Magic Formula for Stock Investing Plus Gold and Copper Outlook with Peter Esho

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Week Commencing March 17, 2014

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This week we look at the following topics:
1.0 Reserve Bank of New Zealand decision
2.0 The magic formula to stock investing
3.0 Gold bulls vs. bears as price stabilises
4.0 How to trade the copper price
5.0 Melbourne – We’re coming to see you

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1.0 Reserve Bank of New Zealand decision
The NZD rallied hard following the announcement, which was being priced as a 95% chance by
traders surveyed ahead of the announcement. It doesn’t come as a complete surprise but we think
those hoping for future aggressive monetary policy moves from the RBNZ in isolation of other
developed economies should think twice. We now have to look forward.
The Reserve Bank of New Zealand (RBNZ) raised its overnight cash rate
from 2.5% to 2.75% last week. With inflation running well above the
target band range, it was a case of needing to raise rates in order to
maintain legitimacy. The biggest risk a central bank faces is that of lost
legitimacy and credibility. It’s always a catch 22 situation. We wrote
about the prospects of this happening in our Invast Insights report
published on 24 February 2014.

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The RBNZ is expected GDP to grow by 3.3% in the year to March and states that the growth in the economy is becoming
more broad based. We don’t dismiss this at all, but at Invast we think the rally in the NZD is significant and perhaps
dangerous, now almost near parity with Australia. This will start to have a detrimental impact to New Zealand’s exports
and increase Australia’s competitiveness. The RBNZ stated “The high exchange rate remains a headwind to the tradables
sector. The Bank does not believe the current level of the exchange rate is sustainable in the long run.” The market hasn’t
budged at all so it will be interesting to see how the RNBZ will manage the currency headache in the coming months.
Jawboning is a dangerous game, just ask RBA Governor Glenn Stevens.
The RBNZ went on further to say “Prices for New Zealand’s export commodities remain very high, and especially for dairy.
Domestically, the extended period of low interest rates and continued strong growth in construction sector activity have
supported recovery. A rapid increase in net immigration over the past 18 months has also boosted housing and consumer
demand. Confidence is very high among consumers and businesses and hiring and investment intentions continue to
increase.”
International trade is a large part of New Zealand’s economic output, accounting for around 24%. Most of this is also
centred on agricultural products which are sensitive to price movements. The diary industry is one of the strongest pillars
and the emergence of a huge middle class in China and eventually India should support growth in demand for New
Zealand’s products, but there are other alternatives in the region – Australia for starters. Tourism is also a reasonable large
part of the economy, contributing around 10% of total output. So it’s obvious from these numbers that a higher currency
will start to chip away at the country’s competitiveness.

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The Australian economy is still feeling the impact of tits currency’s rally above parity over the past few years. Job losses from Toyota,
Holden and Qantas among many others are all compounded by the high cost of doing business. These decisions don’t take place
immediately and so there is a lagging effect. The high NZD will start to have this lagging impact no doubt.

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Perhaps the dairy industry in New Zealand is more resilient than the car or aviation industry in Australia, but the point here is that the
currency plays an important part in determining the cost base of multinationals. The rebuilding of Christchurch and other organic
growth stories in New Zealand cannot be completely ignored but neither can the huge appreciation in the currency.
Traders are likely to continue backing the NZD towards what we think will be a breaking point for the currency. This might be at
parity with the Australian dollar. We don’t propose fighting the market for the time being, going short the NZD will be a difficult
trade in the short term but makes perfect sense – at least against the AUD – over the medium term. Below is a chart form Invast’s
MT4 trading platform which shows the depreciation of the AUD over the NZD.

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In summary we could continue to see the AUDNZD fall in the short term towards the A$/NZ$1.04912 range where it should
find some support. If the currency pairs remains below A$/NZ$ 1.06650 then it seems that the former level will be in
traders sights. Parity isn’t completely out of the question but this will depend on data out of Australia. Make sure you
check out blog.invast.com.au on a daily basis to get our latest technical analysis and short term trading insights.
2.0 The magic formula to stock investing
Investing can be really simple. Many in the market over complicate things. Take analysts for example that spend all day
long crunching numbers, running them through their complex computer models and then publishing reports over dozens
of pages just to get to one conclusion – either a buy or a sell. More often than not, these conclusions are wrong which
makes the whole exercise pointless. My experience in markets has taught me that the best investments are usually the
simplest. This is the most common piece of advice given to me by my mentors. My advice for many people over the years
is to invest in what you understand – if you don’t understand anything, keep your money in the bank. That doesn’t mean
that you should never understand, it just means that you should learn what you are investing in before handing over your
money.
When it comes to investing in shares, there really is only one magic formula and it’s much simpler than you think. It’s ok,
you don’t need to take out your calculator. It’s called studying the business strategy. Simple, right? Some might be cynical
but please let me explain why I think strategy is the most important formula in evaluating a business..

