AUGUST 2015 There is a quotation often attributed to Mark Twain that says there are three kinds of lies: lies, damned lies and statistics. Twain went on to say that “figures often beguile me”, and when it comes to the economic data of Greece and China, I’d venture to say he’s not alone. Greece continued to feature in front page headlines during July; no mean feat given the commotion happening in China. In both China and Greece it was the integrity of information (or the lack thereof) that caused market uncertainty and volatility. Markets just didn’t know what to make of what was happening in either country! Political discussions between Greece and Europe continued throughout the month with optimistic but empty statements. The Greek share market stayed shut for five weeks and immediately sank when it reopened, reflecting the lack of credibility and trust in the Greek economy and its banking sector. Meanwhile the Chinese share market’s wild ride came to an abrupt halt and late in July it suffered its biggest one-day fall in eight years — 8.5% in one day, and then smaller falls in subsequent days. The Chinese market provided plenty of media fodder with stories of individuals who had quit their jobs to play the local share market, or borrowed to participate in what seemed to be a one-way bet. The main Chinese market indices have more than doubled over the last year. While the fun ride has stopped for now, the Chinese share market is still well ahead for the year and the frothy activity has made a positive contribution to China’s GDP with banks, share brokers and financial firms enjoying good times. Where does the Chinese share market go from here? It is impossible to know. Just as there was no logic for the market’s huge spike, there was no real basis for the slump. The Chinese market is opaque and to a large extent is a state-run affair. The Chinese government has, through Chinese media, encouraged investors to join in the frenzy and have also participated in the market themselves through state-owned entities and funds. Similarly the government played a role after the market slumped, announcing new rules and directions for state-owned entities in order to minimise volatility and allow for an orderly market deflation. The Chinese share market is hard to comprehend, but the Chinese economy is an even bigger head-scratcher. As a command economy, China’s policy direction, pace and Lies, Damned Lies and Statistics implementation are controlled by the Government. While the world watches China’s economy with baited breath, it nevertheless struggles to believe the economic data that comes out of China. While we should have rejoiced at China’s achievement of exactly 7% GDP growth for the third quarter (which makes everyone else’s GDP look anaemic), the skeptics couldn’t help thinking how convenient it was that the number precisely coincided with the Government’s target, that at least part of it came from the wild share market, and that it was calculated and released in just two weeks even though the experts in the US Department of Statistics take a full six weeks to figure out their growth! Even applying a generous pinch of salt, China’s economic growth adds a lot of dollars to world GDP. A table from Market Minder provides some perspective: Hypothetical Chinese Growth in US Dollars If China grew... Global GDP would gain 7.0% (official target) $726.6 billion 6.8% (IMF estimate) $705.9 billion 6.5% (assuming share market slowdown) $674.7 billion 6.0% (a bigger slowdown) $622.8 billion 5.0% (just to be really conservative) $519.0 billion Source: International Monetary Fund. Calculations based on IMF’s estimate of China’s 2014 GDP at $10.38 trillion. As Market Minder noted, even assuming the worst, $US519 billion is big: “it’s like two and a half Greeces. Or, if you prefer, it’s the equivalent of the US growing about 3%. Would anyone sneeze at that?” Carmel Fisher Managing Director From the Undergrowth
Transcript
AUGUST 2015
There is a quotation often attributed to Mark Twain that says there are three kinds of lies: lies, damned lies and statistics. Twain went on to say that “figures often beguile me”, and when it comes to the economic data of Greece and China, I’d venture to say he’s not alone.
Greece continued to feature in front page headlines during July; no mean feat given the commotion happening in China. In both China and Greece it was the integrity of information (or the lack thereof) that caused market uncertainty and volatility. Markets just didn’t know what to make of what was happening in either country!
Political discussions between Greece and Europe continued throughout the month with optimistic but empty statements. The Greek share market stayed shut for five weeks and immediately sank when it reopened, reflecting the lack of credibility and trust in the Greek economy and its banking sector.
Meanwhile the Chinese share market’s wild ride came to an abrupt halt and late in July it suffered its biggest one-day fall in eight years — 8.5% in one day, and then smaller falls in subsequent days. The Chinese market provided plenty of media fodder with stories of individuals who had quit their jobs to play the local share market, or borrowed to participate in what seemed to be a one-way bet. The main Chinese market indices have more than doubled over the last year. While the fun ride has stopped for now, the Chinese share market is still well ahead for the year and the frothy activity has made a positive contribution to China’s GDP with banks, share brokers and financial firms enjoying good times.
