By Raymond Chan

What has happened over the month?

  • Over the month: ASX 200 +2%, Dow Jones +0.3%, S&P 500 +1%, NASDAQ +4%, Nikkei +2.6%, Hang Seng +5.8%, Shanghai +2.4%, FTSE +3.7%, TSE +1.8%, AUD/USD +1.4% $0.77, Brent -1.5% $47.2, Iron Ore +3% $59.6, Gold +1.2% $1343
  • We say farewell to Glenn Stevens. In his last speech as RBA governor, Stevens suggested “Australia's inflation targeting regime has sufficient flexibility to retain its integrity through the current period of ultra-weak price pressures in the economy … I think the inflation target, as we have operated it, has the requisite degree of flexibility … We can't just assume that monetary policy can simply dial up the growth we need. We need some realism here”. Latte with Ray maintains a further RBA rate cut will be required in the post-Stevens era. 
  • A Fitch article on Negative Bond Yields (forwarded by our head of fixed interest, Steven Wright) says: “An increase in the amount of European sovereign debt with sub-zero yields (i.e. negative yields) offset, in part, the decline in the corresponding Japanese total … Japanese debt still makes up the majority of negative-yielding sovereign debt globally.” Latte with Ray couldn’t understand why anyone would invest in bonds that guarantee you to lose money if held till maturity – but this is a crazy world. In Japan, $11.7 trillion was invested in such bonds. 
  • The growing move towards negative yields sparked the global pursuit of infrastructure assets. This brings us to the topic of Ausgrid’s saga. Latte with Ray was interviewed by SBS this week on Scott Morrison blocking State Grid and CKI’s bids for a majority stake in Ausgrid. To understand the importance of Ausgrid, we need to first understand the electricity generation industry.

    There are four key components: (1) Generation – unregulated, (2) Transmission – regulated e.g. Transgrid (sold last year), (3) Distribution – regulated e.g. Ausgrid (used to be part of Energy Australia) and (4) Retailing – unregulated e.g. AGL & Origin. Ausgrid is the traditional “pole and wire” business and its revenue (i.e. return) is government-regulated, long life, predictable, and inflation linked. However, investors normally won’t pay more than 1 time RAB (Regulated Asset Base) for regulated assets, but investors' (like Sovereign Funds, SOE) access to a much lower cost of capital can afford to bid MORE (The media suggests that the Chinese is bidding at 1.5 times. If successful, this would have been a good outcome for the NSW government). To be honest, the Ausgrid sale process has been going for 9 months, and there’s NO SHORTAGE of potential buyers (such as Super Funds). However, when those buyers heard both State Grid & CKI showing interest, they just gave up, as they didn’t want to waste time competing with State Grid and CKI (with ultra-low cost of capital). For the NSW government, given the attractiveness of Ausgrid, there will be other buyers for the assets (at a lower price) even though both State Grid and CKI are prohibted to buy. It’s just a matter of time. 
  • And just a few words on the Australian reporting season. Our strategist, Tom Sartor, suggested that only 35 out of 215 stocks of interest (or about 16% of companies) have reported their half or full-year results so far, including a handful of top 50 stocks. The proportion of stocks producing results above expectations has dropped sharply to 17% (from 29%) since February results, although we note it's still early in the month. Going into the reporting season, we noted companies had relatively stretched valuations, which suggested that either stocks are too expensive, or that market expectations are too conservative. Based on results so far, we don't yet have much evidence of the latter. We will provide you with further updates shortly. 

Disclaimer – Morgans Financial Limited (Morgans)

This report is provided for general information purposes only and is not intended as an offer to enter into any transaction.  This information contained in it is not necessarily complete and its accuracy cannot be guaranteed.  We have prepared this presentation without consideration of the investment objectives, financial situation or particular needs of any individual investor.