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The recent Reserve Bank of Australia (RBA) rate cut brings about some important questions. I have been hearing the
following question from clients over the past few months. Should investors be aiming for dividend stocks despite the huge
rally in banking shares? Is Telstra (TLS) going to $6? Should the focus be on growth opportunities from lower lending rates? Is
franking the swing factor? Should a premium be paid for certainty, which can disappoint like the Coca-Cola Amatil (CCL)
downgrade? Or are the miners that are trading on big discount the way to go?
These are all very relevant questions and all very confusing from a portfolio perspective. Let's stand back for a minute and
think things through. The answer I believe really depends on the underlying investment strategy. It all sounds very formal,
having a strategy around your investments, but it really is the most important starting point to every investment process.
Many investors think they have a strategy, but if you ask them to define it in one sentence, they will struggle. If you're reading
this, ask this question of yourself. The most common answer is something along the lines of: "I want a little bit of income and
capital growth. I also want to find a small-cap stock with huge returns and not lose any money during the process."
Basically, that's an "I want it all" approach, which we all know is not possible.
It's not just individual investors. Many companies also fail to define their investment strategy. I met a company at an
investment briefing this week, which is looking at putting together an IPO (initial public offering) in the real-estate space.
After an hour-long presentation and various questions from the analyst team, I realised the presentation slides did not
contain a section or even sentence on strategy. It's something that is often overlooked.

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The very intelligent and experienced managing director managed to answer the question when asked, but not having it in the
presentation slides shows how even the most intelligent investor in the market can often overlook the most simplistic issues. So, what's
the right investment strategy? That's something that you will need to answer for yourself. It largely depends on circumstances,
motivations, risk tolerance, goals, and the pace at which you want to achieve them. What I plan to do here is show you an example of
how strategy setting in portfolios plays an important part in success. You can look at fund managers, or even better, find companies that
have strategised successfully over the years.
One of the best-performing stocks on the Australian market over a long period of time has been Westfield Group (WDC). The company
has changed forms over the years, more so in recent history, but the focus on strategy is something that is always front of management's
mind when driving the portfolio. It's a simple business - build and develop shopping centres, rent them out and manage the operation.
But without a firm strategy, the business could have easily lost its way over the years. Many property groups blew up during the crisis,
particularly larger ones in the US of comparable size. Yet Westfield managed to ride out the downturn in good shape. The strategy is
simple and summed up in one sentence, which you will always find within the first few pages of a Westfield presentation to the market:
"To develop and own superior retail destinations in major cities by integrating food, fashion, leisure and entertainment using technology
to better connect retailers with consumers.“
The strategy changes over time. Food, for example, is now a main priority in the development and management of centres. People have
to eat - and Westfield wants to feed them. Will Westfield develop in remote areas? Probably not, since the strategy says the focus will be
on major cities. Are they afraid of online shopping? Probably not, since the strategy embraces technology that connects retailers and
consumers.

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So, does having a well-thought-out strategy make Westfield a good investment? Assets are geographically diversified: Australia 41 per
cent, US 40 per cent, the UK 15 per cent and other locations the remaining amount. Please note that the Westfield Retail Trust (WRT) is
a different vehicle. Total assets under management for Westfield Group are $64.4 billion. Group occupancy is at 97.8 per cent, with
comparable growth in net operating income of 3.3 per cent. These numbers are as of the end of financial year 30 June 2013.
The brand has become iconic globally, perhaps similar to a Mercedes, Prada or Louis Vuitton. We often complain that the Australian
market lacks such global consumer brands, but I would argue that we have the brand to house them all in one location - shopping
malls. We might not comprehend this in Australia because we have become so used to walking through a Westfield mall, but many
developing economies around the world who seek to embrace Western brands would acknowledge a Westfield mall as a sign of
progress in their economy.
Having Westfield flagship malls on Pitt Street in Sydney, at the World Trade Centre site in New York and the Olympic site in London is
no coincidence. It's all part of the strategy. Does the gloss stack up financially? Return on contributed equity is at 11.4 per cent - the
return Westfield is earning on its investments. It's not a great amount of money, but to me it means there is scope for earnings growth.
Remember, Westfield is not just an owner of malls, it also develops and manages them. The development pipeline has been slow in
recent years, but that is a sign of prudence and patience. Westfield targets 12-15 per cent un-geared returns on its developments.
If Westfield's dividend grows at 5 per cent annually over the next decade, last year's 51-cent distribution will become 84 cents a share.
It's by no means guaranteed, but it's also worth noting that Telstra paid a 27-cent dividend in 2003 and will pay 28 cents a share this
year, so the growth has been much less. The banks have seen a much larger rate of growth in their dividends over the period, but for
investors looking at diversifying outside of the banks, Westfield on merit deserves a closer look.

