Global investor sentiment improved in December 2011, as a lack of new developments in Europe prompted investors to focus on the improving nature of US economic data, which continues to indicate that a double dip recession should be avoided and that confidence is gradually improving. The positive US economic data has been supported by a good start to the earnings season.
Despite the positive market momentum over the past month, investors were reminded of the challenges ahead in 2012 when rating agency Standard and Poor’s (S&P) announced on Friday night the results of its review of European government debt positions. This followed an announcement in which the ratings agency placed 16 countries on CreditWatch with negative implications in early December 2011.
Nine out of 16 European countries were downgraded
Of the countries reviewed by S&P, Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands maintained their current ratings, with strong external positions, and less leveraged public sectors culminating in a more resilient outlook. In contrast, Austria, France, Malta, Slovakia and Slovenia were all downgraded one notch, with Cyprus, Italy, Portugal and Spain downgraded two notches (see Table 1). In addition to this announcement, all countries (excluding Germany and Slovakia) were placed on ‘negative outlook’, which indicates that the ratings agency sees a one-in-three chance of a further downgrade later this year or in 2013. Greece was not reviewed in this process.
The key rational for the most recent downgrades was the lack of cut-through in the prevailing policy response. Accordingly, Germany (with a stable outlook and no downgrade) comes out of this review as the clear winner and this will strengthen its position in future regional negotiations. This will reduce the probability of any quantitative easing program to support economic growth as forced austerity measures place more headwinds on the regional growth outlook.
The market impact is likely to be modest, but there is no ‘quick fix’
The direct market impact from the ratings announcements is likely to be subdued, as downgrades have historically resulted in only a 0.2% rise in yields (French 10-year government bonds yields are at 64-year lows of 3.1%). In addition, the possibility of downgrades were well publicised by the ratings agency five weeks ago and regional share and bond markets have had time to price securities accordingly. Asian markets (including Australia) took the news of the downgrade fairly well, falling between 1 to 1.5% today. However, it does suggest that there is no ‘quick fix’ to the European situation. Indeed the December 2011 round of ‘reforms’ were more focused on preventing a future crisis than solving the current one and even if it was implemented in every country tomorrow, nothing would be done to increase growth, lower unemployment or improve the debt position of struggling European governments.
The European Financial Stability Facility (EFSF) rescue fund could itself be downgraded
As highlighted in our late-November update to clients, the rescue fund that the European’s have been establishing to reduce funding pressures in government bond markets is well short of the target required. This EFSF was heavily criticised by S&P in terms of its lack of firepower and resources. Some market participants (including RBS) state that the EFSF itself, which is now only funded 40% by AAA rated countries, is likely to face a downgrade itself to AA+; closer to ‘average rating’ of its contributors.
This has reignited market concerns about whether adequate policies were in place to address the Northern Hemisphere debt malaise. Indeed, Italy’s move to BBB+ placed it much closer to ‘junk’ status and the proposed austerity program from its government has high political risks attached to it and could generate a worsening of the debt situation, as any resulting recession would negatively impact government revenue and government spending. In addition, Italian yields may rise from here as several large investment funds are unable to hold securities not rated ‘A’ or above. This will have flow on effects to funding costs as Italy has to raise around €0.53 trillion in 2012, relative to €0.5 billion in 2011.
Greece’s negotiations with private sector banks have stalled
Meanwhile, there are heightened market concerns that the talks between Greece and the private sector banks are close to collapse especially considering the flare-up in worries over Greece. Talks appear to be close to collapse according to some reports. The sticking point is apparently the size of the losses to be taken by banks and other bondholders as part of a 100bn Euro deal seen as crucial to bringing the country’s debt under control. This has increased market concerns that Greece was moving closer to becoming the first developed country in nearly 60 years to default on its debt. This highlights the key correlation risk that follows from a worsening in the periphery economies and the lessening of the creditworthiness of the large countries which are funding the bailout funds.
