For your interest, attached is my monthly 'Over the Horizon' share market commentary for February 2014.

1. February 2014 — ‘Over the Horizon’ Market Commentary by David Offer
February was a busy month on the share market, with the majority of Australian listed companies providing interim results
for the 6 months ending 31
st
December 2013. On balance, the results were surprisingly positive. More companies than
not exceeded expectations and two thirds of companies reported profits higher than the prior year. The result was the All
Ordinaries index appreciated 4% during February to close at 5,415. These gains have been maintained into March despite
many companies going ex dividend and the concerning developments occurring in Ukraine.
Some key takeaways from the reporting period include the massive turnaround for resource giants BHP and RIO Tinto,
suggesting that the diversified resource sector is on track for 40% earnings growth for the financial year. Likewise, the
banks have reported solid profit growth that should result in 10% earnings per share growth for this year and the lower
Australian dollar and ongoing cost control is resulting in some improvement in cyclical shares such as Boral, JB Hi-Fi and
Fairfax. Excluding the resource majors and financials, the rest of the market appears to be tracking for a 6% rise in profits
this financial year.
With a strong finish to the year, for the Calendar year, dividends were up 6.7%, versus earnings up 6.2%. For the ASX
200, the dividend payout ratio is presently at a manageable 64% of after tax profit earned. In addition to being a vote of
confidence in the future, this trend of paying out higher dividends reflects that corporate Australia’s balance sheets are
currently in very robust shape. For example, excluding the banks, Australia’s largest 15 companies now hold $51.6 billion
in cash, up from $41.3 billion a year ago.
The major contributors to this cash increase has been resource shares and, in particular, BHP and RIO Tinto. BHP
management is now said to be actively considering capital management initiatives in the region of $5 billion to be
announced at the August full year result. The consensus view is a share buyback, with an on-market buyback for BHP’s
UK listed shares and an off-market share buyback for Australian shareholders.
Off-market share buybacks have been missing from the Australian share market for the last few years and will make a
welcome return when they resume. They are of significant benefit to self managed superannuation funds (SMSFs) where
members are drawing an income as, being tax-free, all franking credits received in the buyback are returned to
members. In such instances, participating in an off-market buyback becomes close to being a risk free trade.
With this in mind, we will be ensuring BHP and, to a lesser extent, RIO Tinto are well represented in SMSF portfolios that
can benefit from participating in an off-market share buyback should buying opportunities present over the next few
months.
On a more sobering note, it is worth noting that the recent rise in corporate profits has come against a backdrop of minimal
revenue growth, meaning profit growth is coming primarily from cost reduction. A by-product of corporate Australia’s cost
reduction focus has been Australia’s unemployment rate, which has slowly been ticking up to now sit at 6%.
At a global level, we are also mindful of the current strength in many international share markets and, in particular, the US
share market as it hovers near all time highs. While the US economy and global economy as a whole is improving, the
world’s major economies are certainly not firing on all cylinders. This suggests that the stimulatory policies of Central
Banks globally, primarily in the form of keeping interest rates at ‘emergency rate’ settings to stimulate growth, is starving
investors of income opportunities in cash and fixed interest investments. The result is to effectively force investors into the
share market to generate a return to live off. This process could easily reverse in the event global interest rates rise to a
level to again provide a reasonable ‘risk-adjusted’ investment return.
Pleasingly, Australia’s economy is also showing signs of improvement. This includes some long awaited buoyancy in
property markets within some capital cities and this is flowing through to an uptick in housing construction. As
homeowner’s household wealth has risen, consumer spending has likewise increased. However, this needs to be
tempered by the significant job cuts that are presently occurring in areas such as manufacturing. Increasingly, areas of the
mining sector are also experiencing pain as the level of mining investment slowly retreats from record levels. It is likely

2. that Australia’s transition away from mining will not be easy, particularly when areas of recent growth such as health and
government services are likely to have government spending curtailed into the future.
The upshot is that, while we take comfort in the interim reporting season and we are pleased that corporate Australia is on
balance meeting market expectations, we still consider the share market marginally overvalued and would like to see a
pull-back in the All Ordinaries index towards 5,100 before becoming more enthusiastic towards buying the market as a
whole. In the interim, we will continue to be stock specific in our share purchases.
If you would like to discuss any aspect of your investment portfolio or the above, please do not hesitate to contact our
office. We would welcome your call.
Sincerely
David Offer
AUTHORISED REPRESENTATIVE 259188
DIRECTOR
HORIZON INVESTMENT SOLUTIONS PTY LTD
SUITE 1, POST OFFICE PLAZA, 153 VICTORIA STREET, BUNBURY WA 6230
T. 08 9791 9188 F. 08 9791 9187
Email: david.offer@horizonis.com.au Website: www.horizoninvestmentsolutions.com.au
Horizon Investment Solutions Pty Ltd, ACN 083 142 438, ABN 79 668 035 212, AFSL 405897
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