2019 economic outlook with Roger Montgomery

2019 economic outlook:
with Roger Montgomery
Presented by
Roger Montgomery
Chairman and Chief Investment Officer
Montgomery Investment Management
20 February 2019

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Housekeeping

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This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109,
AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into
account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for
professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular
circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to
acquire, dispose of, or to continue to hold, an investment in any Netwealth product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person,
including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any
person arising from reliance on this information.
Disclaimer
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Roger Montgomery
Chairman and Chief
Investment Officer
Montgomery Investment
Management
Meet today’s speaker

10
DISCLAIMER
THIS DOCUMENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT AN OFFER OR SOLICITATION WITH RESPECT TO THE PURCHASE OR SALE OF ANY SECURITY. THIS
SUMMARY IS INTENDED ONLY FOR THE PERSON TO WHOM IT HAS BEEN DISTRIBUTED, IS STRICTLY CONFIDENTIAL AND MAY NOT BE REPRODUCED OR REDISTRIBUTED IN
WHOLE OR IN PART NOT MAY ITS CONTENTS BE DISCUSED TO ANY OTHER PERSON UNDER ANY CIRCUMSTANCES. THIS SUMMARY IS NOT INTEDED TO CONSTITUTE
LEGAL, TAX OR ACCOUNTING ADVICE OR INVESTMETN RECOMMENDATIONS, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN ADVISORS ABOUT SUCH MATTERS.
Any investment decision with respect to an investment in the fund should be made based upon the information contained in the private placement memorandum or
information memorandum for that fund. The information contained herein is not intended to be complete or final and is qualified in its entirety by the offering
memorandum and governing document for the fund.
We do not represent that this information is accurate or complete and it should not be relied upon as such. Opinions herein are subject to change without notice. The
products mentioned in this document may not be eligible in some states or countries, nor suitable for all types of investors.
Simulated time series data shown are not forecasts. They are displayed for illustrative purposes only.
The Zenith Investment Partners (“Zenith”) Australian Financial Services License No. 226872 rating (assigned November 2018) referred to in this document is limited to
“General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or
needs of any individual and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s).
Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own
objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith
Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager
or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product
Assessments and at http://www.zenithpartners.com.au/RegulatoryGuidelines
The Lonsec Rating (assigned February 2018) presented in this document is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421445. The Rating is limited to
“General Advice” (as defined in the Corporations Act 2001 (Cth) and based solely on consideration of the investment merits of the financial product(s). Past performance
information is for illustrative purposes only and is not indicative of future performance. It is not a recommendation to purchase, sell or hold Montgomery Global
Investment Management product(s), and you should seek independent financial advice before investing in this product(s). The Rating is subject to change without notice
and Lonsec assumes no obligation to update the relevant document(s) following publication. Lonsec receives a fee from the Fund Manager for researching the product(s)
using comprehensive and objective criteria. For further information regarding Lonsec’s Ratings methodology, please refer to our website
at: https://www.lonsecresearch.com.au/research-solutions/our-ratings
© Montgomery Investment Management Pty Ltd 2013. All
Rights Reserved.

Agenda
1. WHAT MATTERS TO INVESTORS
2. A METHOD TO ACHIEVE IT
3. GLOBAL & DOMESTIC RISKS & OPPORTUNITIES
4. A SENSIBLE RESPONSE – RISK AND STOCK SELECTION

Rights Reserved.
12
RETURNS
RISK
(THE PATH OF RETURNS)
WHAT MATTERS
WE BELIEVE THE PATH OF RETURNS IS AS IMPORTANT AS THE DESTINATION

Rights Reserved.
14
THE MONTGOMERY FUND – UPSIDE/DOWNSIDE CAPTURE
RISK
(THE PATH OF RETURNS)

15
The
Montgomery
Fund
Our Present Role in Portfolios – Volatile times
IML
Allan Gray
Bennelong
Hyperion
Montgomery

Rights Reserved.
16
THE MONTGOMERY FUND – PERFORMANCE with an average 20% in Cash

Rights Reserved.
18
Premium Quality Economics
(A better chance of winning)
Bright Prospects
(For Growth)
Price below intrinsic value
(Capital Preservation)
MONTGOMERY UNIQUE PROCESS