From an investment perspective, these global developments highlight the importance of investing in firms with strong balance sheets and that have lower earnings risk. These are the easiest and by far the best forms of risk management. In every downturn, the companies with the weakest balance sheets decline the farthest. Similarly, during these times investors increasingly look for companies that can generate sustained surplus cash-flow from their operations, whether the environment is supportive or not. Our fund managers continue to search for stocks that have good yields, potential income growth and those which are attractively valued.
These themes will be discussed in depth in the next edition of Perpetual Perspective, which will be dispatched soon.
Matthew Sherwood
Head of Investment Market Research
Matthew is Perpetual Investment’s Head of Investment Markets Research. In his role, Matthew conducts research on and acts as an external voice on the Australian and global economies, financial markets and portfolio strategies.
Matthew has extensive financial industry experience as an economist, investment strategist and central banker. Prior to joining Perpetual Investments in 2005, he worked as an Investment Research Manager at ING Investment Management and before that he was a Senior Economist with the Reserve Bank of Australia, where he gained significant experience in monetary policy formulation. Matthew has a Bachelor of Business from the University of Newcastle and a Masters Degree in Economics (Finance and Econometrics) from the University of Sydney.
By Vivek Prabhu | Senior Portfolio Manager - Strategy & Risk
Vivek has been Portfolio Manager/Credit Analyst since joining Perpetual Investments in August 2004 and is responsible for credit analysis, portfolio construction and trading.
Vivek has over 15 years industry experience and prior to joining Perpetual worked for eight years at Macquarie Bank as an Analyst, Compliance Manager, Assistant Portfolio Manager (Fixed Interest & Currency) and Credit Analyst. Prior to that he spent four years as an accountant/auditor at Coopers & Lybrand (PwC).
Wed, 18 Apr 2012
In the current investment environment, Australian investors are seeking high levels of consistent income. This pursuit for return on capital is evident from investors taking up almost $5 billion worth of corporate bonds and hybrid securities in the first quarter of the year. More »
By Anthony Cay | Portfolio Manager, Property Securities
Anthony is the Portfolio Manager for the Property Securities strategy and Property Income strategy, as well as the Analyst covering Australian and Asian listed and unlisted property trusts.
Anthony joined Perpetual in December 1996 as a Trust Officer in the Private Clients business. From 2003 to 2006, Anthony worked as a Quantitative Analyst, running the Passive Property Fund.
In 2006, Anthony transferred into the Equities team as an Analyst, where he covered property trusts, and the healthcare, information technology, consumer discretionary, industrials and financials sectors. In 2008, Anthony became dedicated solely to property, taking on portfolio management responsibilities.
Anthony has a Bachelor of Economics from Macquarie University and is a Certified Financial Analyst.
Tue, 17 Apr 2012
There is a lot of debate within the property investment community about whether the party is over for retail property. Anecdotal evidence of the number of empty shops on your local shopping strip will definitely support this view. More »
By Matthew Sherwood | Head of Investment Market Research
Matthew is Perpetual Investment’s Head of Investment Markets Research. In his role, Matthew conducts research on and acts as an external voice on the Australian and global economies, financial markets and portfolio strategies.
Matthew has extensive financial industry experience as an economist, investment strategist and central banker. Prior to joining Perpetual Investments in 2005, he worked as an Investment Research Manager at ING Investment Management and before that he was a Senior Economist with the Reserve Bank of Australia, where he gained significant experience in monetary policy formulation. Matthew has a Bachelor of Business from the University of Newcastle and a Masters Degree in Economics (Finance and Econometrics) from the University of Sydney.
Wed, 11 Apr 2012
Global investor sentiment improved significantly in the new year as closure of the European Greek solution, combined with a massive liquidity injection from the European Central Bank (ECB) and signs of improvement in the US economy, prompted an extended period of ‘risk on’ in markets.
However, more recently the continued disappointing European economic data combined with an end to the ECB’s liquidity injections (and the US Federal Reserve’s announcement that its often cited QEIII program had been suspended) saw the market’s four month rally peter-out fairly quickly. More »
By Jack Collopy | Portfolio Manager, BEc
Jack is the Portfolio Manager of the industrials portion of the Smaller Companies strategy and an Analyst covering small cap industrial companies across a range of sectors.
