BlueBlog
Rockanomics

ROCKANOMICS - Sept Quarter 2017

If markets are truly efficient, digest all available information and are somewhat “forward thinking”, then clearly it is dismissing any real threat of war despite the near weekly barbs being lobbed about by two of the most famous, nuclear equipped, madmen in the world. The broad based All Country World Index of global shares hit YET another all-time high, gaining an impressive 5% this past quarter! What war??? Guess this writer won’t be seeking shelter in Middle Earth (New Zealand for everyone else) just yet.
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What was?

If markets are truly efficient, digest all available information and are somewhat “forward thinking”, then clearly it is dismissing any real threat of war despite the near weekly barbs being lobbed about by two of the most famous, nuclear equipped, madmen in the world. The broad based All Country World Index of global shares hit YET another all-time high, gaining an impressive 5% this past quarter! What war??? Guess this writer won’t be seeking shelter in Middle Earth (New Zealand for everyone else) just yet.

And the US markets seemed bullet proof to fire from repeated healthcare legislation passing failures and let’s face it, a fair amount of legislative messes and distractions and yes, the obvious. Need we say his name. Even a terrible trio of hurricanes couldn’t stop the all-encompassing Wilshire 5000 index finishing the quarter up 3.7%. Small caps and the tech heavy NASDAQ faired even better with 4.5% and 6.3% respectively. What makes this even more surprising is that these sorts of numbers are still being charted despite the possible beginnings of a global monetary tightening cycle. Canada became the 2nd country in the Group of 7 (after the US) to raise its benchmark rate. It may not seem obvious to us down under but deposit rates have in fact been inching higher all over the world.

A popular ETF tracking European large caps went up 5.7%, the highest the index has been in more than 2 years, as the European recovery gathers further pace. This too despite the U.K. being slapped with a credit downgrade. Emerging markets were up about the same and Asia ex Japan did even better. An ETF on large cap Latin American stocks was up an incredible 15%, a stunning resurgence and reversal of fortunes from January 2016, for the region. Empty threats of the NAFTA trade agreement being torn up we’re clearly just that, empty populist threats. In fact, the only market that lagged all this exuberance was Japan, managing just a 1.5% return, however the outlook remains largely positive with macro economists due to favourable government policy.

Commodities experienced a welcome change in direction this quarter as the benchmark Bloomberg Commodity index rose a modest 2.5%, led in part by a 12% gain in the price of crude oil alone. Falls in physical crude stocks, a weakening USD, U.S. output (possibly) levelling out and a rise in demand could finally be giving a much-needed lift to oil investors. While gold may have taken a hit in the month of September, it too rose 3.3% over the quarter as the year-to-date upward price trend holds. With shows of the latest cinematic war blockbuster, “The Rocket Man vs The American Dotard”, playing well past matinee hour, gold should probably see some continued strength. Iron ore, looked to be under pressure again but still managed to eke out a 1% gain for the quarter.

The Australian dollar (vs the USD) managed to finally break out of the 80-cent handle and hit a 2 year high in September. Though it settled back to 78.5 cents, 2.1% return for the quarter was registered. A decline the greenback’s demand was the most likely reason behind the jolt. Given his overwhelming penchant for distracting sideshows, investors were most likely paring their bets on the Twitter-in-Chief’s ability to pass through potentially stimulating legislation via tax cuts and infrastructure spending. The economic devastation levied by a particularly violent hurricane season might also dampen the odds of further rate rises from the US Federal Reserve, thus reducing the attractiveness of the USD. The Aussie dollar though wasn’t so hot against other major currencies, as the star performer year-to-date was, hands down, the Euro. Rocketing up 12% (vs the USD), Europe’s economic recovery triggered talks of tightening monetary policy i.e. higher rates.

The ASX 200 found itself in a relatively tight band of about 150 points for literally the entire quarter finishing down less than 1 percent in the end. Bulls and bears tried their best at times to muster a breakout but the move (typically preceded by dwindling volatility and volumes) was not forthcoming by quarter’s end. Interestingly, the telco sector is now sitting at a NEGATIVE 30% one-year return and this writer can barely get his internet browser to load. Was it $50 billion they ponied up for the NBN? Bring back the dial up modem for Rockanomics’ sake!

Fixed income was steady as she usually goes returning just over 1 % across our various bond managers. While overall property exposures were positive, our healthcare property managers once again returned a stellar 6.5% for the quarter. Global large caps came in at a modest 1.5% while smaller international stocks impressed with over 5%. Although Asian mid-caps detracted very modestly, large cap holdings surged to an 8% gain! Results were mixed on the local share font (albeit positively), as small company holdings went down 3%, mid-caps we’re just above level at 1%, while micro caps ran riot to finish 7% for the quarter. High conviction and concentrated portfolios are prone to inevitable bouts of underperformance. Such is the price of entry into this game (at times), but when managed steadfastly as part of a measured risk profile, with a watchful eye over your wealth and welfare (which the Private Wealth team prides itself on) risk can, for a good part, be your investing friend.

