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Semelhante a Stanford Brown Investor Insight Series November 13
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Stanford Brown Investor Insight Series November 13
- 1. Welcome Address Hamish Harvey - Partner
- 2. Perpetual Investments WHERE IS THE PRODIGAL SON? Presented by Matt Sherwood Head of Investment Markets Research November 2013
- 3. ONLY US SHARES HAVE RISEN FROM THEIR 2011 LEVEL US, AUSTRALIA AND WORLD (INDEXED TO 100 AT END-FEB 2009) PRICE RETURN TOTAL RETURN United States 260 United States 240 260 240 220 220 200 Australia 200 180 180 Rest of World 160 160 Rest of World 140 Australia 140 120 120 100 100 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Source: UBS Australia Limited as at 22 October 2013. 3 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13
- 4. … DUE TO EARNINGS, MORE THAN CENTRAL BANK POLICY EPS AND NOMINAL ECONOMIC GROWTH: US AND WORLD (EX-US) STRONG US PROFITS, DESPITE WEAK RECOVERY 100 GLOBAL (EX-US) PROFITS ARE BELOW 2007 LEVELS 24 100 20 80 16 60 24 2007-2013 EPS Growth -25% Global (ex-US) 20 EPS Growth (LHS) 16 40 12 40 12 20 8 20 8 0 4 0 4 -20 0 -20 -4 -40 2007-2013 EPS Growth +15% US EPS Growth (LHS) 80 60 US Economic Growth (RHS) -40 -60 2005 2007 2009 2011 2013 Source: Minack Advisors as at 27 August 2013. 4 -8 2015 -60 2005 Global (ex-US) Economic Growth (RHS) 2007 2009 2011 2013 0 -4 -8 2015
- 5. THE US RECOVERY IS LOOKING SELF-SUSTAINING Unemployment rate 11 % 10 Housing starts 2.4 36 28 1.6 8 7 1.2 6 Seas. adj. Trend 0.8 5 4 12 225 Jan 2000 = 100 US budget deficit 0.0 -0.4 175 120 03 04 05 06 07 08 09 10 11 12 13 House prices 200 130 20 03 04 05 06 07 08 09 10 11 12 13 Household debt % of annual disposable income 24 16 0.4 03 04 05 06 07 08 09 10 11 12 13 '000 Petajoules (12-month moving total) 32 2.0 9 140 Net energy imports Mn units -0.8 150 110 -1.2 125 100 -1.6 100 03 04 05 06 07 08 09 10 11 12 13 Source: Bank of America Merrill Lynch as at 21 May 2013 03 04 05 06 07 08 09 10 11 12 13 US$ trn(12-mth moving total) 03 04 05 06 07 08 09 10 11 12 13
- 6. … BUT EX-US EARNINGS GROWTH REMAINS ELUSIVE REGIONAL SHAREMARKET PERFORMANCE SINCE JUNE 2012 100% 80% Change in expected earnings Change in valuations Change in price 60% 40% 20% 0% -20% -40% -60% Czech Mexico Sing. China UK India Portugal Aust. US Austria France Holland Japan Brazil Canada Thailand Poland SA Norway Ireland HK Sweden Italy Germ. Spain Source: Original data sourced from UBS Australia Limited as at 22 October 2013. 6
- 7. SOFT MACRO AND EARNINGS NEAR RECESSIONARY LEVELS GLOBAL ECONOMIC AND EARNINGS GROWTH (%) Global economic and earnings growth (%) 9% 60% Global recessions 8% Forecast 7% 40% Global earnings growth (RHS) 6% 5% 20% 4% 3% 0% Global economic growth (LHS) 2% 1% -20% 0% -1% -40% -2% -3% 1980 1983 1986 1989 1992 1995 1998 Source: UBS Limited and the International Monetary Fund as at 24 October 2013. 7 2001 2004 2007 2010 2013 -60%
