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Start of the correction?
The Australian equity market recorded its strongest monthly gain this calendar year rising 4.5% in July. The local market was driven higher primarily by the strong performance of Australia’s mining stocks with investor confidence in the sector bolstered by China’s confirmation that it was on track to achieve 7.5% GDP growth this year. In the US strong GDP figures out on Wednesday showed their economic recovery continues to gather pace while the US reporting season has continued to be positive with 76% of stocks exceeding analysts’ expectations. However, overnight US markets tumbled with the Dow Jones Industrial Average Index falling almost 2% – the biggest one day drop since February. The sell-off was driven by Argentina’s bond default and moves by Portugal’s central bank to force Banco Espírito Santo (which reported a shock €3.58 billion loss) to raise
capital. In addition, US investors are grappling with growing expectations that interest rates will move higher over coming months. In Australia, the S&P/ASX All Ordinaries Accumulation Index followed Wall Street’s lead falling 1.3% today to close the week down 0.5%.
Genworth – safe as houses?
On Wednesday mortgage insurer Genworth (ASX: GMA) reported an after tax profit of $42.5 million for the period since its listing on 19 May 2014. The result was accompanied by a profit upgrade with the company now forecasting full year profit of between $231.1 million and $250 million, which at the top end is up 8% from its prospectus guidance. In our view, Genworth is a clear beneficiary of Australia’s strong housing market. Given that interest rates are forecast to remain at historically low levels and the positive impact this will have on the housing market, we believe that Genworth’s earnings guidance is conservative. Since listing at $2.65 per share, GMA’s stock price has surged around 29% to $3.43 making it one of the best performing IPOs this calendar year. We own Genworth in our investment portfolio.
Eurovision economic contest
Senior Equity Analyst Matt Haupt returned from the UK and France this week, meeting with Australian-listed companies with European operations and gathering insights into the region’s economic drivers. Here Matt shares his insights from the world’s largest economic region.
Divergent economies
The current condition of Europe’s economy is best described as patchy with the performance of some national economies strong, while others are languishing. According to the IMF’s latest World Economic Outlook, the euro area has emerged from its recession and is continuing to recover with growth forecast to be 1.2% this calendar year led by countries such as Germany and the United Kingdom. In comparison, Italy and Spain are forecast to grow by 0.6% and 0.9% respectively.
Britain booming
The UK economy has launched a strong recovery over the last year. Economic conditions are the best they’ve been in years with 2014 growth forecast to be 2.9% - one of the best performers in Europe. In response, there are now many commentators who are forecasting record low interest rates will rise before Christmas. The housing market is hot with recent figures showing valuations are up more than 10% over the last year and up around 15% since the market’s lows of June 2009. The general mood amongst companies was very positive as reflected by consumer sentiment which rose for six consecutive months to June this year.
…while France flounders
In contrast, the picture in France est terrible with recent figures showing a March quarter GDP reading of 0.0%. Following growth of just 0.3% in 2013, the French economy is on track to expand just 1.0% in 2014. In our view, ineffective government is a key contributor to the country’s current woes. Speculation of a Paris city tax and the recent VAT increase from 7% to 10% in an effort to raise money are stifling economic growth.
Next week, Matt will share further insights and views of specific companies he met with in the UK and France.
Future Generation Investment Fund Limited
Last Sunday our Chairman Geoff Wilson discussed Future Generation Investment Fund with Deborah Knight on Channel Nine’s Financial Review Sunday. Watch the interview here.
Why have small cap stocks underperformed?
In this week’s edition of Chris Cuffe’s Cuffelinks I contributed an article examining why Australian small cap stocks have underperformed over the last two years. The article sets out the reasons why in our view small cap stocks will in future outperform their larger cap rivals consistent with the long term historical trend. Read the full article here.
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