Monthly market overview by Elio D'Amato - June 2014 - Lincoln Stock Doctor
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Monthly market overview by Elio D'Amato - June 2014
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Monthly Messages
A key focus in May was the continued corporate activity in the form of
acquisitions and takeover bids (both domestically and overseas),
which buoyed the market. The encouraging news for Stock Doctor
members was that Star Stocks, Borderline Star Stocks and Lincoln
preferred income stocks remained at the forefront of many of the
positive announcements, as a result of their strong corporate
structures and inherent quality.
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Market Overview
The Australian equities market saw little change from April to May 2014. Indices on the
Australian market were up less than 0.1% in May, compared to 1% and 2% gains in the US,
and volatility across shares dropped to their lowest levels since 2007.
Sustained gains in the broader market were a backdrop to the outperformance of a number of
Star Stocks and Lincoln preferred income stocks. It is clear that Stock Doctor continues to
highlight strong companies, with prospective earnings and fundamentally superior performers.
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It is worth remembering that we are in the fifth year of recovery since the Global Financial
Crisis (GFC) and things won't go upwards forever. As a result, many commentators are looking
for reasons why the Australian economy may incur future challenges. Suggestions include the
peak in capital expenditure and budgetary fiscal constraints as reasons for an impending
correction. The strong GDP figures released recently showed growth for the year of 3.5%, but
these were quickly dismissed as being "as good as they will get for the next two years". Time
will tell if that view is correct.
Despite this gloomy backdrop, there was an ongoing flavour for organic and acquisitive
overseas expansion by some Australian small and mid-cap companies. Corporate takeovers
such as PanAust Limited (PNA), Treasury Wine Estates Limited (TWE) and Karoon Gas Australia
Ltd (KAR) bolstered sentiment, as investors latched onto business confidence.
Stock Doctor Star Stocks Ramsay Health Care Limited (RHC) and G8 Education Limited (GEM)
continued their trend of growth through acquisition. In addition, we saw overseas expansion
continue for Borderline Star Stock CarSales.com Limited (CRZ), Star Stock GBST Holdings
Limited (GBT), and Borderline Star Stock Infomedia Limited (IFM), to name a few. Lastly,
Lincoln preferred income stock Spark Infrastructure Group (SKI) acquired approximately 14%
of DUET Group (DUE), which got tongues wagging amongst utilities sector watchers.
Investment Climate
The current investment climate is indicative of a broader, maturing recovery seeking another
leg. Both domestic and overseas growth is proving somewhat disappointing, with the
exception of only the UK and New Zealand. At home there are headwinds developing, which
could inhibit growth.
Potential bumps in the road include:
The peak in capital expenditure, courtesy of the mining cycle peak;
Lower wages growth at 2.5% per annum, down from 4.5% two years ago - meaning we are
now in line with growth rates typical of a developed western world; and
Federal budget-related fiscal constraints.
The budget-related constraints will be offset somewhat by infrastructure spending, expected
to take effect in 2015 and 2016. Also, the latest GDP figures show the mining boom is still in
earnest, even though the capital development boom may be over. Therefore, those calling an
end to the Australian economy may have jumped in too soon.
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Monthly market overview by Elio D'Amato - June 2014 - Lincoln Stock Doctor
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Source: abs.gov.au
Overseas, the US economy remains sluggish, although investors are focused on the more
positive data released, not to mention the fact it actually is improving in the first place. In
Europe, the EU is now contemplating further monetary easing by the European Central Bank
(ECB), where, despite the improved financial health of most EU countries, any real growth in
the region is still absent.
In Asia, Japan has knocked its short-term recovery on the head with a new sales tax. This will
create a one-off kick to inflation and thus the prospect of an economic recovery in the short
term is open to debate. Longer-term we expect the tax to be a small distraction to broader
structural issues, which continue to linger.
Of greater importance to Australia, China has announced some mini-stimulus initiatives in
recent weeks. These include increased local government spending, People's Bank spending on
shanty town projects and cuts to bank reserve requirements.
Notwithstanding potential gains in China, these trends are encapsulated in price movements
we have seen in commodities and government bonds this year, and throughout the last 12
months. Commodity prices have been in decline, as supply is outpacing demand in broad
terms. Precious metals, some base metals and bulk commodities have lost price momentum.
In particular, the iron ore price has been the most worrying, as indications of supply expansion
begin to show signs of a potential surplus over demand.
Source: various
The Australian government 10 year bond rate has fallen to 3.7%, from around 4.1% two
months ago and over 4.2% at the end of 2013. This move is replicated across other developed
countries and to some extent elsewhere. This trend looks set to continue for some time until
positive sentiment around the economy's outlook changes.
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Source: various
Portfolio clean up - tax time
June brings a focus on end of financial year considerations. As always, we encourage our Stock
Doctor members to actively manage their portfolios around tax considerations, including any
required loss realisation, dividend and income requirements, and portfolio structuring.
In this context, investors should look to conduct a portfolio review or clean-up, addressing any
unrequired stock positions that may have been accumulated. In addition, investors should
look to 'lock in' some profits and seek opportunities to grab financially healthy, stronger
companies at advantageous pricing.