- 8. MANAGING RISKS: 1. BALANCE SHEETS ARE OVER-LEVERAGED A5 TOTAL ECONOMIC DEBT (USD TRILLIONS): REAL 2 YEAR GROWTH (% PA) 28% $85 Total debt (RHS) 21% $72 Global Financial Crisis 14% $59 20-year average (5.3%) (LHS) 7% $46 0% $33 BI-ANNUAL CHANGE (LHS) -7% 1990 1992 1994 1996 1998 Source: Credit Suisse as at 4 March 2013. 8 2000 2002 2004 2006 2008 2010 2012 $20
- 9. 2. EUROPE’S PROBLEMS ARE UNRESOLVED GOVERNMENT DEBT AND DEPOSITS (% GDP) Gov Debt (% GDP) Greece 150% Cyprus Italy 120% 90% 60% Finland Portgual Ireland Belgium EU average Germany Austria Holland France Spain Malta 0% HIGHVALUE ADD LOW VALUE ADD ULC (REL.TOE17) €91bil 17.5% 50% 29% +6% €15bil 8.3% 35% 50% +83% Estonia 0% 50% 100% 150% 200% 250% Source: Bank of America Merrill Lynch as at 20 April 2013. 9 GROWTH(%) CORE Slovenia 30% EXPORTSTO CHINA PERIPHERY Slovakia VARIABLE 300% 350% 400% 450% Bank Deposits ( % GDP)
- 10. BANKS ARE PREVENTING A SUSTAINED EUROPEAN RECOVERY LENDING STANDARDS AND ANNUAL CREDIT GROWTH: US AND EUROPE 100 … and European credit growth is contracting European lending standards are tightening 15% 80 10% 60 Tightening lending standards 40 US corporate lending 20 US 5% European housing lending 0% Europe 0 -20 -40 2003 2005 European US business lending housing lending Easing lending standards 2007 2009 2011 2013 Source: Bank of America Merrill Lynch as at 20th October 2013. -5% -10% 2003 2005 2007 2009 2011 2013 -15%
- 11. 3. THE AUSTRALIAN ECONOMY NEEDS A LOT MORE SUPPORT MINING INVESTMENT (AUD BIL), RETAIL SALES AND HH CREDIT (% PA) OUR ‘MINING CLIFF’ CULMINATES IN AN AUD40 BILLION ‘GROWTH HOLE’ 100 90 80 70 60 50 40 30 $84.1 billion $74.8 $73.6 +14% billion Other billion -11% Iron Ore +35% $61.0 LNG billion $54.5 -18% billion +20% $45.5 $45.2 billion billion -26% $34.6 billion -24% $23.3 billion -33% 20 10 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 11 HOUSEHOLDS CAN’T FILL THE GROWTH VOID AS THEY ARE PAYING FOR PRIOR LEVERAGE SINS 24 20 16 Housing credit growth 12 Retail sales 8 4 0 Dec-93 Source: Perpetual Investments and Macquarie Equities Limited as at 1 July 2013 Dec-97 Dec-01 Dec-05 Dec-09 Dec-1
- 12. 3. HIGHER ASSET PRICES, BUT NO CONSTRUCTION BOOM HOUSING FINANCE AND NEW CONSTRUCTION LOANS (% SHARE) 70% SHARE OF HOUSING FINANCE SHARE OF NEW CONSTRUCTION FINANCE 26% 23% Owner Occupied 62% Owner Occupied 20% 17% 54% 14% 46% 11% 8% Investors 38% Investors 30% 2001 2003 2005 2007 2009 2011 2013 2002 2004 2006 12 Source: Bank of America Merrill Lynch and UBS Australia Limited as at 20th October 2013. 2008 2010 2012 5% 2%
- 13. QE – THE ONLY THING WE HAVE TO FEAR IS LIQUIDITY ITSELF 2008-12 FINANCIAL INSTABILITY • History haunted central banks – another Great Depression? • How can we prevent the global financial system and economy from imploding, while balance sheets are fixed? They had to think outside the square – QE, • Growth held up even though the velocity of money declined. 2013 ONWARDS FINANCIAL STABILITY? SORT OF? • Central banks are thinking they’ve done more than enough. • History still haunts them – another destructive asset bubble? • Have to withdrawal stimulus once the emergency is over and before asset bubbles form. • But QE has made things easy and politicians only do whatever it takes, when forced to by the markets. • Governments have to reign in debt and raise productivity. 