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Clime Asset Management. The impact on the macro-environment on the Australian market. Disclaimer.
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Clime Asset Management The impact on the macro-environment on the Australian market
Disclaimer • The information contained in this document is published by the Clime Group. The information contained herein is not intended to be advice and does not take into account your personal circumstances, financial situation and objectives. The information provided herein may not be appropriate to your particular financial circumstances and we encourage you to obtain your own independent advice from your financial advisor before making any investment decision. Please be aware that investing involves the risk of capital loss and past results are not a reliable indicator of future performance and returns. Clime Asset Management Pty Limited (Clime), Total Fund Services Limited and its directors, employees and agents make no representation and give no accuracy, reliability, completeness or suitability of the information contained in this document and do not accept responsibility for any errors, or inaccuracies in, or omissions from this document; and shall not be liable for any loss or damage howsoever arising (including by reason of negligence or otherwise) as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this document, as it does not purport to be comprehensive or to render personal advice.
Investment Performance – February 2011 Clime Australian Value Fund Total Returns.
How we manage capital • Capital preservation is essential, avoiding losing money is essential to maximising the return. • The sustainable NROE (profitability) of a company will determine the value of the company. • The company’s share price will eventually reflect the intrinsic value of the company in the medium term. • We identify companies who have: • attractive investment characteristics; and • buy those companies when their share price is lower than our assessment of the intrinsic value of the company. • We build a portfolio of approx 20 stocks or securities and we target a portfolio return of 12% pa
We create concentrated portfolios of listed company securities on the ASX • We build concentrated portfolios of 15 – 25 investments. • We study the Australian and global economies, analysing the impact on companies. • We invest in ASX listed company securities (equity, hybrid, debt) that have attractive investment characteristics and where their share price is below our assessment of the value of the business. • If we cannot find investments that meet these requirements, we will hold cash. • We do not follow the market indices and are benchmark and sector unaware.
Understanding the operating environment of a company is critical • Companies do not exist in isolation; • To value a company one must understand and have a view on the operating environment - social, political, environmental, economic – ie, the operating environment will affect the outlook for a company and therefore its value; • The macro outlook will affect the valuation of the market and therefore should be considered and monitored to determine the amount of capital to allocate to the market so long as value is identified.
The critical issues for the world economy are… • The outlook for the US is most uncertain. The outlook for the economy and the markets is unclear as sustainable economic recovery has not been created. The US represents 20% of the world GDP – thus unsettling for all investment markets; • The introduction of QE2 in the US is supportive of speculation in financial markets but its effect on the real economy is also uncertain and so far unproven; • The UK is undertaking a massive fiscal workout , however it is benefitting from an independent currency in the European region; • Europe continues to be affected by the financial collapse of Iceland, Greece and Ireland. Other nations such as Spain, Portugal and Italy are teetering;
The critical issues for the world economy are… • Japan has recently experienced a massive shock to its economic system now requiring massive repatriation of funds. This withdrawal of capital from Europe and the US will effect currencies in investment markets for the foreseeable future. • China is attempting to maintain its growth levels by undervaluing its currency, tightening of bank credit and adopting anti-inflationary measures; and • Australia is riding the Chinese growth story, however the uneven growth across the economy is testing economic policy settings and the political will.
But sovereign debt is growing with $6 trillion of new debt in 2011. Government Net Debt
Sovereign debt will actually increase despite austerity measures Govt debt as a percentage of GDP for select G20 countries, actual & estimated
It will be a challenge to reduce fiscal deficits with high unemployment
The level of sovereign debt has to be addressed • There will be $6T of government debt issued around the world in 2011; • Without quantitative easing, it is unclear as to how this is or was going to be funded; • Quantitative easing is being undertaken in the US, UK, Europe and Japan; • However there is one omnipresent issue for the western world which is now coming into focus and it is the aging population and the lack of fiscal preparedness for this event;
The level of sovereign debt has to be addressed • Economic forecasters warned western governments 20 years ago of the aging baby-boomers who are now approaching retirement age; • Baby boomers are changing or refining their consumption patterns and are focusing on saving or preservation of capital; • Thus, governments will and are struggling to deal with pension costs and the activities of retirees is beginning to have a dramatic effect on consumption patterns, tax collections and social security drawdowns.
Japan, Europe & USA have aging populations Entitlement Programs Are Unsustainable
BUT the world is growing at about 3% p.a. for the next two years
The two speed world is still a good world for Australia World Output – March Quarter 2006 = 100
In 2010, households suddenly decided to pay back debt around the world. • Meanwhile the Government increases debt
The US has stagnated over the last 10 years; real wealth and employment static
The US distribution of wealth needs to be addressed, but no political will to do so!
The result of these observations for the future is TAX, TAX and more TAX • 2009/10 The year of sovereign debt • 2010/11 Restructuring of sovereign debt • 2011/12+ TAX, TAX and more TAX
Tax measures to address key global issues • Economic:Sovereign debt and fiscal stimulus will have to be serviced & repaid • Environmental: • Climate change addressed through a carbon tax Social:The aging population of the developed world • Wealth re-distribution. Eg Resources Super Profits Tax
Australia’s household wealth tied up in houses Household balance sheet comparisons Source: Australian Bureau of Statistics
Australia’s Household Saving Ratio is increasing and will effect banks and retailers
Debt reduction and lower debt funded consumption affects retail sales
Credit margins have increased in Australia with interest rates rising faster than RBA tightenings
Australian Resources: improving terms of trade will lead to trade surplus
Iron ore the powerhouse: 20% of our exports Australian iron ore exports
Australian resource companies will benefit from US recovery through Chinese trade • China’s growing share of US trade deficit
The outlook for Australia • The economy is growing • The population is growing - immigration 160,000 + 270,000 births p.a. • The terms of trade are improving and are at a record high • AUD/USD above $1.00 holds down inflationary pressures • Government debt is under control, peak at $90bn 2013, 8% of GDP • Linked to growth engines of world, China & India • Risks • Very high household debt • Full employment (unemployment 5.4%) wages push • Slow down in China & India’s growth • The unknown shocks (Japan)
Conclusions • Volatility remain in markets. We use it to our client’s advantage by having an active value based investment methodology. • It is not the time to be passive. Markets will go from optimism to depression. We have to stay alert and not listen to the noise. • Yield is important. We seek out quality yield investments in shares and hybrids. • Do not borrow to invest and keep cash.
