Friday, March 11 2011
Markets continued their recent soft run this week. We see three short term factors impacting markets:
US markets have rallied strongly this year and have been due a pullback. The Middle East instability has provided a trigger. Uncertainty over the Middle East crisis and the potential for the oil price to destabilize the global growth outlook is the key concern. Signs of OPEC increasing production has begun to ease these fears but markets are likely to remain a watching brief on the region especially Saudi Arabia.
- China has been tightening monetary policy to ward off inflation. This has begun to feed through to lower commodity prices and profit taking in the resource sector. Note the smaller resource stocks have some speculative froth which needs to be blown off.
- Despite the strengthening US economy and the tightening in China, the A$ has remained stubbornly high. This is keeping International Investors away from our market despite an attractive valuation.
Longer term thematics remain positive. The developed world is recovering, China is growing, Australia has many billions of dollars being spent on major infrastructure and resource projects in the next couple of years. Furthermore valuations of equities are attractive (12x earnings compared to a 15 year average of 14.5x). As a consequence we see the pullback as likely to provide an attractive entry point into the market but it is a question of timing. We would prefer to see the A$ pullback a little to enable international investors to be more confident on entering Australia.
The portfolios are positioned in three areas which should position it reasonably well against the market trends:
- A strong exposure to stocks which earn profits offshore (Hendersons, Newscorp, Lend Lease, Amcor, QBE). These stocks will outperform if the pressures noted above drive a pullback in the A$.
- A range of defensive holdings including Fosters, Invocare, AGL and Crown.
- An exposure to oil via Woodside and Worley. We note Woodside has not rallied as much as we would expect into the oil price move but continues to offer substantial and improving value.
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