What now?

The state of the world has not changed much this year. The issues that were there before still confront us today as news (market friendly or otherwise) bombards us from all angles and corners of the planet. Markets seem Teflon coated in the face of some very real risks, however you want to slice it. Stepping back from the white noise, the real issue (and risk to be aware of) might be that of a potential, global tightening cycle.

Growth prospects aside, one must admit that plenty of investors and businesses have had their floaties on in the deep end of the pool, during these last 8 years of ultra-cheap money. What will happen when rates start to REALLY push up and from multiple angles at that? Who (and how many) will be caught overleveraged past their eye balls because of the hunt for yield these previous years? How many are right on the edge? As one Warren has said, “only when the tide goes out do you discover who’s been swimming naked”.

Portfolio construction remains in line with our higher conviction on international equities vs our more familiar domestic counterparts, property is tilted away from listed exposures in favour of direct, and bonds are focused on high quality with floating rates, inflation linked rates or shorter dated fixed rates.

Globally we have higher weightings to U.S. tech and banks, U.S. small caps and Asian equities for emerging market exposure. We are currently looking at other emerging markets, pockets of Europe and Japan for inclusion into portfolios.

For Australian investors, the good ol’ Blue Chips featuring the banks, miners, Telstra and our grocery chain moguls generally feature heavily in portfolios. BlueRock maintains a higher than normal tilt to mid (outside top 20), small (outside top 100) and micro (outside top 300) cap stocks on the basis this part of the market provides opportunity for active management to find higher growth businesses which aren’t as heavily reliant on pure economic growth to drive profits.

The recent investment rally most likely, and somewhat surprisingly, has some more steam in it just yet, with index management likely to continue to do well. Having said that, our eyes remain keenly focused on the interest rate cycle and the flow on effect to income focused investments in 2018 – bonds, blue chip shares, listed property and infrastructure.

What's that?

Cryptocurrencies.

While this much talked about term may conjure up thoughts of what money might be called in the infernal realms of Hades or even in casinos run by Lucifer and his merry band of fallen croupiers (at least in this writer’s ahead), the reality is much more complex! A relatively straightforward Google search on crypto (or virtual/digital currencies) will typically result in a “I’m going straight to the crypt” sized headache for regular non-geeks, in the pursuit of comprehending - what this medium of exchange actually is, its origins and how it works.

Technicalities aside, what we can tell you is that while cryptos attempt to satisfy the basic characteristics of money i.e. store of value, medium of exchange, limited supply etc, it has 1) no redeemable intrinsic value (not exchangeable for/backed by gold for example), 2) has no physical form, existing only in a network (cyberspace), and 3) its supply and demand are not determined by a central bank i.e. it is completely decentralized with no government oversight.

Though Bitcoin was the first and probably most famous of all cryptos, there have been numerous others since 2009 – Ethereum, Litecoin, Zcash, Monero, Tezos to name but a few. Once the de rigueur payment method for illicit activities procured on the Dark Web, partly due to the anonymity feature of some cryptos, its use is now increasingly vanilla i.e. restaurants, online stores, courier services etc as its acceptance as a currency alternative grows. The big question however, given its ever increasing spotlight, is……worthwhile investment or wild “Dutch Tulip mania” style speculation?

With the plethora of websites, e-books, seminars, Uber drivers, Paris Hilton and Stevo the millennial down the road spruiking it as the next sure thing, its value has surged 500% in just this past year! Traded on cryptocurrency specific exchanges, the USD 160 billion dollar “asset class” is 30 times more volatile than the USD and prone to 20% price swings on any given day. The bane of governments and the establishment (what is a government anyway if it can’t govern/control something), federal moves to shut down Bitcoin exchanges in Russia and China (its biggest markets), have seen plenty of investors burnt only to have its value bounce back and continue its turbo charged run. Price sensitive announcements are made via tweets or in chat rooms with coordinated chat room frenzies often responsible for wild price inflations in an almost “pump and dump” fashion. Proponents argue that decentralization protocols solve the inflation issue, that cryptos cannot be counterfeited or reversed arbitrarily, have much lower transaction fees and heightened transparency, provide access to everyone connected to the internet (2.2 billion and counting) and is recognised at a universal level (not bound by interest and exchange rates like uppity paper money). While the concept seems solid, its wild speculative nature (at present) make’s this vehicle deserving of a “buyer beware” sticker and may only suit players with a very high-risk tolerance. Although the technology looks here to stay, its general acceptance as a genuine alternative and by the establishment (and then by extension, its true value), remains to be seen.

On a funny side note, a Collateral Debt Obligation (CDO) on mortgages (the ones that played a big part in bringing the world to its knees back in 08/09) were also a struggle to work out back then, even for the bankers hawking it! Its effects however, won’t be forgotten by many.

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Did you know?
The origin of the BlueRock name is a mash-up of the founders two favourite things.
Through a mutual love of the Carlton football team and Dwayne 'The Rock' Johnson, a firm was born!