Jack joined Perpetual in November 2001 as an Investment Administrator and Equity Dealer. After four years, he moved into an Analyst role focusing on small cap industrial companies. Jack took on portfolio management responsibilities in June 2010.
Prior to joining Perpetual, Jack gained two years industry experience working in London as an Equities Dealer and Investment Administrator at both Salomon Smith Barney and Goldman Sachs Asset Management.
Jack has a Bachelor of Economics from the University of Sydney.
Thu, 05 Apr 2012
The share price of small electrical goods supplier, Breville, has made a stellar climb since the start of the year, especially since it issued an earnings update at the end of January. In February, it reported a strong H1 FY2011 net-profit-after-tax increase of 41%. More »
By Matthew Sherwood | Head of Investment Market Research
Matthew is Perpetual Investment’s Head of Investment Markets Research. In his role, Matthew conducts research on and acts as an external voice on the Australian and global economies, financial markets and portfolio strategies.
Matthew has extensive financial industry experience as an economist, investment strategist and central banker. Prior to joining Perpetual Investments in 2005, he worked as an Investment Research Manager at ING Investment Management and before that he was a Senior Economist with the Reserve Bank of Australia, where he gained significant experience in monetary policy formulation. Matthew has a Bachelor of Business from the University of Newcastle and a Masters Degree in Economics (Finance and Econometrics) from the University of Sydney.
Fri, 16 Mar 2012
There was quite a sharp market reaction to Chinese trade data this week. On Monday, China recorded its first trade deficit in 22 years. While this is a significant development, it is not so bad that it signals a major slowing underway in China. More »
By Matthew Sherwood | Head of Investment Market Research
Matthew is Perpetual Investment’s Head of Investment Markets Research. In his role, Matthew conducts research on and acts as an external voice on the Australian and global economies, financial markets and portfolio strategies.
Matthew has extensive financial industry experience as an economist, investment strategist and central banker. Prior to joining Perpetual Investments in 2005, he worked as an Investment Research Manager at ING Investment Management and before that he was a Senior Economist with the Reserve Bank of Australia, where he gained significant experience in monetary policy formulation. Matthew has a Bachelor of Business from the University of Newcastle and a Masters Degree in Economics (Finance and Econometrics) from the University of Sydney.
Thu, 15 Mar 2012
Should there be some political pressure applied to the RBA to lower interest rates and reduce pressure on the Australian dollar? More »
By Thomas Choi | Assistant Portfolio Manager / Credit Analyst CFA B.Ec
Thomas joined Perpetual in March 2008 and joined the credit team in May 2010.
Thomas’ focus is on cash dealing and management of liquidity within portfolios. He also supports Perpetual’s TAA process which includes quantitative analysis and sector rotation, as well as analytical support for our Credit Scoring process.
Thomas’ most recent role was within Perpetual’s Research and Analytics Team. In this role he was dedicated to supporting the Credit Team, provision of investment analytics such as attribution and portfolio analysis, and the active asset allocation process for Perpetual’s balanced funds.
Thomas comes from an investment management background having previously worked in a number of investment roles, including time at the hedge fund manager Prodigal as an Investment Analyst, and CMC Markets where he was a dealer on the trading desk.
Fri, 09 Mar 2012
Could this really be the beginning of the end for the Greek debt problem that has plagued financial markets for the past three years? More »
By Matthew Sherwood | Head of Investment Market Research
Matthew is Perpetual Investment’s Head of Investment Markets Research. In his role, Matthew conducts research on and acts as an external voice on the Australian and global economies, financial markets and portfolio strategies.
Matthew has extensive financial industry experience as an economist, investment strategist and central banker. Prior to joining Perpetual Investments in 2005, he worked as an Investment Research Manager at ING Investment Management and before that he was a Senior Economist with the Reserve Bank of Australia, where he gained significant experience in monetary policy formulation. Matthew has a Bachelor of Business from the University of Newcastle and a Masters Degree in Economics (Finance and Econometrics) from the University of Sydney.
