“Interest rates will remain low for an extended period – certainly, much lower, on average, than before the global financial crisis…[as] the result of some powerful global factors that are affecting interest rates everywhere.” Philip Lowe - Governor Reserve Bank of Australia
A year ago, investors had experienced a painful repricing in global equities as tightening liquidity conditions and heightened geo-political concerns weighed heavily on investment sentiment.
In a remarkable turnaround, the performance of financial markets has been tantalizing with the ASX 200 Accumulation Index up over 20% in 2019.
The rebound in equity prices has been even more noteworthy given weakening global economic activity, especially in the manufacturing sector, where trade uncertainties contributed to a marked reduction in capital expenditure investment. Australian companies have not been immune to slowing economic activity with the most recent reporting and AGM seasons contributing to a myriad of earning downgrades.
Against a backdrop of economic and political uncertainty central banks have pivoted aggressively to easing monetary policy, with more than 30 central banks cutting interest rates in 2019. Indeed, the indelible mark of central bank intervention has been the repricing of risk assets and has been arguably the single most important driver of equity returns in 2019. Encouragingly, there have been tentative signs that the global economy is regaining some its footing supported by favourable liquidity conditions and easing US-China trade tensions.
Nevertheless, with the ASX 200 trading on a 12-month forward price earnings ratio of c.17 times, a 20% premium to its 20- year average, investors should be cautious of current elevated valuations. The ongoing preference for equity markets to garner their support from central bank easing rather than the direction and health of corporate earnings is a timely reminder that investors should be increasingly cautious of the investment fundamentals underpinning future returns.
Our portfolios are tilted to companies that are well positioned in their industries, have strong balance sheets and are benefiting from growth. We have also been cognisant of the relative attractiveness of sustainable dividends in a period of record low interest rates. With an RBA cash rate at 0.75% compared to the ASX 200 dividend yield of c.4%, investors are seeking solace in company dividends and the benefits of franking credits.
Blended Australian Equity Portfolio & Australian Income Portfolio
The Blended Australian Equity Portfolio finished the December Quarter up 2.6% compared to the ASX 200 Accumulation Index up 0.7%. The major positive contributors to the investment performance were Caltex Limited (CTX), CSL Limited (CSL), and Macquarie Group (MQG). The main detractors to performance were Healius (HLS), National Australia Bank (NAB), and Woolworths Group (WOW).
The Australian Income Portfolio finished the December Quarter up 1.4% compared to the ASX 200 Accumulation Index up 0.7%. The major positive contributors to the investment performance were Caltex Limited (CTX), Macquarie Group (MQG), and BHP Group (BHP). The main detractors to performance were Healius (HLS), National Australia Bank (NAB), and Australia and New Zealand Banking Group (ANZ).
During the December quarter both the Blended and Income Portfolios were beneficiaries of a potential takeover proposal for Caltex. On 26th November 2019, Caltex informed the ASX of an unsolicited and conditional proposal from Alimentation Couche-Tard Inc (a leading Canadian convenience & fuel group) at $34.50 per share. The Caltex Board determined that the takeover proposal undervalued the Company but would provide the Canadian Group an opportunity to conduct non-public due diligence in order to formulate a revised proposal.
Blackmore Capital has been a long-term shareholder in Caltex based on the investment premise that value could be unlocked in separately listing its Convenience Retail sites and distributing its large franking credit surplus. Interestingly, Caltex announced a proposed IPO of 250 Convenience Retail sites on the 25th November. With the Caltex Board now actively engaged in the process of unlocking embedded value in the Group and the potential for a revised takeover offer, we will monitor developments closely.
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