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I started off with a range of different questions and ended up with a simple investment that we all
know fairly well. Even if you don't like the Westfield proposition or it doesn't fit into your strategy,
it's hard to discredit their successful execution of their own portfolio. We can learn a lot from them.
They have a well-thought-out plan, a track record spanning many decades, solid and well-tenanted
assets, reasonable earnings growth, a commitment to dividends and prudence in spending money.
Understanding a company’s strategy is the most important first step to investing. Even if you have
been investing for decades, ask yourself this question – do you understand the strategy of each
stock you are currently holding right now?
We’ve recently welcomed a whole list of new clients to Invast which might have not read our
previous reports. For the new comers, we want to reiterate some of the basics around our service.
The same way of thinking articulated above is put into practice monthly when we update our
portfolios. There are three portfolios which Invast clients receive free as part of our premium
content. Our model portfolios are aimed to give you an idea and framework around managing your
investments - they are general in natural and do not take into consideration your personal
circumstances so please keep that in mind.

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The portfolios are not benchmarked to any particular index, they are run with an absolute return basis in mind. They will
also evolve to include global foreign exchange and index positions and so picking one stock index to benchmark against is
pointless. Common benchmarking to the ASX200 is pointless since:
The index is just a measure based on market capitalisation and doesn't really mean much other than a mathematical
calculation and 2: Most individual investors do not have to be invested 100% of the time, unlike fund managers and so the
opportunity cost of investing is being in cash.
Without knowing personal circumstances, our general portfolios are set up to reflect time horizon. If you are 20 years old
and looking at growing your wealth your portfolio should very different to somebody aged 64 and about to enter into
retirement. Most stock tipping sheets and research services will tell you which stock to buy but they won't tell you how
much and for how long you need to hold that investment. Even the ones that provide model portfolios, there isn't enough
emphasis on time horizon. Is a balanced portfolio suitable for the 20 year old just as much as the 64 year old?
In a perfect world we would balance time horizon with risk tolerance etc but then the value of the portfolios will become
too complicated. The portfolios we update on a monthly basis will just drill down on what we think - on a general basis -
each age category should be looking at (buying/selling) from time to time. For those 20 year olds that feel like growing up
quickly, they have the choice of adopting a shorter time frame approach and conversely for the baby boomers looking at
going into retirement, they can opt to be young forever.

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The three portfolios explained - We think most investors are in one of three stages - wealth creation phase,
wealth preservation phase and then drawdown phase. A fully franked dividend is much more important later on in
life when income from salary becomes difficult than it is for somebody who has a life and work expectancy of
more than 40 years. Again, this is a general statement only and individual circumstances will change. In our
portfolios, each category tries to capture:
Wealth Creation - Higher tolerance for risk, more exposure to forex and commodity positions, greater appetite for
growth and emerging opportunities. Taking large losses is tolerable although focus is on very tight risk mitigation
methods like stop losses. Return target above 10% pa. Portfolio commences with $50,000.
Wealth Preservation - We have made the money and looking at smart ways to invest it. Quality is key, income is
important but not as important as certainty. We have some tolerance for the riskier things in life but not too much
as retirement is the next phase of our life. Return target between 5-10% pa. Portfolio commences with $50,000.
Drawdown Phase - We have created our wealth, preserved it well and now need to find ways to generate a
reliable income because we are no longer work and need to make sure we have enough money to pay the bills as
they fall due. Return target around 5% excluding franking credits pa. Portfolio commences with $50,000.