Mon, 05 Mar 2012
This week's economic data in Australia has confirmed what Australia's company reporting season has been telling us; there is only modest growth momentum in both the economy and earnings at present. More »
By Paul Skamvougeras | Portfolio Manager, BEc, CA
Paul is the Portfolio Manager for the SHARE-PLUS Long-Short strategy and the Concentrated Equity strategy.
Paul rejoined Perpetual Investments in February 2010 as a Portfolio Manager, having previously spent seven years with Perpetual. He began his career with Perpetual in 1994 in a back office role, moving into a dealing role after three years, working his way up to the Head Dealer role.
Between stints at Perpetual, Paul spent seven years working at CPH/Ellerston Capital, where he had portfolio management responsibilities for an Australian long/short strategy for the first four years and a global long/short strategy for the last three years.
Paul has a Bachelor of Economics from Macquarie University and is a Member of the Institute of Chartered Accountants.
Fri, 02 Mar 2012
Over the past few weeks I’ve met with quite a few CEOs and CFOs who have described their operating environment as ‘challenging’. This has particularly been the case for companies in the Retail, Media and Building Materials sectors. However, even in those sectors ‘doing it tough’, there are some companies that are doing well. More »
By Pablo Berrutti | Manager Responsible Investments and Sustainability
Pablo is responsible for the design, implementation and maintenance of Perpetual’s Responsible Investment Framework. Pablo chairs the Investor Group on the Climate Change Research working group, and is a member of both the Low Carbon Finance and the Financial Services Council ESG working groups.
Prior to this role, Pablo joined Perpetual in 2007 as a Risk Manager in the Risk Group and has over nine years financial services industry experience.
Pablo has a diploma of superannuation and a certificate IV in financial planning. He is in the process of completing a graduate certificate in sustainability with the Harvard extension school.
Mon, 27 Feb 2012
Environmental, social and corporate governance (ESG) risks can have a more dramatic impact on stocks in the resources sector than in other sectors. However, despite high profile environmental disasters, like the Ok Tedi mine in Papua New Guinea or the oil spill in the Gulf of Mexico, a broad range of ESG risks can have less publicised, but material implications for long term company performance. More »
By Thomas Choi | Assistant Portfolio Manager / Credit Analyst CFA B.Ec
Thomas joined Perpetual in March 2008 and joined the credit team in May 2010.
Thomas’ focus is on cash dealing and management of liquidity within portfolios. He also supports Perpetual’s TAA process which includes quantitative analysis and sector rotation, as well as analytical support for our Credit Scoring process.
Thomas’ most recent role was within Perpetual’s Research and Analytics Team. In this role he was dedicated to supporting the Credit Team, provision of investment analytics such as attribution and portfolio analysis, and the active asset allocation process for Perpetual’s balanced funds.
Thomas comes from an investment management background having previously worked in a number of investment roles, including time at the hedge fund manager Prodigal as an Investment Analyst, and CMC Markets where he was a dealer on the trading desk.
Thu, 23 Feb 2012
Since Australia’s major banks started issuing covered bonds in recent months the domestic securitisation market has remained largely dormant. The generous margin offered by CBA of +175bps over the benchmark swap/BBSW in their inaugural domestic covered bond issue, resulted in a significant repricing of both the senior unsecured and securitised debt markets. More »
By Matt Williams | Head of Equities
Matt is Head of Equities and responsible for the strategic direction of the equities business and oversight of all investment strategies. He also provides support and mentoring to the analysts and portfolio managers in the team. Matt is the Portfolio Manager for the Australian Share strategy, the Pure Value Share strategy and 50% of the Industrial Share strategy. In the past he has managed the Smaller Companies strategy.
Matt joined Perpetual Investments in August 1993 as an Equities Dealer, before becoming an Analyst in 1997 and Portfolio Manager in 1998.
Prior to joining Perpetual, he worked as a Board Broker on the Australian Option Market and as a Cash/Bills Dealer at Lumley Corporation.
Matt has a Bachelor of Economics from the University of New England.