13 BREAKEVEN RBA Cash 2.50% - 3-year Term Deposit* 4.05% - Australia (3-year Govt bond) 2.71% +0.90% United States (3-year Govt bond) 0.61% +0.20% United Kingdom (3-year Govt bond) 0.77% +0.26% Japan (3-year Govt bond) • YIELD 0.12% +0.04% UBS Composite Bond Index 3.50% +0.86% Barclays Global Aggregate - Yield to Maturity 2.05% +0.33% Perpetual DIF (credit duration of 3-years) 4.92% +1.64%
- 14. DEFENSIVE ASSETS MUST DIVERSIFY EQUITY RISK INDEX PERFORMANCE OF HYBRIDS, 2000-07 AND 2007-11 … AND EQUITIES IN BEAR MARKETS HYBRIDS BEHAVE LIKE BONDS IN BULL MARKETS 180 NAB Equity 160 110 NAB 2017 Corporate bond 100 90 80 140 NAB Hybrid Equity 70 120 60 100 80 NAB Hybrid Equity NAB Equity 50 40 30 60 2000 2001 2002 2003 2004 2005 2006 2007 *Source: FactSet – as at 26 July 2013. 14 NOV-07 NOV-08 NOV-09 NOV-10 NOV-11
- 15. FI STRATEGY - MAXIMISE QUALITY AND REDUCE DURATION DURATION AND CORRELATION WITH EQUITIES *Source: FactSet,– as at 26 July 2013. 15
- 16. SHARES – CAN DEFENSIVE ‘YIELD’ PLAYS OUTPERFORM? SECTOR PERFORMANCE DURING RECOVERIES OF 1974, 2003 & 2009 180% Performance after ‘74 and ‘03 Performance after ‘09 160% THE SEARCH FOR YIELD IS EXPENSIVE AND WILL EVOLVE 140% • The global economy remains subdued 120% 100% • Earnings growth is trapped by de-leveraging 80% 60% • Payout ratios are low 40% • Demographics 20% 0% 16 Energy CD Materials Indust. HC Util. CS Financials Telcos
- 17. OVERLY-OPTIMISTIC EARNINGS AREN’T A PROBLEM US SHAREMARKET PERFORMANCE AROUND AUSTERITY PROGRAMS 30% Change in share prices Average (+5.2%) 20% 10% 0% -10% Change in expected earnings Average (-6.8%) -20% -30% 1990 1992 1994 1996 1998 Source: UBS Australia Limited as at 11 September 2013 17 2000 2002 2004 2006 2008 2010 2012
- 18. … BUT RISKS ARE ABOUND AND NEED TO BE MANAGED RELATIVE VALUATION MEASURES AND RETURN ON EQUITY CYCLICALS ARE LOW AND DEFENSIVE VALUATIONS ARE HIGH AUSTRALIAN BANKS ARE TRADING AT HISTORICALLY HIGH PREMIUMS 1.5x 2.5x 1.3x 2.2x 1.1x Price earnings ratio (LHS) 120% 110% 1.9x Relative valuations: cyclical vs. defensives Sell defensive valuations when they are high 100% 1.6x 0.9x 90% 1.3x 0.7x Price-Book value (RHS) 0.5x 0.7x 0.3x 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: UBS Australia as at 3 October 2013. 18 80% 1.0x 0.4x Relative earnings: cyclical vs. defensives 70% 60% 2010 Buy cyclical earnings when they are low. 2011 2012 2013
- 19. WHERE DOES THIS LEAVE THE MARKET RECOVERY? AUSTRALIAN BEAR MARKETS (INDICES REBASED TO 100 AT PEAK) 120 1929 1987 100 1973 80 60 Now 40 20 Year 1 Year 2 Year 3 Source: Australian Stock Exchange as at 26 July 2013. 19 Year 4 Year 5 Year 6 Year 7
