolerance. It is one of the most important,
but one of the most overlooked aspects of wealth management.
28. 28
The Economic Cycle : Recovery is supportive for Equities
Economic conditions remain in equity
friendly recovery mode as financial
settings remain accommodative, although
market forces are shifting.
With synchronised global growth now
picking up, upside risk to inflation (and
interest rates) is likely to challenge
income-oriented asset classes (property
and income assets) especially while
valuations are elevated.
We expect the steady normalisation in
interest rates to support a gradual
transition in outperformance from
defensive and high yield assets, to cyclical
and growth assets.
The Economic cycle
29. 29
Strategic Asset Allocation : A systematic approach
Critical to our SAA approach is clearly
defining the risk profile and objectives of
individual investors.
We use recommended long term
Benchmark allocations per asset class
around which we apply shorter term
Tactical Tilts.
The current stage of the economic cycle is
supportive of reducing allocations in
defensive assets in favour of increasing
exposure to assets which capture the mid-
late stages of economic growth. This
incorporates a higher weighting to equities
and lower allocations to Income Assets.
Recommended Asset Allocations inclusive of Tactical Tilts
30. 30
International investing
Investing offshore not only provides access to superior returns, but also allows investors to
capture global trends, mitigate regional risk, and leverage currency movement.
31. 31
Diversification – Risk mitigation
Most Australian SMSF’s have almost no exposure to International shares. A significant
‘home bias’ exposes investors to sub-optimal diversification and risk mitigation due to a high
concentration into Australia-centric drivers.
Average Australian SMSF
Asset Allocation
ASX200 Index shows
Australia’s poor Sector
diversification
MSCI World Index offers access
to relatively diverse/compelling
themes
Australian
shares
Cash &
Deposits
Commercial
Property
Unlisted
Shares
Managed
Investments
Listed
Trusts
Res.
Property
Foreign
Shares 1%
Other
Assets
Financials
52%
Materials
13%
Consumer Staples
7%
Industrials
7%
Health Care
7%
Energy
5%
Telco
2%
Consumer
Discretionary
3%
Utilities
3%
IT
1%
Financials
19%
Materials
5%
Consumer Staples
11%
Industrials
11%
Health Care
13%
Energy
7%
Telco
3%
Consumer
Discretionary
12%
Utilities
4%
Information
Technology
14%
32. 32
Preferred International funds : LICs and ETFs
Thematic exposures
European recovery
Aging demographics
Technology
Emerging markets and Asia
Diversification
• Sector and geographic
34. 34
Morgans – Built around personalised service
+35 Year history
Australia's leading full service financial advisory
group
100% Staff owned
90% of all Australians live within 100km of a
Morgans office
+300,000 clients, +500 authorised
representatives operating from 60 offices
$60 billion of funds under advice.
+$20 billion raised via 700 transactions for
Australian companies over 25 years
Award-winning research team, covering + 250
companies across all industry
Top-ranked small and mid cap corporate finance
house
38. 38
This presentation is provided for general information purposes only and is not
intended as an offer to enter into any transaction. This information contained in
it is not necessarily complete and its accuracy can not be guaranteed. We have
prepared this presentation without consideration of the investment objectives,
financial situation or particular needs of any individual investor.
Before a client makes an investment decision, a client should, with or without
Morgans' assistance, consider whether any advice contained in the
presentation is appropriate in light of their particular investment needs,
objectives and financial circumstances. It is unreasonable to rely on any
recommendation without first having spoken to your adviser for a personal
recommendation.
The information contained in this presentation has been taken from sources
believed to be reliable. Morgans Financial Limited does not represent that the
information is accurate or complete and it should not be relied on as such. Any
opinions expressed reflect Morgans' judgment at this date and are subject to
change. Morgans and/or its affiliated companies may make markets in the
securities discussed. Further Morgans and/or its affiliated companies and/or
their employees from time to time may hold shares, options, rights and/or
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Morgans Financial Limited (ABN 49 010 669 726 AFSL 235410)
A Participant of ASX Group
Principal Office: Level 29, Riverside Centre, 123 Eagle Street,
Brisbane QLD 4000
This document has been prepared by Morgans Financial Limited in accordance
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expressed herein are solely the views of Morgans Financial Limited.
General disclaimer
Market bulls make the point that low volatility is a by-product of economic conditions ideal for markets to keep edging higher. Bears point to a lack of worry as a sign of complacency to economic risks. These are uncharted waters.
Market bulls make the point that low volatility is a by-product of economic conditions ideal for markets to keep edging higher. Bears point to a lack of worry as a sign of complacency to economic risks. These are uncharted waters.
Ultimately the market continues to heavily favour earnings momentum wherever it can find it, though it will be equally quick to move on once the momentum turns. Seeing some interest in the more cyclical type companies on lower valuation multiples that are showing an ability to add near term earnings growth as the economic cycle improves.