Rights Reserved.
19
REA Group Limited
ASX:REA
Feb 6 - 5.62%
Jun 21 - 3.85%
Aug 7 – 4.00%
Sep 27 – 2.40%
Nov 9 – 1.60%
Jan 21– 1.09%

© Montgomery Investment Management
Pty Ltd 2013. All Rights Reserved.
20
Resmed Inc.
ASX:RMD
Feb 6 - 5.89%
Jun 21 - 4.15%
Jul 17 – 3.58%
Exit

Rights Reserved.
21
Reliance Worldwide
ASX:RWC
Nov 27- 0.17%
Dec 21 – 1.50%
Jan 15 – 2.43%

• Retires 1979.
• Investment
balance
$148,000.
• 50% Equities and
50% Bonds.
• Draws $10,000
indexed to
inflation,
annually.
• By 2011 =
$40,000
Sequencing Risk’s Impact on Retirement
Australian market performance data 1979-2011 & sequence reversed.
Funds run out 10yrs earlier
RETURNS

24
Number of
stocks
Fair Value OvervaluedUndervalued
“Stocks are overvalued”
Likely true — on average
There is a subset of stocks
that are significantly
undervalued
CONCEPTUAL
RETURNS

The higher the price paid, the lower the return, and the higher the risk of poor early returns!
Rights Reserved.
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-0.58%
3.87%
-1.45%
17.94%
18.23%
16.25%
14.26%
7.95%
RETURNS S&P500 CAPE RATIO
1870-present

Rights Reserved.
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Exuberance

Rights Reserved.
27
Berkshire
Hathaway
An attractive price is “a requirement that proved to be a barrier to
virtually all deals we reviewed in 2017.” 2018 Annual report
Record Cash

Rights Reserved.
28
US Federal Reserve
30 Jan 2019
“Prepared to adjust any details for completing b/s
normalization in light of economic and financial
developments..”
Will be “patient” before making further moves
Case for rate increased has “weakened” highlighting
how weak the economy remains.
Discarded promise of “Further gradual increases”.
…but will continue QT until b/s is “substantially smaller”

Rights Reserved.
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US Federal Reserve
The Pace of Policy Tightening
QE + Lower rates = Higher Asset Prices,
QT + Higher rates = Lower Asset Prices

Rights Reserved.
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US Earnings

Rights Reserved.
31
US Earnings
Feb 1, 2019
Q4 2018 (46% reported), 70% reported positive EPS surprise, 62%
reported positive revenue surprise.
Earnings growth rate for the S&P 500 is 12.4%, down from
17% expected in September.
Earnings Guidance for Q1 2019, 33 S&P 500
companies negative EPS guidance and 9
positive EPS guidance.
Q1 EPS growth estimate = a decline of 0.9%, compared
with +1.9% on Jan. 11 and +6.7% on Sept. 30.
The forward 12-month P/E ratio for the S&P 500 is 15.7 - below the
5-year average (16.4) but above the 10-year average (14.6).

Rights Reserved.
32
US Margin Pressure
Investors switching out of corporate bonds into
US Treasuries
(Corporate rates going up)

Rights Reserved.
33
Global industrial production declining since Dec’17 continued
in Jan’19 – the decline is now 13 months old
Current downturn is the third since GFC
Since 1956 20 Global IP slowdowns but only 8
US/Global Recessions
Of the 12-midcycle downturns median time from peak is
18.5 months

Past peak growth is not contraction
Powell (Fed) + PBoC = “the Plunge Protection team”
Market has now factored in good outcome, so
volatility to return
Singapore economy (bell weather for global
trade) GDPg 1.6% q/q Q4 vs 3.6% expected)
….thanks to China

Rights Reserved.
35
China
(30% of Australian Exports)
Q$ GDP 6.4% slowest since GFC (10 Years)
President Xi Jingping warns of “serious dangers”
Malaysia cancels $US20bn one-belt-one-road rail project
Chinese population shrinks 1st time in 70yrs
Capital Economics: “China will slow to as little as 2% a year
within the next decade”
As with Japan in the 1980s, the policies of ultra-high investment and
rapid debt accumulation make it vulnerable to a sharp deceleration.
Crucially, China’s investment rate, at 44 per cent of gross domestic
product in 2017, is unsustainably high.