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3.0 Gold bulls vs. bears as price stabilises
We were recently asked by a client to state both the fundamental bull and base case scenarios for the gold price over the
coming few years. We thought it would be interesting to share these with you this week. We will update our gold chart
levels next week – it seems as though gold is forming some solid support from its recent lows. Clients should note that we
update our view on major market movements daily via blog.invast.com.au and hold a weekly live market analysis session
where you can ask questions, to register to this week’s session click here.
Bulls say: Inflation is set to rise globally from historically low levels and gold is seen as a major inflation hedge against
traditional paper currencies. The world can print an infinite amount of money but the amount of physical gold is only
becoming harder and harder to mine which means its relative value is only set to keep rising. As governments fuel more
money into the global financial system, the next major collapse could be only around the corner which means that gold
will once again become the preferred safe heaven sending its price to new all-time highs.
Bears say: The world is experiencing lower growth which means price rises are not likely to be seen like the past few
decades and with deleveraging, deflation is the largest threat to the financial system. This means gold will continue to lose
favour and traditional income producing assets, like currency, will remain in favour. Gold carries with it inconvenient
carrying costs like storage etc. It has little utility other than a store of value – you cannot eat gold or use it to produce much
other than jewellery.

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4.0 How to trade the copper price
The recent slump in copper price has been driven by much weaker than expected Chinese data. We have
previously made the case that at the time being, China is still the key marginal consumer of copper and worse
than expected economic data – while still positive in absolute terms – has put pressure on the industrial
commodity. We remain fairly positive on the medium term outlook for copper, we think that China and India are
still in the early stages of their full consumption of copper and supply continues to struggle. Copper stock piles at
the London Metals Exchange have come off their five year historic high levels and currently trading at around the
265,000 tonnes which compares to the high of 680,000 experienced in May last year. Click here to see the full
copper stockpile and private analysis via Kitco Metals website.
While our fundamental view is positive, we think short term technical levels should not be ignored either. We are
of the view that copper will find a base of support at around US$3/lb – many large producers like Oz Minerals
(OZL) in Australia are producing at around or above this level and so a sustained copper price around here will see
many smaller and less economic mines go out of business, adding more pressure to global supply. Copper needs to
rise at around US$3.60/lb for the producers to start generating a reasonable return on their capital.

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The chart below shows the copper price via our Invast MT4 trading platform. We currently see the following short term technical
levels playing out over the next few weeks – support levels at US$2.9075/lb and then at US$2.8645/lb with resistance from here at
US$3.00/lb and at around the US$3.10/lb. We think the price has bottomed and a long position with a stop loss at the above
mentioned support levels could generate a profitable position over the next few months. Please note that patience is needed and
stop losses should be put into place.

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5.0 Melbourne – We’re coming to see you
Invast is partnering up with the Trading, Property and Franchise expo which means we will be exhibiting at the
Melbourne show on 28/29 March. For clients who are in Melbourne, this would be a great opportunity to come along
and meeting the Invast analyst team, ask your questions about markets and get in touch with our staff to see the latest
product offering. Being a Sydney based office, we take every opportunity possible to stay in touch with our clients
when touring to these types of expos and seminars.
Both Chief Market Analyst Peter Esho and Senior Technical Strategist Vito Henjoto will be presenting various seminars
around topics often mentioned in this report – exploring the latest market trends and taking your questions. Because
we are a partner in the expo, we have the ability to offer you complimentary tickets. Visit www.tpfexpo.com.au/tickets
and enter promo code TPFEXH to claim your ticket. If you would like to book a personal appointment with either Peter
or Vito, please email through the client services team support@invast.com.au

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Go to www.invast.com.au/insights to get a
complimentary 4 week trial and receive the latest
insights as they are published to our live clients.

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Disclaimer
Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd
(AFSL 438 283). Invast staff members may from time to time purchase securities which are
included in this or future reports. The authors of this report may or may not be holding a position
in the securities mentioned. Please note that the information contained in this report and Invast's
website is of a general nature only, and does not take into account your personal circumstances,
financial situation or needs. You are strongly recommended to seek professional advice before
opening an account with us.
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does not accept liability for any errors or omissions in the contents of this newsletter which arise
as a result of downloading this newsletter. This newsletter is provided for informational purposes
and should not be construed as a solicitation or offer to buy or sell any financial product. Invast
Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product Disclosure
Statement, and any other relevant Invast Financial Services Pty Ltd documents before you
decide whether or not to acquire any financial products listed in this email. Our Financial
Services Guide contains details of our fees and charges. All these documents are available here
on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are
leveraged products and carry a high level of risk and you can lose more than your initial deposit
so you should ensure CFD and Foreign Exchange trading meets your personal circumstances.
General Advice Warning: Being general advice, this newsletter does not take account of your
objectives, financial situation or needs. Before acting on this general advice you should
therefore consider the appropriateness of the advice having regard to your situation. We
recommend you obtain financial, legal and taxation advice before making any financial
investment decision.

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