Wed, 22 Feb 2012
In what has so far been a fairly lacklustre reporting season, one highlight has been the profit result of Treasury Wine Estates. Over the first half of the financial year, the company achieved EBIT (earnings before interest and tax) growth of 18%, on a constant currency basis and its profits from sales into Asia were up 67%. More »
By Matthew Sherwood | Head of Investment Market Research
Matthew is Perpetual Investment’s Head of Investment Markets Research. In his role, Matthew conducts research on and acts as an external voice on the Australian and global economies, financial markets and portfolio strategies.
Matthew has extensive financial industry experience as an economist, investment strategist and central banker. Prior to joining Perpetual Investments in 2005, he worked as an Investment Research Manager at ING Investment Management and before that he was a Senior Economist with the Reserve Bank of Australia, where he gained significant experience in monetary policy formulation. Matthew has a Bachelor of Business from the University of Newcastle and a Masters Degree in Economics (Finance and Econometrics) from the University of Sydney.
Fri, 17 Feb 2012
Australia is in its third year of earnings recovery post the GFC and while Australian stocks remain well-capitalised on the whole, local economic data, along with the strong Australian dollar and continued Eurozone uncertainty, are likely to culminate in low single-digit earnings growth throughout FY12. More »
By Greg Stock | Portfolio Manager/Credit Analyst, B.Comm (Acc & Fin), ICAA, SIA, AFMA
Greg has been Portfolio Manager/Credit Analyst since joining Perpetual in August 2004. He is responsible for running the weekly credit process, researching non-structured issues (eg corporates, banks, infrastructure) and trades fixed rate securities.
Greg has over 14 years industry experience and prior to joining Perpetual worked at Macquarie Bank in financial operations, debt markets research and fixed income investment management. Prior to that he worked as an accountant at PriceWaterhouseCoopers.
Thu, 16 Feb 2012
The RBA has kept its Cash Target Rate at 4.25%. Despite this, banks have increased their lending rates to partially reflect the elevated funding costs they are incurring. Is there any good news in this story? More »
By Pablo Berrutti | Manager Responsible Investments and Sustainability
Pablo is responsible for the design, implementation and maintenance of Perpetual’s Responsible Investment Framework. Pablo chairs the Investor Group on the Climate Change Research working group, and is a member of both the Low Carbon Finance and the Financial Services Council ESG working groups.
Prior to this role, Pablo joined Perpetual in 2007 as a Risk Manager in the Risk Group and has over nine years financial services industry experience.
Pablo has a diploma of superannuation and a certificate IV in financial planning. He is in the process of completing a graduate certificate in sustainability with the Harvard extension school.
Mon, 13 Feb 2012
Product focused terminology: RI screening, negative screens, positive screens and the best of sector. More »
By Matthew Sherwood | Head of Investment Market Research
Matthew is Perpetual Investment’s Head of Investment Markets Research. In his role, Matthew conducts research on and acts as an external voice on the Australian and global economies, financial markets and portfolio strategies.
Matthew has extensive financial industry experience as an economist, investment strategist and central banker. Prior to joining Perpetual Investments in 2005, he worked as an Investment Research Manager at ING Investment Management and before that he was a Senior Economist with the Reserve Bank of Australia, where he gained significant experience in monetary policy formulation. Matthew has a Bachelor of Business from the University of Newcastle and a Masters Degree in Economics (Finance and Econometrics) from the University of Sydney.
Fri, 10 Feb 2012
There is an old Latin phrase, 'timeo danaos et dona ferentes', meaning 'beware of Greeks bearing gifts' which had its origin in the tale of the Trojan Horse. Today, there may be a new saying 'beware of Greeks taking back gifts' following an agreement by Greek political leaders overnight to take new austerity measures allowing access to Europe's €130 billion aid package. More »
By Vivek Prabhu | Senior Portfolio Manager - Strategy & Risk
Vivek has been Portfolio Manager/Credit Analyst since joining Perpetual Investments in August 2004 and is responsible for credit analysis, portfolio construction and trading.
Vivek has over 15 years industry experience and prior to joining Perpetual worked for eight years at Macquarie Bank as an Analyst, Compliance Manager, Assistant Portfolio Manager (Fixed Interest & Currency) and Credit Analyst. Prior to that he spent four years as an accountant/auditor at Coopers & Lybrand (PwC).