Rights Reserved.
36
Iron Ore Supply in China slowed sharply in 2018

Rights Reserved.
37
China vehicle sales 2008-2018

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“I fear this really could be ‘it’”… their Minsky Moment
China is in “the grip of a dangerous downturn”
Still can manoeuver but cannot escape the forces of economic
gravity
Kenneth Rogoff
‘I fear this will be the third leg of the debt supercycle”

Rights Reserved.
39
Australian
Economy
+
Year to November created 286,000 jobs.
Unemployment rate (5% Dec) near full employment
November RBA said 2018 GDP growth of 3.5%
27 years without recession
Budget surplus about to be recorded

Rights Reserved.
40
Australian
Economy
_
A Terrible Drought
Retreating House Prices
Wobbling China growth + anxiety about election
Evaporating Consumer Confidence
Declining unemployment but slowing GDP
(2.8% at end of 3rd quarter)
But detracting from the positives is…

Rights Reserved.
41
Australian
Economy
_
Now experiencing biggest house price falls in 40 years
Sydney recording steepest declines in 20 years
Lower domestic and foreign investment
Labor win would be worse
Tighter lending, fewer loan approvals, delays to approvals
Higher housing supply*
*SQM Research, listings in Melbourne jumped 42.3 per cent compared to December 2017, Canberra was up 24.6
per cent and the number of Sydney homes advertised for sale increased 22.3 per cent. Nationally, listings rose 8
per cent on December 2017.

Rights Reserved.
42
Australia’s property plunge accelerating

TAKING THE HEAT OUT…APRA quarterly data
-55.5%

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44
Source: NAB/ABS

DECLINING DEMAND - A GLOBAL PHENOMENON

Rights Reserved.
46

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47

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48
Australian
Economy
Evaporating Consumer Confidence
Foot traffic down 8% in Dec yoy. Week 1 & 2 of Jan down 3% on
2018, which was down 10.7% on 2017

Rights Reserved.
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Australian
Economy
CBA Credit card spending at retailers fell sharply (3.7%) Nov-Jan yoy
Australian Q4 GDP, quarterly retail sales volumes rose by just 0.1%, well
below the 0.5% increase expected. Household goods (2.8%), clothing and
footwear (2.4%), Dep’t stores (1.1%)
Jan Australian consumer sentiment fell heavily largest monthly
decline in over three years.

Rights Reserved.
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Australian
Economy
_
Weakness ahead for furniture, hardware and whitegoods
ASX:WES: Bunnings was 27% of FY18 EBIT, post
demerger 37.1%
ASX:HVN: 39% of earnings driven by furniture
and appliances
ASX:MTS: 25% of earnings Mitre10/HTH

Rights Reserved.
51
Australian
Economy
_
Weakness ahead
Targeting 2500 lot sales versus 3277
22% jump in BDDs
“expect arrears to rise”
Delinquencies up in all states

Rights Reserved.
52
Australian
Economy
_
Weakness ahead
FY19 east coast soft. NSW flat. Weaker house prices
Guiding flat 1H19 NPAT y/y
Challenging FY18. market remains tough
Top line to moderate in FY19
Market Conditions to be soft in 1H19

Agenda
1. WHAT MATTERS TO INVESTORS
2. A METHOD TO ACHIEVE IT
3. GLOBAL & DOMESTIC RISKS & OPPORTUNITIES
4. A SENSIBLE RESPONSE – RISK & STOCK SELECTION

Rights Reserved.
54
Risk Manage Cash flexibly
Employing cash as value
emerges
‘Pause’ or raise cash if markets
rally and value erodes

Rights Reserved.
55
Eschew High Risk Sectors (Stock Selection)

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This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109,
AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into
account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for
professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular
circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to
acquire, dispose of, or to continue to hold, an investment in any Netwealth product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person,
including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any
person arising from reliance on this information.
Disclaimer
Thank you
Webinar Series

2019 economic outlook with Roger Montgomery

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