Where does the Chinese share market go from here? It is impossible to know. Just as there was no logic for the market’s huge spike, there was no real basis for the slump. The Chinese market is opaque and to a large extent is a state-run affair. The Chinese government has, through Chinese media, encouraged investors to join in the frenzy and have also participated in the market themselves through state-owned entities and funds. Similarly the government played a role after the market slumped, announcing new rules and directions for state-owned entities in order to minimise volatility and allow for an orderly market deflation.
The Chinese share market is hard to comprehend, but the Chinese economy is an even bigger head-scratcher. As a command economy, China’s policy direction, pace and
Lies, Damned Lies and Statisticsimplementation are controlled by the Government. While the world watches China’s economy with baited breath, it nevertheless struggles to believe the economic data that comes out of China. While we should have rejoiced at China’s achievement of exactly 7% GDP growth for the third quarter (which makes everyone else’s GDP look anaemic), the skeptics couldn’t help thinking how convenient it was that the number precisely coincided with the Government’s target, that at least part of it came from the wild share market, and that it was calculated and released in just two weeks even though the experts in the US Department of Statistics take a full six weeks to figure out their growth!
Even applying a generous pinch of salt, China’s economic growth adds a lot of dollars to world GDP. A table from Market Minder provides some perspective:
5.0% (just to be really conservative) $519.0 billion
Source: International Monetary Fund. Calculations based on IMF’s estimate of
China’s 2014 GDP at $10.38 trillion.
As Market Minder noted, even assuming the worst, $US519 billion is big: “it’s like two and a half Greeces. Or, if you prefer, it’s the equivalent of the US growing about 3%. Would anyone sneeze at that?”
Carmel Fisher Managing Director
From theUndergrowth
FISHER FUNDS FROM THE UNDERGROWTH2
Your Portfolios Highlights and Lowlights
» In New Zealand, our retirement village companies Summerset and Ryman Healthcare provided updates during the month, indicating that both operators are trading very well and have ambitious plans for the future. Summerset announced the purchase of a further two sites in Auckland for future villages and upgraded its earnings estimates. Ryman detailed its foray into the Melbourne market with five villages expected to be completed there by 2020.
» During the month we sold the last of our holding in Opus International Consulting, bringing an end to an investment that promised much given its sector dynamics, but never really delivered.
» The majority of our property & infrastructure investments provided pleasing share price performance over the month, with NZ and Australian property exposure benefiting from falling bond yields while other investments generally benefited from investor preference for defensive names. Despite delivering results in line with expectations, the share price of Malaysia Airport came under pressure following media propaganda from one of its major airline operators, AirAsia.
» Our International funds enjoyed a strong Google result with significantly improved cost management and guidance for improved capital allocation. Hong Kong listed Wasion continues to be buffeted by Chinese share market volatility.
» In Australia, a positive contribution from the share portfolio was offset by hedging losses leaving the fund 3.7% up, slightly ahead of its benchmark. With reporting season imminent, there was little in the way of company specific news. Given weak earnings growth prospects, we have been reluctant to buy Resources stocks despite their offering increasing value over the last year. During July this decision continued to pay off as mining stocks weakened further on falling commodity prices.
» Recent falls in global commodity prices have caused inflation expectations to be revised lower. This is good news for our fixed interest portfolios as high-grade fixed income assets benefit from a lower-for-longer interest rate outlook.
China Shenanigans (part deux)By Roger Garrett Senior Portfolio Manager, International Equities
Investing in the Chinese share market isn’t for the faint hearted at present. A couple of months since we wrote about the speculative rally in Chinese shares, the bubble appears to have burst. Since reaching a peak around the middle of June, the Shanghai and Shenzen Composite Indices have corrected by over 30%.
As a reminder, China has two main stock classifications: A-shares which are stocks traded on the local exchanges and traded mostly by Chinese investors and H-shares that are traded on Hong Kong exchanges and available to international investors like us. While all Chinese stocks have experienced turbulence, the worst of the volatility has been largely concentrated in A-shares.