- 20. NEVER UNDER-ESTIMATE THE POWER OF INCOME INCOME, VALUE & TOTAL RETURN FROM AUD1,000 INVESTED AT END-1974 TOTAL INCOME (1975-2012) CAPITAL VALUE (1975-2012) $25,000 $25,000 $20,000 $21,000 $15,000 ACCUMULATED RETURN (1975-2012) 180x $180,000 $16,000 $150,000 102x $120,000 $90,000 $11,000 $10,000 48x $5,000 $6,000 28x 14x $0 GOLDCASH PROP. LPTS SHARES $1,000 GOLDCASH PROP.LPTSSHARES $60,000 $30,000 $0 GOLD CASHPROP. LPTS SHARES Source: REIA, Reserve Bank of Australia, IRESS and UBS Australia Limited, as at 31 December 2012. Net income is determined by deducting all expenses from investment returns. Property is calculated using the REIA time series on rents and values for 2-bedroom units and then deducting costs such as strata, insurance and maintenance. Before 1980, the series uses the average change in Sydney and Melbourne prices each period. 20
- 21. MANKIND - A FASCINATION WITH INCOME ‘A large income is the best recipe for happiness ‘All progress in based upon a universal innate desire on the part of every organism to live I ever heard of.’ beyond its income.’ Jane Austen 1775 - 1817 Samuel Butler 1835 - 1902 ‘First secure an independent income, then practice virtue.’ Greek proverb 300 BC ‘A broken heart is a very pleasant complaint for a man in London if he has a comfortable income.’ ‘I am for the death penalty. He who commits terrible acts must get a fitting punishment. Then he learns the lesson for the next time.’ George Bernard Shaw 1856 - 1950 Jessica Simpson 1981- 21
- 22. IF INCOME’S SO IMPORTANT, WHY INVEST IN CASH? ANNUAL INCOME: AUST. SHARES & CASH (AUD1,000 INVESTED AT END-1974) AUD 1350 1200 1050 900 750 600 Franking Credits All Ords Dividend Income Cash Income 450 300 150 0 75 78 81 84 87 90 93 96 Source: DataStream as at 31 December 2012. 22 99 02 05 08 11
- 23. IF INCOME’S SO IMPORTANT, WHY INVEST IN CASH? ANNUAL INCOME: AUST. SHARES & CASH (AUD1,000 INVESTED AT END-1974) AUD Years of income decline (with franking credits) Cash Shares >0% 16 12 1350 1200 >15% 11 2 >30% 1050 5 0 900 750 600 Franking Credits All Ords Dividend Income Cash Income 450 300 150 0 75 78 81 84 87 90 93 96 Source: DataStream as at 31 December 2012. 23 99 02 05 08 11
- 24. INCOME IS THE BASIS OF SUCCESSFUL WEALTH CREATION CAPITAL GAINS, DIVIDENDS & TOTAL RETURN SINCE 1882 (LOCAL CURRENCY) AUSTRALIA US UK JAPAN GERMANY FRANCE 5.3% 4.4% 3.8% 4.8% 2.7% 5.9% $84,719 $27,486 $13,132 $46,331 $3,293 $165,771 Dividends (% pa) 6.1% 4.2% 5.9% 5.5% 4.2% 3.9% Total return (% pa) 11.8% 8.8% 10.1% 10.6% 7.0% 10.0% $216 mil $6 mil $28 mil $49 mil $1 mil $25 mil Capital gains (% pa) Value (in local currency) Value (millions in local currency terms) 24
- 25. KEY MESSAGES FY2013/14 LONGER TERM • The US recovery is continuing, but improvements are marginal. • Sub-3% growth in most advanced economies (de-leveraging, debt and demographics). • Europe's existential crisis has abated, but the growth crisis remains • Chinese growth target of 7.5% looks achievable, but will decline into the ‘6%s’ through time. • Japan’s recovery is likely to cease in 2014. 25 • Asia will be characterised by lower growth rates – less infrastructure, more consumption. INVESTMENT STRATEGY • A lot of our perceptions about investing are unhelpful: - returns & capital gains - the laws of finance - investment timeframes - focus on fees, instead of after-fee returns • Fixed interest – keep it short duration and ensure it is high quality. • Shares – need to navigate through the distortions that QE created.
