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ROCKANOMICS – December Quarter 2017

Those with the crystal balls 12 months ago are likely heading back to the pawn shop – to exchange them for a set of tarot cards. 2017 got off to a rocky start (not dissimilar to Sly Stallone’s career in the early days) only to come home strong. It seems some significant geopolitical events were no match for low interest rates and global corporate strength in 2017...

What was?

Is it March already? Or did we miss that too?

Those with the crystal balls 12 months ago are likely heading back to the pawn shop – to exchange them for a set of tarot cards. 2017 got off to a rocky start (not dissimilar to Sly Stallone’s career in the early days) only to come home strong. It seems some significant geopolitical events were no match for low interest rates and global corporate strength in 2017.

A very positive year it was as global equities – on average and as measured by the benchmark All Country World Index – went up another 5% in the December quarter and a mammoth 20% in 2017 overall. It makes that fixed deposit earning look woeful, doesn’t it?

All things considered, shares worldwide have enjoyed a reasonably smooth uptrend over the last 2 calendar years thanks to some very low rates (by very low, we mean 1 in 5 German companies getting charged by their banks to keep deposits!) and a search for greener pastures – whatever may be hiding in those blades of grass!

The very broad-based Wilshire 5000 share index went up 6.4% for the quarter, as the American economy continues to gain steam – even in long, stubborn but crucial areas of wage growth and employee earnings. The Nasdaq itself gained 28% over the calendar year. That certainly fuelled talk of Amazon possibly being the first ever TRILLION-dollar company. It’s market cap surged 25% in just a quarter, making ol’ Bezos the richest man in the universe (if we were to discount other wealthier life forms out there, of course).

And all this was before the big announcement of the passing of the much anticipated (by America’s rich anyway) US Tax Cuts & Jobs Act. The biggest sector driver in the US equities market was, not surprisingly, technology, with modest gains from cyclicals (your Fords, Whirlpools and Nikes) and financials. Most other sectors were flat or down, with US utilities the biggest loser last quarter.

Over in Europe, large caps bucked the global bullish fever (despite positive GDP growth) to go down 2.5% for the quarter – no doubt in some ways, impacted by UK Brexit talks entering the next crucial phase, support among ECB policy makers to reduce monthly asset purchases/quantitative easing and a rising Euro currency.

It was, however, green on the board everywhere else – emerging markets and Asia (ex-Japan) were up over 5% for the quarter. Japan came to the party this time, notching 11.5% for the last 3 months of 2017. While the poster boys of gains were down 2% this time around, Latin American large caps have had a stunning 60% run over the last 2 calendar years.

Despite well-known political troubles and economic hardships in places like Venezuela, Brazil and Argentina, pro-business political parties (replacing previous populist governments), rising currencies and attractive valuations (compared to American equities) have made South America a hot spot for hot money.

Africa, the ‘final frontier’ for opportunities, enjoyed a 25% gain in its equities over 2017, but may have some way to go if investments and growth are managed prudently and politics are stable.

Emerging markets, particularly India, remain an asset class/region of perceived valued for 2018. However, as the saying goes, “All boats rise and fall with the tide”. Nothing can be truer for emerging markets and good ol’ Uncle Sam – with the water sometimes disappearing altogether!

On the home front, the ASX 200 – notorious for always being the last to get the memo (it must be the distance?) – was finally jolted into a 6.7% run for the quarter. It averaged a decent 7% for the calendar year. The index finally broke through the important psychological barrier of 6000 points – a level last hit 10 years ago in January 2008. Healthcare, IT and consumer staples led the way while financials was only beaten (severely we must add) by telcos, in the race to the bottom. September 2017 quarter’s GDP was slightly positive, interest rates remained on hold, the unemployment rate rose a tad from 5-year lows and household debt remains, eye wateringly high. But who’s counting?

BlueRock has positioned higher allocations to global equities than Australian equities over the past 10 years and this has, year on year, continued to reward us. Though international shares pay lower dividends, total return has truly trumped.

Commodities, overall, had its second positive quarter in a row – up 4.7%. Most of that gain was attributable to crude oil alone gaining 16%, hitting the USD 60/barrel level for the first time since June 2015. Indications are that supply cuts are finally taking hold while global demand has been ticking up. If copper’s gain (now at its highest price in 2 years) is anything to go by, then industry is picking up! Iron ore too was up 21% for the quarter and a bit more for the year despite some testy peaks and troughs.

While safe-haven gold went through a bit of a roller coaster to finish slightly below even for the quarter, it too sits on the higher end of its 2-year price band, signalling that some investors are still insisting on safety. With the Kim and Don Circus playing extra shows in town, why wouldn’t they?

The Australian dollar (versus the USD) spent most of the quarter in free fall to sit just shy of 75 cents but a Santa-inspired reversal in the last 3 weeks of December, brought it back to near even and a smidge short of 78 cents. The USD index (the US dollar measured, on average, against a basket of major currencies), while mostly flat for the December quarter, lost 10% over the course of 2017.

