Portfolio Changes - July 2019
The Australian equity market is trading on a 12- month forward Price Earnings Ratio (PE) of 16.2 times, 15% higher than its long-term average of 14 times. It is notable that the Australian equity market has maintained a valuation multiple above these levels only once in the last 30 years. This period was during the “tech bubble” in the late 1990’s.
Global equity markets are reaching new highs buoyed by the prospect of further central bank easing and a general hunt for yield.
Nevertheless, we believe that this year’s pronounced rally in equity markets is looking increasingly vulnerable, as valuations look relatively full and where earnings revisions are still negatively skewed. As such, we are raising our cash levels to around 20%.
A higher cash weighting serves two purposes. First, it provides ballast to the portfolios’ in times of heightened volatility. And second, it provides optionality, where we can invest counter-cyclically taking advantage of lower prices to purchase companies at more attractive valuations.
We have allocated a weighting of our cash component into BetaShares Australian High Interest Cash ETF, that invests in Australian bank deposit accounts that exceed the 30 day Bank Bill Swap Rate and distributions are paid monthly.
Recent changes to the Blended Australian Equities Portfolio & Australian Equities Income Portfolio
Reduced Woodside Petroleum (WPL) We reduced the position in Woodside because its major growth projects, Browse and Scarborough, are facing several uncertainties from a regulatory, market and joint venture partner point of view. The partners in Woodside’s proposed projects are facing pressure from the WA Government to commit to development in order to retain the resource leases. While this may suit Woodside’s agenda to develop the projects, the LNG market into 2025 is presented with several rival projects (currently ~100mtpa) with competitors that are prepared to develop with significant uncontracted capacity. This environment may necessitate the higher risk of developing the projects with significant uncontracted capacity. We have reduced the Woodside exposure in the portfolios until there is greater clarity around these issues. Reduced Qube Holdings (QUB) QUBE Holdings has an impressive suite of operating divisions in Automotive, Bulk and General Stevedoring along with Logistics and strategic developments in the Moorebank Logistics Park. This combination of essential logistics earnings with long term Industrial Logistics property development is more attractive amid a low interest rate environment and the stock price traded to record high earlier in July. While we remain long term investors in this suite of assets, the share price has moved well ahead of earnings in the near term and has traded up with the support of the bond market rally. Sold QBE Insurance (QBE) & Reduced Insurance Australia Group (IAG) Over the course of the last 12 months IAG and QBE have benefitted from a period of greater industry discipline and a more favourable pricing environment. Both companies have recorded strong share price appreciation in 2019 and their earnings multiples now look relatively full. Moreover, the bond yield collapse in 2019 and the likely long- term impact of an extended period of record low interest rates will negatively weigh on insurance sector returns. As such, we have sold our position in QBE Insurance and reduced our weighting in IAG Limited.