- 26. IMPORTANT NOTE This presentation has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 for the use of financial advisers only, it is general information and is not intended to provide you with financial advice. The views expressed in the article are the opinions of the author at the time of writing and do not constitute a recommendation to act. Any information referenced in the presentation is believed to be accurate at the time of compilation and is provided by Perpetual in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group guarantees the performance of any fund or the return of an investor’s capital (Perpetual Group means Perpetual Limited ABN 86 000 431 827 and its subsidiaries). Total returns shown in the presentation/slides have been calculated using exit prices after taking into account all of Perpetual’s ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance. 26
- 27. DAVID BROWN CEO
- 28. TRIVIA QUESTIONS
- 29. 29
- 30. 30
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- 32. JONATHAN HOYLE CHIEF INVESTMENT OFFICER
- 33. How much risk to take? 33
- 34. Interest rates are extremely low… 34
- 35. 35
- 36. …and they will stay low for a long time 36
- 37. Conservative portfolios have performed very well over the past 40 years 37
- 38. But in the future… they won’t 38
- 39. Key Points Rates are low They are staying low Conservative portfolios have been winners in the past They won’t be in the future We need to do things differently and buy different assets 39
- 40. 40
- 41. ‘ 41
- 42. Keep calm and buy bonds! 42
- 43. 43
- 44. 44
- 45. This time it’s not different 45
- 46. Key Points Bonds are not necessarily riskless Shares are not necessarily risky It depends on their price 46
- 49. Does it work? 49
- 50. What else can we invest in? Commodities Credit Absolute Return funds Commercial Property Macro Funds and CTAs Private Equity Esoterics – Catastrophe Bonds, Water Rights, Patents 50
- 51. Is a Conservative portfolio safer than a Balanced one? 51
- 52. In summary Interest rates are very low and staying low Conservative portfolios have done well in the past; but those same portfolios will fare poorly in the future We need to reconsider risk; bonds may not be risk-free and shares may be less risky than we think We will have to buy different assets We must evaluate future returns, not gaze longingly at past ones Is your attitude to loss condemning you to penury? 52
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- 54. DISCLAIMER Any advice contained in this presentation is general advice only and does not take into consideration personal circumstances. Any reference to personal circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products. Genesys Wealth Advisers Limited ABN 20 060 778 216 AFSL No.232686
- 55. QUESTION & ANSWER TIME MATT SHERWOOD & JONATHAN HOYLE
Notas do Editor
- After a 25% rise in recent times in global sharemarkets,investors are asking where to from here and the market rally over the past nine months has been amazing in the sense that global earnings expectations have declined, economic growth has lessened and the rise has been primarily driven by defensive sectors.
- US outperformance is the most obvious feature of global equities over the past two years. This has largely been due to the superior earnings growth reported by domestically-focused US corporates. The US has avoided the sharp macro setbacks seen elsewhere, while firms have expanded margins, in large part by driving unit labour costs to multi-decade lows. Almost all equity markets rallied sharply from the global crisis lows, and went on to make new post-crisis highs in the first half of 2011. Since then, however, the US has been the only major market to make fresh highs (with the S&P 500 is up almost 20% from early May 2011, while emerging markets have fallen over 10% and developed markets by 5%). GDP outperformance provides only a partial explanation for the better earnings performance of US-focused US companies, but the heavy lifting has been driven by margin expansion. The question is whether margins will improve this year and to the extent that margins have been assisted by fiscal easing, the significant fiscal tightening now being introduced suggests margins are unlikely to expand enough to generate double digit EPS in 2H 2013.