The turbulent events in the Chinese share markets have turned into a bit of an own goal for the Chinese authorities who had been active in promoting share market investment by individuals. The Chinese response has been heavy handed, unconventional and at odds with an ambition to have an open and transparent capital market. In an attempt to arrest the fall in the share markets, authorities have implemented a number of ad hoc emergency measures including a ban on new listings, short selling and selling by principal shareholders. They have followed this up by establishing what is now called a ‘national team’ of state institutions that have been actively buying stocks in order to support the market. Finally the regulator has become more
active, urging investors to report any market misbehaviour on official hotlines (like the China of old) and actively suspending accounts of purported market manipulators.
The upshot is a high degree of uncertainty and this is reflected by ongoing volatility in the share market.
By actively buying up the market and preventing key stakeholders and other market participants the right to sell, the Chinese authorities have a manipulated share market that cannot trade to its fundamentals. We continue to monitor the market closely but given the high level of uncertainty are happy to remain on the sidelines until we believe fundamental value exists.
- what has been going on since we last spoke?
FISHER FUNDS FROM THE UNDERGROWTH 3
Staying ahead of the packBy David McLeish, Senior Portfolio Manager, Fixed Interest
A country’s overnight interest rate or ‘cash rate’ is typically set by its central bank. Here in New Zealand it is the Reserve Bank who controls the Official Cash Rate. Charged with steering the economy toward price stability (read: 2% inflation) the central bank sets what it believes to be the ideal cash rate to ensure the economy is neither running too hot nor too cold.
Should the economy be deemed to be facing sufficient headwinds as to put the central bank’s medium-term inflation target at risk, they will be inclined towards a lower, more stimulative, cash rate setting. With this in mind and at first glance, the axe that our Reserve Bank has recently taken to the cash rate could be construed as an alarming sign of economic weakness ahead.
So how concerned should we be?
In a world where abnormally low interest rates are now the norm, your starting point is far more important than the direction you’re going. In this regard, New Zealand’s cash rate remains one of the highest in the developed world, giving the Reserve Bank considerable capacity to invigorate the economy through lower borrowing rates and (hopefully) a lower currency. It also allows the Reserve Bank to be proactive, in essence staying in front of the uncertainty ahead.
This is a privilege many countries don’t have. The contrast is no more apparent than when you compare the New Zealand economy to that of the United States — a country that is widely expected to soon be raising its cash rate. Here all number of economic indicators including growth, inflation, retail sales, and industrial production show the US is still lagging behind New Zealand.
This epitomizes the dilemma a number of less fortunate central banks face. At some point there will be another recession. If the US does not get their cash rate above 0% sometime soon they will find themselves entering the next downturn in the unenviable position of not having any conventional monetary policies left in its arsenal to ward off the deflationary effects it will likely bring.
For them, it’s a matter of need rather than want. New Zealand is in the fortunate position of having the flexibility to breathe life into our economy when warranted.
Greenback is a tough taskmasterBy Roger Garrett Senior Portfolio Manager, International Equities
The strengthening US dollar continues to crunch the revenues and profits of those US companies with international earnings. Over the last year the USD has appreciated by 21% against both the Euro and Yen as the European and Japanese central banks aggressively ease monetary policy while the US is looking to increase interest rates. Total revenues for the S&P 500 companies are approximately $10 trillion with roughly a third of these revenues coming from abroad. Therefore, approximately $3.3 trillion of revenue is impacted by the strength of the US dollar. Very rough calculations suggest that a staggering $500 billion could be sliced off the revenues of US companies as a result of the greenback’s strength.
Before the hankies come out, we should remember that this dollar strength just reverses an extended period of dollar weakness that has allowed US companies to significantly increase their share of global sales. However the speed of the dollar’s rise has presented major challenges to the management of US companies that are now also facing stronger competition from foreign competitors in international markets. These companies have had minimal time to adjust and adapt to the changing environment.
The experience to date from US companies in our portfolio confirms the difficult environment. Many now report on an actual as well as a constant currency basis to highlight
the impact of the currency and give a sense as to how well the underlying business is performing. The assessment of management and track record are important parts of our STEEPP process and we are encouraged by management initiatives in many portfolio companies to cut costs, improve efficiencies and reassess capital allocation in response to the dollar’s appreciation. As a result, while there may have been some disappointment at the revenue level, this was not repeated at the earnings level where most US companies we hold have outperformed expectations.
