Investment12 December 2018

Stand back, look at the big picture

Ian Lundy
Ian Lundy
Chief Investment Officer

Stock markets globally fell during October and have been volatile but broadly flat through November. Shares had been performing very strongly for a long time. When shares perform above our long-term expectations, then we expect a fall to occur at some point, although it’s impossible to predict when with certainty. As markets kept going up, the chance of a pull-back had increased, with potential triggers such as a trade war. In anticipation of a fall, which we thought was becoming likely, we positioned the portfolio conservatively and sold down some of our international equity holdings in July and September. This turned out to be a sensible decision.

Stand back and look at the big picture

Long-term investors shouldn’t be too concerned with market noise like this. We’ve ridden the outperformance of stock markets for many years and now some of that has been handed back. Despite this, one year returns for all of our investment options were positive to the end of October. This shows just how important it is to stand back and look at the big picture.

There is a flip side to falling equity markets. As markets kept rising, they started to look expensive and it was getting more difficult to invest money. The fall has brought valuations back to more reasonable levels and provided opportunities for us to invest.

We’re now seeing different behaviour in different markets, rather than all markets rising together, with some unlisted markets holding up well.

Housing market

Tighter regulation of banks has continued to impact house prices. This has mainly come as a result of the Royal Commission and is far from over. Apartment developments are also impacted by capital controls out of China where some buyers who paid a deposit years ago can no longer bring the rest of the money to Australia.

The Tasmanian housing market has been out of sync with the rest of the country. Prices rose much later in Tasmania than in the big interstate cities, and not by as much. Our prices have also kept rising as the big cities have started falling – from very high levels. Recent surveys show that Tasmanian prices are still rising over twelve months, but personal observation of the local market is that houses are taking longer to sell, and prices are starting to level out.

Tasplan has minimal direct exposure to residential real estate as we believe there are better investment opportunities. Also, many of our members already have most of their non-super assets invested into residential real estate and a more diversified super portfolio is beneficial.

Banks are selling off great assets for the wrong reasons

The banks have copped a lot of criticism during the banking Royal Commission and a lot of it has been deserved. The worst of the criticism has been levelled at the ‘non-banking’ businesses such as financial planning and insurance. As a result of the criticism, banks seem to be in almost a state of panic and have been selling many of their businesses that aren’t traditional banking.

The problem here is that it feels like banks are selling the assets at low prices just to get rid of them and make their lives less complicated. Commonwealth Bank’s sale of CFS Global Asset Management to Mitsubishi UFJ Trust and Banking Corporation of Japan is an example where a bank is selling a high quality asset that was not named at the Royal Commission for less than they would have got normally. It’s not clear that this is in the long-term interests of Australian super investors who previously owned this investment manager.

The other side of the electricity price debate

Federal politicians have had plenty to say about electricity prices recently, aimed mostly at the bigger states. Electricity markets are complicated with separate companies involved in generation, transmission, distribution and retailing. Generation often gets most attention, especially where it relates to renewables, but this is only 20 to 30% of the price of electricity that you pay. Tasplan has investments across the spectrum, and within our infrastructure portfolio this is focussed on transmission and distribution. The Federal Government and energy regulators are seeking to reduce the return that companies within the electricity can earn, but these are mostly owned by super funds and it’s super fund members who will suffer as a result. We expect this will dampen returns slightly in the short term.

Past performance isn’t a reliable indicator of future performance.

This article contains information or advice that’s intended to be general in nature and which was prepared without taking into account your personal objectives, financial situation or needs. Because of that, before acting on any information or advice in this article, please consider whether it’s appropriate to your personal circumstances, talk to a financial planner and consider the relevant Member guide, available at tasplan.com.au or by calling 1800 005 166, before making a decision about whether to acquire the products. The trustee of Tasplan Super (ABN 14 602 032 302) is Tasplan Pty Ltd (ABN 13 009 563 062).

Wall Street slump: Are we doom...

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