Investment Market Update – March 2023
Key Points
- Share markets gave up almost half of January’s gains over February.
- Comments from central banks confirm inflation remains their core focus.
- The February reporting season was reasonable and provided more good news on dividends.
- Outlook statements from many corporates were cautious, forcing analysts to lower fair valuations on many stocks.
- Tremors continue in the startup/crypto sector, with a major US bank exposed to the startup sector experiencing the largest bank run since the GFC.
The Australian Share market relinquished almost 50% of January’s rally, with the ASX200 index down 2.9% for February after climbing 6.2% in January.
Though monthly returns are currently seeing relatively high levels of volatility, investors should note that returns for the 2023 financial year remain attractive, with the ASX200 up 10.5% to date.
Some investors attributed the cause of February’s falls to that month’s corporate reporting season. The real impetus though, was once again strong signals from central banks around the world that their firm focus is on reining in inflation.
This sent a message to traders not to expect a respite in higher interest rates any time soon.
Hawkish words from central banks sent interest rates higher over the month, with the US two-year treasury note reaching a yield of 5%, and Australia’s three-year government bond rate rising to 3.6%.
Expectations for the peak in our cash rate increased to 4.1%.
Despite concerns, February reporting season overall was a reasonable outcome for investors, with most companies reporting higher profits and higher dividends.
Outlook statements were however an area of concern, with many companies conservative about their earnings growth for the remainder of the year.
This cautious outlook saw many analysts review and cut their share price valuations for many stocks.
In the February reporting season, 55% of companies recorded higher profits. This compares to an average over the last ten years of 64%. Similarly, 53% of companies paid higher dividends, compared to the long-term norm of 60%.
BHP and RIO both cut their six-month dividends by around 50%, highlighting again that commodity stocks cannot be relied on for consistent income yield.
In March the RBA announced its 10th monthly rise in the cash rate, which now sits at 3.6%.
Even so, in a possible sign of relief for households, we could be very close to the peak, with the RBA reviewing economic releases over the rest of March before deciding on the timing of further increases in the cash rate.
Most analysts retain a peak cash rate in Australia of 4.1%, indicating at least one or two further 0.25% increases.
Recently markets have been spooked by tremors from the crypto cleanout impacting the global banking sector. Silicon Valley Bank (SVB), the 16th-largest lender in America, with about US$200bn in assets, went bust.
SVB specialised in providing banking services to the startup industry, mostly in the tech and life sciences space. The bank held significant cash deposits for many startups that don’t have profitable cashflows.
As news of SVB’s problems surfaced, it experienced a classic bank run, where depositors all demanded their cash back at the same time.
The flow-on effects to the bank and crypto sectors is immense. Bank stocks globally have been sold off over the last week, as SVB’s bank run raised concerns about contagion into the global banking sector.
Given how quickly US regulators swooped in to close down SVB, the risks of flow-on effects to global banks is relatively low.
The impacts of the speculative bubbles created from the era of cheap money (crypto being a classic example) still have some way to go.
US Federal regulators rolled out emergency measures Sunday night to stem potential spillovers from Friday’s swift collapse of Silicon Valley Bank, including measures to backstop all depositors.
Regulators announced the action in a joint statement from Treasury Secretary Janet Yellen, Federal Reserve chair Jerome Powell and Federal Deposit Insurance chair Martin Gruenberg. The group said that depositors at SVB will have access to all of their money on Monday 13 March.
Kauri Wealth Investment Portfolio – Company news
TPG Telecom
In February the company released its six-monthly earnings, up 4% to $1,793M. The final dividend was nine cents per share – an increase of 9%.
Mobile subscribers increased by 300,000, largely due to the return of international students and higher migration.
TPG has realised annualised merger cost synergies of $140M following its merger with Vodafone Australia. The balance sheet has been strengthened with a reduction in net debt, with the average revenue per user increasing by 2%.
The return of students and migrants remains a compelling growth strategy for TPG. Being the clear value player in the telecom marketplace, TPG picks up a substantial portion of these customers.
Carsales.com
In March, management announced the acquisition of a further 40% of Webmotors Brazil for A$353M.
Carsales.com will then own 70% of the business. To fund the acquisition, the company is raising $500M via a one for 14.01 rights issue, at $19.95 per share.
Webmotors Brazil is the leading automotive digital marketplace in Brazil, which is one of the largest and fastest-growing car markets in the world.
The rights issue opens on 15 March and closes on 30 March 2023.
Carsales.com has a solid track record in mopping up minority shareholders in the company’s overseas businesses. The recent acquisition of the remaining shares in Interactive Trader in the US is evidence that management can execute its offshore growth strategy.
Newcrest Mining
In early February the company announced it had received a conditional and non-binding proposal from Newmont Corporation to acquire 100% of Newcrest Mining by way of a scheme of arrangement.
The offer to Newcrest shareholders was 0.38 Newmont shares for each Newcrest Mining share.
The Newcrest Board immediately rejected the offer, stating it does not represent sufficient value for Newcrest shareholders. At the same time, the Board indicated it is prepared to offer access to the company’s books. Negotiations are ongoing.
The offer by Newmont puts Newcrest in play. The takeover will take some time to unfold but is likely to be implemented, as it offers both companies a compelling consolidation outcome.
Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.
I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.
Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au
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