A bird’s eye viewWinning with wireless
We have recently added Crown Castle to our Property & Infrastructure portfolios. Portfolio Manager Zoie Regan explains why this business appeals to us.Crown Castle ticks all the boxes as a business because it provides essential assets that people rely on to stay in touch, conduct their business and basically live their lives every day. It also makes the grade from an investment point of view, possessing all the qualities that infrastructure investors want — stable revenues backed by long-term contracts, predictable cash flows, strong margins and growing customer demand.
Crown Castle owns and leases towers and other infrastructure used by telecommunications companies to provide data services for wireless devices such as mobile phones and tablets. With consumer demand for data, video, email and other activities on mobile devices growing, the need increases for the phone companies and other wireless carriers to access additional tower space. While telecommunication companies historically owned their own infrastructure, they have increasingly moved to a model where they become tenants of infrastructure companies such as Crown, leasing more space as consumer demand for data expands.
Crown owns more than 40,000 towers and is one of the largest providers of wireless infrastructure in the US, leasing space to the likes of AT&T and Verizon, who in turn operate and maintain all the communication network equipment on the property and tower. The top three tower operators now
FISHER FUNDS FROM THE UNDERGROWTH 4
have 76% share of the US tower market (with Crown having the largest-equal market share of 32%).
Towers can accommodate multiple tenants (typically four to five tenants per tower), meaning tower operators can offer leases to carriers significantly cheaper (savings range from 30-65%) than if the carriers were to build or operate their own towers.
The ‘moats’ around tower operators such as Crown, which in our view make them attractive long-term investments, include location scarcity, zoning restrictions and capital requirements associated with towers, as well as the typically long-term, non-cancellable leases which give certainty and predictability of cash flows. Crown has a $21b pipeline in contractual lease payments, equivalent to seven times its FY2014 site rental revenue!
Since listing in 1998, Crown has successfully acquired six carrier portfolios, with two of these occurring relatively recently in 2012 and late 2013. As a result of acquiring towers from carriers which have historically been single-tenanted, Crown has a significant opportunity to improve occupancy on its portfolio. As there are minimal costs associated with adding additional tenants to existing infrastructure, Crown enjoys good profit margins, strong cash flows and attractive returns on invested capital.
We believe Crown has an exceptional business model uniquely combining the attractive qualities of infrastructure assets and the simplicity and strengths of a property landlord.
Fisher Funds Managed Funds Financial Statements now availableThe Fisher Funds Managed Funds Financial Statements for the year ending 31 March 2015 (including the auditors’
report and a summary of recent amendments to the Trust Deeds) are now available to review on our website (www.fisherfunds.co.nz/downloadable-forms) . If you would like us to post this information to you free of charge,
please email us at [email protected] or call us on 0508 FISHER (0508 347 437).
Market Indices 1 Month 1 Year 2 Years 3 Years 5 Years 7 Years
NZ50G 3.4% 14.6% 14.2% 18.6% 14.3% 8.5%
90day bank bill 0.3% 3.7% 3.3% 3.1% 3.0% 3.4%
S&P/ASX300 (Calculated in $NZ) 1.6% 7.0% 10.0% 8.9% 6.9% 4.3%
Global Small Cap Index (in $NZ) 2.2% 36.0% 21.1% 24.6% 15.3% 10.4%
New Zealand Government Stock Index 1.6% 9.4% 6.2% 4.0%
For a copy of any of our investment statements, visit our website www.fisherfunds.co.nz or phone 0508 FISHER (0508 347 437) The information and any opinions herein are based upon sources believed reliable, but the Company, its officers and directors make no representations as to its accuracy or completeness. All opinions reflect our judgement on the date of this report and are subject to change without notice. The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment. Past performance is not a reliable guide to future performance.
Further information about all of our funds (including a full breakdown of the portfolio holdings, investment team profiles and current fund fact sheets) can be found at www.fisherfunds.co.nz.
