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Off with a bang!
After a weak start to the week, the S&P/ASX All Ordinaries Accumulation Index started the new financial year with a bang finishing up 1.5% for the week. This week was the best performance for the local bourse in five months. In Australia, the RBA left interest rates unchanged on Tuesday and in a speech in Hobart on Thursday, Governor Glenn Stevens seemingly softened his stance in regard to further interest rates cuts. The central bank clearly has an easing bias and hinted that interest rate increases are not amongst their current considerations. Positive jobs numbers in the US were ahead of expectations seeing unemployment fall to 6.1%, its lowest level since September 2008. The US market rallied on the back of this data into the 4th July holiday which will see its market closed tonight.
Market outlook for the new financial year
As we have now entered financial year 2015 we thought this would be an opportune time to share five key themes which we think will shape the market in the new year:
Interest rates lower for longer:
Given economic growth in Australia remains below trend, we now expect interest rates will remain low for the next two to three years. We expect inflation will continue to soften and perhaps leave the door open for the RBA to reduce the cash rate further. This bodes well for the equity market, particularly yield driven stocks given term deposits are delivering circa 3% compared to the grossed up yield of the major banks of around 7%.
Housing market to remain strong:
With interest rates to remain at record lows, this will see house prices continue to move higher. The other factor driving house prices is the heightened level of competition amongst the banks for new home loans. We are hearing of discounts in the order of 1.4% off the standard variable rate for larger residential loans. This competition in the banking sector is returning to levels we witnessed between 2005-2007.
Where is the earnings growth?:
As discussed previously, we have been concerned with the level of price to earnings ratio expansion in the Australian market. Earnings growth remains anaemic with a raft of profit downgrades in recent months across a number of sectors. In our view, the market’s expectation of 8% earnings per share (EPS) growth for the next twelve months looks too high.
US increasing interest rates:
With economic data continuing to improve over the last year, we think the US Federal Reserve could increase interest rates by the end of 2014. Generally, rising interest rates have a dampening impact on equity market returns. In our view, this could provide short term volatility to the downside.
IPOs and M&A activity heats up:
Continuing its strength, we expect IPO and M&A activity to increase further this year as companies look to grow earnings off the back of a weaker economy in Australia.
With our higher than average cash weighting we are well positioned to take advantage of opportunities as they arise in the market.
Exposure to Australia’s best fund managers and support children's charities
Wilson Asset Management is supporting a new Listed Investment Company (LIC) – Future Generation Investment Fund Limited – which will provide investors with access to Australia’s best fund managers for 0.0% management fees and 0.0% performance fees. As fund managers, and many service providers, will be providing their services pro bono, this will allow the company to donate 1.0% of assets per annum to Australian children’s charities. Where the balance of the forgone fees is greater than the amount paid to charities, the balance will be for the benefit of shareholders.
You’re invited to a presentation about this investment opportunity. Presentations will be held in capital cities around the country commencing next week. A Prospectus for the new LIC will be available on Monday 7 July 2014. For more details, to request a Prospectus or to RSVP to the presentation, please click here.
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