A certain former reality TV star, with 4 (some count 6) corporate bankruptcies under his belt, running the country from his Twitter account, may have had a small part to play.

For BlueRock Private Wealth it was a very positive quarter – our read of the markets and ensuing choices of investments and diversification strategies played in our clients favour. It was healthy numbers across the landscape but special mentions must go to healthcare property, international infrastructure, Asian equities and our continued convictions in domestic micro, small and mid-cap equities. We’ve enjoyed double digit returns across the year, across all these spheres compared to the ASX 200 at 7%.

What now?

The Everything Bubble.

Now you may have heard this term being thrown about in mass media but let’s attempt to shed some intelligible discourse your way.

The definition of an economic bubble seems to be very subjective (and emotive) depending on which side of a trade an investor is usually on (ok we give up, it’s the long side!). But one can’t deny that when money is overtly cheap (and for so long), it unfortunately tends to find its way into things it ordinarily shouldn’t or wouldn’t. Fact. And if you haven’t already noticed, a whole bunch of asset classes have been going up in price, near simultaneously. Hence the ’everything‘.

House prices in Australia aside (we know the story here), home values in the US are now, on average, higher than they were at the peak of the subprime mortgage episode. Real estate price indices in Canada and Sweden (as an example) are through the roof – so much so that citizens are leaving, flustered with the lost hope of ever purchasing a home in their own home.

There are now more varieties of cryptocurrencies in ‘circulation’ than there are UN-recognised fiat currencies (1072 versus 180 as of the end of 2017). And a lot of ‘investors‘ still don’t understand it as well as they should – only that it’s a sure bet, apparently. Notice this writer’s liberal use of inverted commas. Apparently adding the word ‘blockchain’ next to your surname increases your own value two-fold. Try it.

The FANG-type stocks (you know the ones) account for most of the year’s gains. Uber and plenty of other tech ‘start-ups’ have not made a dime in profit but continue to raise capital like there’s no tomorrow.

Tesla became the world’s fourth largest automaker by market capitalisation. Yes, the company that never meets any self-imposed production deadlines (good looking cars though, we’ll give them that!) and racks up hundreds of millions in losses every quarter. But they don’t seem to have a problem raising capital, do they?

Auto loans in the US have grown 70% in 7 years, with 1.1 trillion US dollars outstanding, $280 billion of that sub-prime. Corporate credit is on the way up again. And China is so addicted to debt, it accounts for something like 260% of its GDP. If that old car you’ve been eyeing keeps rising in price, chances are it’s not the cult aspect of it so much as the cheap money available to create the ‘hysteria’ around it. Credit and debt, magnified by the now omnipresent existence of ‘cheap money’.

What might ‘pop’ these subjective bubbles?

That’s hard to say given the kinds and depths of shenanigans that typically identify with periods of euphoria. But interest rates are always a good one to watch. Specifically (and historically) the speed and magnitude on the way up might catch a fair few without their underpants on. With much-sought inflation now clearly emerging, the cycle of rate rises have well and truly begun in a number of countries.

How can I avoid any potential pop?

5000 years of anecdotal evidence says you can’t completely – only that you can be hypervigilant to what’s happening around you. That might mean leaving something on the table, but in investing, prudence never really hurt a nest egg.

More than ever, this is the time to have a very well diversified, nimble and active investment solution. The last 5 years have been very kind to low cost, index hugging strategies as pretty much everything has risen on the tide of cheap capital. However, many believe volatility will return and effective portfolio construction will play an integral part in managing associated risks and targeting what areas of value remain.

With that in mind, we’re pleased to announce that our enhanced BlueRock investment solution (the BlueRock MDA) is now live! Transparent, active, diversified and quick on your feet – this is the state of play.

What's that?

An MDA? While it sounds kind of illegal, this version is indeed very legal and an extremely effective method of managing an investment portfolio in a cost-effective manner. To avoid any possible confusion though, MDA stands for Managed Discretionary Account – a technical term which probably means nothing to anyone other than a wealth manager.

Over the past 24 months the BlueRock Private Wealth team has been busily liaising with ASIC (the top corporate watchdog), our lawyers and various investment specialists to secure our very own Australian Financial Services Licence (AFSL), as well as the smarts and technology required to finally roll out the BlueRock MDA portfolio service.

What does this practically mean? A higher level of investment sophistication, backed by a very experienced investment committee, with more direct investments across domestic and global markets, being actively managed in a more efficient and timely manner.

Sound good? Well we would hope so. The roll out of this project, now live, is the culmination of 2 years of well researched work. We have assessed the technological and investment landscape, analysed many different options and structures, and even attempted to see into the future to formulate what we feel is a ‘best of breed’ solution for our clients.

In a world where the 1980s stock broker model is dying by the day, and shiny new DIY solutions are being cleverly marketed, we are very confident about the holistic robustness of what we can now deliver.

If you'd like more information on any of the above, feel free to get in touch with the BlueRock Private Wealth team.

This article is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. The information in this article has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information in regards to these factors before acting, or seek advice before making any financial decisions.

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