Thu, 09 Feb 2012
In January, the Commonwealth Bank of Australia (rated AA-) executed the first domestic covered bond issue by an Australian bank. Whilst foreign banks have been issuing covered bonds for many years, the Australian Parliament only recently passed legislation allowing domestic banks access to this funding alternative. More »
By Thomas Choi | Assistant Portfolio Manager / Credit Analyst CFA B.Ec
Thomas joined Perpetual in March 2008 and joined the credit team in May 2010.
Thomas’ focus is on cash dealing and management of liquidity within portfolios. He also supports Perpetual’s TAA process which includes quantitative analysis and sector rotation, as well as analytical support for our Credit Scoring process.
Thomas’ most recent role was within Perpetual’s Research and Analytics Team. In this role he was dedicated to supporting the Credit Team, provision of investment analytics such as attribution and portfolio analysis, and the active asset allocation process for Perpetual’s balanced funds.
Thomas comes from an investment management background having previously worked in a number of investment roles, including time at the hedge fund manager Prodigal as an Investment Analyst, and CMC Markets where he was a dealer on the trading desk.
Wed, 01 Feb 2012
If you are wondering whether the banks will pass on any future rate cuts, you should first ask whether they actually can. More »
By Pablo Berrutti | Manager Responsible Investments and Sustainability
Pablo is responsible for the design, implementation and maintenance of Perpetual’s Responsible Investment Framework. Pablo chairs the Investor Group on the Climate Change Research working group, and is a member of both the Low Carbon Finance and the Financial Services Council ESG working groups.
Prior to this role, Pablo joined Perpetual in 2007 as a Risk Manager in the Risk Group and has over nine years financial services industry experience.
Pablo has a diploma of superannuation and a certificate IV in financial planning. He is in the process of completing a graduate certificate in sustainability with the Harvard extension school.
Tue, 24 Jan 2012
ESG Engagement refers to the process of encouraging changes or improved practices from a company in relation to particular ESG risks, opportunities or issues. Engagement can take many forms from meeting with company management or boards; or the company’s advisors. It can be done in person, via teleconferences, in writing, or in extreme cases can be more publically aired. More »
By Matthew Sherwood | Head of Investment Market Research
Matthew is Perpetual Investment’s Head of Investment Markets Research. In his role, Matthew conducts research on and acts as an external voice on the Australian and global economies, financial markets and portfolio strategies.
Matthew has extensive financial industry experience as an economist, investment strategist and central banker. Prior to joining Perpetual Investments in 2005, he worked as an Investment Research Manager at ING Investment Management and before that he was a Senior Economist with the Reserve Bank of Australia, where he gained significant experience in monetary policy formulation. Matthew has a Bachelor of Business from the University of Newcastle and a Masters Degree in Economics (Finance and Econometrics) from the University of Sydney.
Mon, 16 Jan 2012
Global investor sentiment improved in December 2011, as a lack of new developments in Europe prompted investors to focus on the improving nature of US economic data, which continues to indicate that a double dip recession should be avoided and that confidence is gradually improving. The positive US economic data has been supported by a good start to the earnings season. More »
By Pablo Berrutti | Manager Responsible Investments and Sustainability
Pablo is responsible for the design, implementation and maintenance of Perpetual’s Responsible Investment Framework. Pablo chairs the Investor Group on the Climate Change Research working group, and is a member of both the Low Carbon Finance and the Financial Services Council ESG working groups.
Prior to this role, Pablo joined Perpetual in 2007 as a Risk Manager in the Risk Group and has over nine years financial services industry experience.
Pablo has a diploma of superannuation and a certificate IV in financial planning. He is in the process of completing a graduate certificate in sustainability with the Harvard extension school.
Tue, 08 Nov 2011
Some interesting climate news over the weekend, with US Department of Energy estimating that global CO2 emissions for 2010 increased by a massive 6% over 2009 making it a record year both in the pace of the increase and total emissions. We have also seen a number of studies recently which use statistical analysis to explore links between some weather events and climate change including the 2010 Russian heat wave, increased risk of extreme rainfall in the northern hemisphere and English floods in 2000. More »