Fund Facts (as at 31 July 2015)
New Zealand Share Price Change
Contribution to Return
Summerset 17% 0.8%
Auckland Airport 10% 0.3%
Fisher & Paykel Healthcare 9% 1.2%
Australia
Ramsay Healthcare 5.6%
Carsales.com 4.4%
Veda Group 4.4%
Cash 7.9%
Top 10 holdings 46.1%
International
Wirecard 4.8%
Ebay 4.6%
Brembo 4.3%
Cash 7.7%
Top 10 holdings 42.7%
Property & Infrastructure
Union Pacific 10.2%
Flughafen Wien AG 8.5%
Flughafen Zuerich AG 7.4%
Cash 5.9%
Top 10 holdings 65.8%
Australia Share Price Change
Contribution to Return
DWS Solutions 33% 0.1%
Infomedia -15% -0.1%
CSL 11% 0.4%
International Share Price Change
Contribution to Return
Google — Class A 24% 0.9%
Icon PLC 22% 0.6%
Biotest 15% 0.4%
Property & Infrastructure Share Price Change
Contribution to Return
Flughafen Zuerich AG 9% 0.6%
One Gas 8% 0.2%
Goodman Property Trust 8% 0.4%
with you all the way...Fisher Funds Management Limited
What we’re reading ...Earnings reporting season is halfway through in the US and results are about to start coming thick and fast from Australasian companies. Miranda Maxwell of Business Spectator talks about the upcoming Australian season.
Australia’s share market is in for another volatile reporting season this month and, if history repeats, is likely to outperform its international peers over coming weeks.
While Australian equities have generally underperformed global markets in recent years, Australia tends to be a notable outperformer during reporting seasons, achieving better returns in around two-thirds of reporting seasons, Deutsche Bank says.
There is ample room for improvement at the top end of the market. In almost a precise inverse of what is happening in the US market — where much has been made of that fact that the bulk of overall market gains can be attributed to just a handful of mega stocks — the Australian market is up overall for the year but has been weighed by favourite names in the top 10: the top four banks, BHP Billiton and Woodside, and the supermarket majors.
A substantial pullback in input costs such as fuel and lower interest costs should beef up earnings. A decent smattering of relief rallies is also expected among stocks that have underperformed in recent months and experienced a big decline in their price-to-earnings ratios.
The already challenged mining and energy sectors are unsurprisingly expected to be impacted by reduced earnings, operating cash flow, and lower cash balances. Also with official interest rates at historic lows and possibly headed lower still, the hunt for sustainable yields will intensify as more super
funds and retirees move their funds into quality stocks with a proven income track record.
Companies able to achieve consistent and stable earnings which will fund an above-market dividend yield will continue to be the main drivers for the ASX indices this year.
The payout ratio among Australia’s industrial and bank stocks is trending broadly flat, and with gearing low and interest costs continuing to fall, there should be ample capacity to sustain dividend payout ratios, or up spending.
Currency gains to the miners are likely to be more than offset by commodity prices being substantially lower than 12 months ago, though overall market declines are expected to be mild and quickly attract buying on the dips.
For industrial stocks, the lower Australian dollar is a boon for local earnings figures, and softer US growth was offset by firming growth in Europe. Analysts say margins for industrials look to have bottomed in fiscal 2015 and bounced over the past 12 months. Efficiency programs have delivered, and there is further potential for cost cutting and more debt reduction.
Whether corporate Australia’s efforts and any August gains are sustained when the US finally acts on its intention to raise interest rates will be the big question in the months after the profit disclosure season.
Reporting season is rarely a major or prolonged driver of market performance, notes one analyst report, adding that the current benign global backdrop won’t last.
Getting to know ...For some of you, this introduction will feel like a second date as we have introduced Zoie in an earlier newsletter. However, that was back in December 2012, six months after Zoie had joined Fisher Funds as an investment analyst working with Murray Brown on the Property and Infrastructure fund.
Today’s introduction is different altogether because Zoie is now the Portfolio Manager of our Property and Infrastructure portfolios.
Zoie is Auckland born and bred, and has also lived in Wellington and Sydney. Zoie is a numbers guru and has a BCom (majoring in Finance) and BSc (double major in Statistics and Operations Research) from Auckland University and is a CFA charterholder. Zoie’s interest in analysis and number crunching has come in handy considering the strong
share price momentum in the property and energy sectors in recent times. Her willingness to don hard hats, overalls and boots has also proven invaluable — not all of us get a kick out of visiting power stations in the middle of winter, but Zoie has happily taken it in her stride.
Like many in the Fisher Funds team, Zoie loves the outdoors, sport and international travel. We’ve sent her to Huntly, Christchurch and Taupo, and no doubt Zoie will try convincing us how important it is to investigate our portfolio investments in Zurich, Vienna, the US and beyond!
