May 2019 - Portfolio Update
The unexpected election of the Federal Coalition provided a salient reminder of the perils of forecasting, whether it be in the disciplines of politics, economics or indeed investing. Undoubtedly, financial markets expectations had centred on a change in the Federal Government. Instead, the unequivocal re-election of the Coalition provided a dramatic catalyst for the Australian share market.
The equity market response was immediate and profound with a sharp rally in bank, private health providers and residential building stocks, relieved by the decisive nature of the victory and the expectation that the worst scenarios of regulatory interference would not be realised.
Instead, an armoury of policy support emerged to address a languishing economy and vulnerable housing market. Stimulatory policy intervention is expected to be delivered in three forms. First, the Federal Coalition’s policies for income tax cuts and support for first-home buyers. Second, APRA’s proposal to remove the serviceability floor rate applied to home loans. Third, a more dovish position by Australia’s Central Bank supporting lower interest rates.
Thus, the coordinated stimulus policy responses by the Australian treasury, the banking regulator and central bank should assist in moderating the risks in the domestic economy. At a portfolio level, we would contend that more accommodative policy measures in banking and private health care underpins our increased investment in these sectors.
Blended Australian Equity Portfolio | Australian Equities Income Portfolio
The Blended Australian Equities Portfolio finished the month of May up 0.32% compared to the ASX Accumulation Index up 1.71%. Positive attribution for the Blended Australian Equities Portfolio was driven by Resmed (RMD), Alumina (AWC) and Ramsay Health Care (RHC). Whereas, QBE Insurance (QBE), Caltex (CTX), and Adelaide Brighton (ABC) weighed negatively on attribution.
The Australian Income Portfolio finished the month of May up 0.11% compared to the ASX Accumulation Index up 1.71%. Positive attribution for the Australian Income Portfolio was driven by Alumina (AWC), Ramsay Health Care (RHC) and Viva Energy REIT (VVR). Whereas, QBE Insurance (QBE), Macquarie Group (MQG) and Caltex weighed negatively on attribution.
The Federal Coalition victory heralded a potent re-rating in the banking, domestic housing related, and private health care sectors. With the Blended and Australian Income Portfolios holding relatively smaller weightings in the banking and domestic cyclicals, neither portfolio was able to fully participate in the meaningful rotation into these sectors post the outcome of the Federal election.
Our investment stance remains vigilant with the ASX 200 trading c.10 per cent above its long-term average and at a time when earnings revisions remain negative. A focus on earnings resilience and balance sheet strength is paramount as the global economy navigates its way through a myriad of geo-political challenges.