- Earnings outside the US have been falling, consistent with very weak GDP growth. The GDP growth series in the chart below may surprise you. There are two reasons why it’s weaker than generally perceived. First, I’ve used GDP at market prices and exchange rates (because investors do not live in a PPP-adjusted world). Second, it’s GDP in US$ terms, so US$ strength damps this aggregate. Investors watch earnings and indices in US$ terms. The surprise with the US is not that GDP has been strong. It hasn’t been. The surprise is the profits have improved as much as they have in this lacklustre recovery.I concede that QE has added something to equities. But if the key to relative performance has been earnings, then ending QE may not, by itself, be a rally-ending factors for equities – unless ending QE causes big problems in debt markets, and hence growth and earnings (a risk, to be sure). US equities are now trading at a substantial PE premium to other major markets.
- The tremendous global equity rally over the past year – 29% from the November 2012 low to the August 2013 high – has been due solely to valuation expansion. Trailing and prospective EPS are unchanged over the period. In my view this is largely due to investors pricing a ‘return to normal’, and less due to global QE. While US earnings have been good since 2010, recent performance has been subdued with flat growth in revenue and profits in the current reporting season. Elsewhere, earnings have been the missing ingredient from the market rally. Earnings have been declining whereas share prices have been rising. This is not unusual and has occurred in individual years such as 1975, 1982, 1991, 2001, 2008 and now 2012, but it has never occurred in two consecutive years, so earnings growth from now is key for the rally to be sustained and added to. Nevertheless, consensus earnings expectations is that EPS will continue to fall. The rolling 12 month-ahead forecast for global EPS has flat-lined, and is no higher now than three years ago, but is lower ex-US.While, I'm sceptical that recovery based on loose monetary policy, record low rates and rising leverage is sustainable on a medium-term view, for now, the prospect of unusually loose monetary policy is likely to be a supportive mix for risk assets as long as growth holds up.
- The economic growth moderation has meant that downside risks to earnings have increased, with companies in a more difficult environment more likely to disappoint earnings expectations than exceed them.IMF latest forecast for global GDP in 2013 is 3.1%If history is any guide, earnings growth can be expected to be around 1%, which is well below the post-1980 average of 7% , with an additional dividend yield of 2%-3%, you are still talking about modestsharemarket returns, butif valuations expand a bit more it could be better. However, within the regions, US looks promising and Europe looks cheap, whereas Asia is likely to be the primary victim of changes in US Federal Reserve policy.However, given modest EPS growth, the global economy doesn’t have much room to disappoint before EPS turns negative. Consequently, we may have seen the majority of the market’s rise already this year and corporate earnings may not be overly constructive in the period ahead.
- The most surprising thing about the aftermath of the global financial crisis which highlighted to dangers of excessive leverage is how little deleveraging has actually occurred. Overall leverage in the five largest advanced economies (US, UK, Japan, Germany and France) has risen by 24% since the end of 2007 (with total debt in Japan up by 41%, France by 27% and the US 24%). The US is the only economy that has seen any form of deleveraging, and that largely reflected reduced debt in the household sector due to mortgage defaults, more than anything else. The rise in G5 debt reflects a rise in public sector debt. Global economic prospects won’t start to get better until de-leveraging begins and the process will be protracted as result in many years of sub-trend growth, even if interest rates are kept at record lows.