Any clean-up should first focus on stocks that investors may be holding for all the wrong
reasons and aren't showing the fundamentals you should demand from your investments.
Sometimes stocks just do not behave the way you might have wished and holding a candle for
any improvement will be a painful process.
In reviewing a portfolio an investor should ask the following:
Has the reason I bought the stock changed?
Would I buy the stock today if I were given the opportunity?
Does my portfolio need rebalancing?
Does it align to my objectives?
Some of the criteria investors should be addressing are the company's Financial Health,
operations, management and earnings growth. In doing so, you will select the best companies
that align with your investment objectives.
Stocks to watch in the new financial year
Looking forward to the second half of 2014 and a new financial year, Lincoln has identified
'five stocks to watch'. These stocks are quality, long-term opportunities and currently hold a
Lincoln Financial Health rating of 'Strong'. They are also viewed as efficient, growing and with
strong prospects ahead:
TPG Telecom Limited (TPM)
FlexiGroup Limited (FXL)
Credit Corp Group Limited (CCP)
Australia & New Zealand Banking Group Limited (ANZ)
Infomedia Limited (IFM)
As we regularly keep tabs on how our companies are performing between reporting seasons,
if a stock is rated as a preferred company by Stock Doctor, you know that it is under constant
review and analysis.
For those seeking dividend and income, only Commonwealth Bank (CBA) - a Lincoln preferred
income stock - and Bendigo and Adelaide Bank (BEN) are heading into the cum-August
dividend time.
Therefore, income seeking investors need to broaden their view and consider other options
that carry 30 June year end dividends. Within Lincoln preferred income stocks we recommend:
Suncorp Group Limited (SUN)
Woodside Petroleum Limited (WPL)
Adelaide Brighton Limited (ABC)
Spark Infrastructure Group (SKI)
Infomedia Limited (IFM)
Insurance Australia Group Limited (IAG)
Ardent Leisure Group (AAD)
Cromwell Property Group (CMW)
CFS Retail Property Trust Group (CFX)
BWP Trust (BWP)
Telstra Corporation Limited (TLS)
June and beyond
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We anticipate a continued strong performance from our preferred companies. In the second
half of 2014, we look forward to themes around quality companies with healthy accounts,
continued prominence put to acquisition strategies, and overseas earnings recovery and
expansion.
In a number of cases, these themes match up well with our Star Stocks and Lincoln preferred
income stocks.
It is important that you actively invest your money in a way that ensures your portfolio is
continuously aligned to your investment objectives, especially at this time of year. As we have
discussed, be sure to manage your tax considerations including loss realisation, and taking the
opportunity to acquire fundamentally better performers at this time. For those with a focus on
income, spotlight stocks with upcoming dividends and income for the financial year-end, as
we move closer to 60 days before dividends start to be declared.
Until next time, happy investing!
Data as of Market close 30 May 2014
Open
Close
Change
Change %
All Ordinaries
5,469
5,474
5
0.09%
S&P ASX200
5,489
5,493
3
0.06%
16,581
16,717
136
0.82%
1,884
1,924
40
2.11%
Gold
$1,292
$1,248
-$44
-3.34%
Oil
$99.70
$102.71
$3.01
3.02%
AUD/USD
$0.929
$0.931
0.002
0.21%
Interest Rates
2.50%
2.50%
-
0.00%
Unemployment rate (April 2014)
5.80%
5.80%
-
0.00%
Dow Jones Index
S&P 500
Yours sincerely
Elio D'Amato
Chief Executive Officer
Important information
Author: Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.
This information is current as at 6 June 2014.
Our advice and the advice of our Authorised Representatives (including advice in this communication) are prepared without
taking into account your personal circumstances. You should therefore consider the appropriateness of the advice in light of
your objections, financial situation and needs, before acting on it. Where our advice relates to the acquisition or possible
acquisition of a financial product, you should obtain a copy of and consider the Financial Services Guide (FSG) before making
any decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.
Testimonials are provided by third parties for information purposes only and are not intended to be financial product advice.
They do not represent opinion or advice from Lincoln. The information provided may not be appropriate to your particular
circumstances. You should consider obtaining your own independent advice before making any decision.
Lincoln, its director, employees and agents, makes no representation and gives no warranty as to the accuracy of this
communication and does not accept any responsibility for any errors or inaccuracies in or omissions from this communication
(whether negligent or otherwise) and shall not be liable for any loss or damage howsoever arising as a result of any person
acting or refraining from acting in reliance on any information contained herein. No reader should rely on this communication
as it does not purport to be comprehensive or to render advice. This disclaimer does not purport to exclude any warranties
implied by law which may not be lawfully excluded. Lincoln, its employees and/or associates hold interests in TWE, RHC, GEM,
GBT, TPM, CCP, ANZ, SUN, WPL, SKI, IAG, AAD, CMW, CFX, BWP and TLS. This position could change at any time without notice.
Economic and other information taken into account in forming any opinions are subject to change and therefore opinions
expressed as to future matters may no longer be reliable.
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