- Cyprus
- Ad lib from the slide
- Income has been supportive for the cyclical recovery, but cyclical sectors have lagged the rally. Indeed, the search for yield has boosted dividend-paying equities. The relative valuation on stocks with above-average dividend yield already looks rich on some measures. However, the factors pushing investors into equity yield seem likely to persist for the foreseeable future and dividends may be an outperforming theme for several reasons:Firstly, economic and earnings growth remains tepid. That reduces the relative attractiveness of cyclical equities that are leveraged to the economic cycle. Secondly, with global profits already at a relatively high share of global GDP, it seems unlikely that earnings can grow faster than GDP for a sustained period.Thirdly, the payout ratio (the percentage of earnings distributed as dividends) is relatively low. This means that corporates can, for a time, increase dividends faster than earnings. This could partly reflect a shift away from distributing earnings via buybacks to dividends. Fourth ageing baby-boomers, who control a disproportionate share of invested capital, are moving from the stage of building up their nest egg to living off the nest egg raising demand .The question, of course, is whether corporates will increase dividend payout ratios. My view is that they will if the incentives are right – and the incentives appear to be changing. S&P CEOs are now more likely to have stock than options – so they receive dividend checks, along with other owners.
- It's been five years since the peak in the Aussie market. Only the 1973 and 1987 corrections were longer in duration, taking ~6.5 years to recoup losses (left chart below). On those occasions the market rallied hard after about 5 years but valuations were cheaper than now (13.6x now vs 10.8x in 1978 and 11.4x in 1992). So where does it leave the latest recovery?The key question to ask is what sectors can push the Aussie market higher from here? Banks led the market out of the post-1987 funk, increasing around 90% between November 1992 and January 1994, but they had good prospects for earnings growth coming out of the last recession since households only had half the leverage of today. This time around there's a smaller chance banks can meaningfully increase earnings, and we are sceptical miners will record stellar earnings growth over the next 5 years. However, healthcare and US-exposed stocks are prime candidates to record solid earnings growth and quality industrial companies with strong balance sheets and surplus cash-flow generating business models should remain core portfolio holdings, in our view as they will provide upside potential with downside protection. … But given the subdued global and domestic outlook it could take longer for the Aussie market to regain its peak than the 1973 and 1987 episodes and the market is more likely to grind higher than have a large bionic leap as has been the case in previous recoveries. So with price growth likely to be around nominal GDP (which has averaged 6% since 1959) and a four 4% dividend yield, we are talking about a total return of 10% - less than the historical average of 12.0%, but not bad considering the headwinds out their. This tells us, the income and income growth are going to remain large determiners of market and portfolio performances.
- The 1974 crash in the wake of the first oil crisis was the only time Australian investors lost more money than what they did during the GFC. And like today, investors back then faced a similar quandary – should we put our money into this risky asset class given how unstable the environment is. Now we can look back and ask did the risky sharemarket really reward people for taking extra risk, considering on three occasions, it fell by more than 30%.Lets have a look how each asset class performed. Gold – no income, total return of 14 times your moneyCash – income, but no capital growth – 28 times your money (twice that of gold)Residential property – little income with large capital growth – 48 times your money (around twice that of the cash market)Listed property – more income less capital growth – 102 times your money (double that of residential property)Shares – the most income, the most capital growth and 180 times your money (double listed property, four x residential property, six x cash and 13 x gold).No correlation between price and total return, but perfect symmetry between income and total return – because income generation is the basis of successful wealth creation and it has been since the dawn of time.
- When you exclude the four years of unusually high dividend growth you can see the trend in share dividends is very consistent, as is cash but the only problem there is that the trend is downwards. Cash not only has less income, but it is more volatile than other forms of income.
- When you exclude the four years of unusually high dividend growth you can see the trend in share dividends is very consistent, as is cash but the only problem there is that the trend is downwards. Cash not only has less income, but it is more volatile than other forms of income.
- So if 007 was an investor he might think he is at an existential crossroad and perhaps in this film Daniel Craig considered his own shelf life, in the knowledge that in the revolving door James Bond franchise, where the character lives on far longer than the actor, his days as a secret agent are also numbered. As an investor, he and all of us, can’t help but remember the power of income – it is the greatest source of wealth creation – it always has been and always will be. And while times are slowly getting better, diamonds are not forever and for your ears only - the power of quality companies to deliver the income and income growth to investors is the best path forward in any economic terrain.Thanks so much.