Is the "Santa Rally" real?

Investors found their festive spirits dampened at the end of 2018. With concerns over the health of the global economy looming large, global stocks fell 13.7% in the final quarter of the year, according to the MSCI World Index.

It wasn’t a merry advent period, indeed it was the worst December for markets in three decades. Bah humbug.

The global index fell 7.7%, crushing any hope of a “Santa Rally” for only the seventh time in the last 32 years.

But although 2018 was miserable, December remains one of the most prosperous months for stocks.

What are the chances of a Santa Rally?

The “Santa Rally” is a supposed effect of the Christmas feel-good factor, helping stock markets rise at the end of the year, although many seasoned investors remain unconvinced.

It’s unwise to draw firm conclusions from stock market history but in the spirit of festive fun, Schroders analyses the data each year.

The data shows that global stocks have in fact risen in 78.1% of Decembers since 1987, with stock prices up on average 1.7%, perhaps adding some substance to the “Santa Rally” myth.

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This material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Past performance is not a guide to future returns and may not be repeated.

Monthly facts and figures

While December has been a consistent month for stocks rising, April is the most prolific.

It matches December for consistency but the average April rise for stocks (2.1%) has been higher over the last three decades.

The next best months were July and November. Stocks have risen 65.6% of the time in both those months, but July boasts a better average rise in stock prices, 1.4% versus 0.7% for November.

June was the worst month for markets, with stocks gaining just 34.4% of time. August was the worst month for stock market performance, when stocks fell an average of -1.1%.

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This material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Past performance is not a guide to future returns and may not be repeated.

The shocktober lesson

Investors should note the data for the month of October. It seems to underline the unpredictability of markets.

October has the third highest frequency of gains and the joint third highest average rise. But historically it is also the month that has included some of the biggest stock market falls.

October 1987: Black Monday

On 19 October 1987 global stock markets crashed amid worries about a slowing global economy and high stock valuations. The concerns were compounded by a computer glitch. Global stocks fell on average by 23% in October that year.

October 1997: Asian financial crisis

The Asian financial crisis began in the summer of 1997. A sequence of currency devaluations in Asia rocked global confidence. Global stocks fell by 6.6% in October that year.

October 2008: Global financial crisis

The seeds of the global financial crisis were sown when the US housing market began to collapse in 2007. The full extent wasn’t realised until Lehman Brothers investment bank collapsed in September 2008. The global financial system seized up and a month later global stocks had fallen by more than 15%.

October 2018: Trade wars and rising rates

Investors fretted about issues such as US-China trade tensions, European political uncertainty and the withdrawal of quantitative easing stimulus programmes. Global stocks fell 7.4% that October. It was the worst monthly performance for stocks globally in six years and it was the tenth worst in the last decade.

Why have stock markets performed better in December?

There is much speculation as to the reasons for the “December effect”. One theory is based around investor psychology. There is, perhaps, more goodwill cheer in the markets due to the holiday season putting investors in a positive mood, which drives more buying than selling.

Another view is that fund managers, which account for a substantial part of share ownership, are re-balancing portfolios ahead of the year-end. By selling some better performing stocks managers can afford to buy more of the underperforming ones, pushing up prices.

The danger of superstitions

The dramatic stock market fall in December last year proves two things: past performance can not be relied upon and stock market superstitions are only true until they fail to be.

Stock market history can be fascinating, but it can often lead to assumptions – that Octobers are bad or that you should sell in June because summer months are poor performers.

In fact, trying to time markets at all is a questionable strategy as it is impossible to predict short-term movements in the market.”

Time in the market

Separately, Schroders’ calculations also showed if in March 2003 you had invested $1,000 in the MSCI World and left the investment alone for the next 15 years it would have been worth $4,211. Figures have not been adjusted for inflation or fees.

However, if you had tried to time your entry in and out of the market during that period and missed out on the index’s 30 best days the same investment would now be worth $1,268, or $2,943 less.

Investors’ best bet is to be patient and give their investment time to grow. The general rule is five years to allow for stock markets to go through their natural cycles.

As with all investing, the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. 

Meet Damian Czarnecki

Each month we give our readers a little insight into a Powerwrap team member by asking them ten questions about their role, life and personality. This issue we speak to Damian Czarnecki from the Powerwrap Model Manager team.

Name: Damian Czarnecki

Company role: SMA Portfolio Service Manager

How long have you been with the company:  Almost 4 years

What does your role at Powerwrap entail?  My job is to make sure SMA runs smoothly on a daily basis. The SMA environment is on an Omnibus structure and as such there are a lot of moving parts that need to be managed including daily rebalances, Investments/settlements, payments, corporate actions, queries etc.

What nickname do you prefer to be called?  Damo

What is your favorite Hobby? Motorcycling, nothing else even comes close

What do you like most about Powerwrap?  I love the small company culture.  There’s not one person in the company that I wouldn’t have a beer with.

What were you like in high school? I was into anything fun, so hung out with most kids. The Headbangers were my favorite group though.

Do you have any kids? I have 3 children, two boys and a girl.

If you could be someone famous, who would it be? Mick Doohan. Amazing talent, focused and laid back. (ex bike racer)

What has been your latest accomplishment? I won an argument with my daughter

Which AFL team do you barrack for? Carlton

Powerwrap’s Model Portfolios

Blackmore Capital Equity Investors Monthly Portfolio Update

Entrenched uncertainty is exerting a pervasive depressing effect on global economies. A growing number of global manufacturing & services indexes are now in contraction territory. There is also the concern of a deeper slowdown with the U.S. no longer immune to slowing global growth or the impact of trade tensions, with the U.S. Institute for Supply Management declining to a level previously seen a decade ago.  Closer to home, The Reserve Bank of Australia (RBA) cut interest rates to a new all-time low as the economy recorded its slowest growth since the global financial crisis. As broader economic activity slows the importance of earnings quality and balance sheet strength becomes a vital tenet in equity portfolios.

Recent changes to the Blended Australian Equities Portfolio

Purchased Northern Star Resources Ltd (NST)

We recently added Northern Star (NST) to the portfolio following a correction which saw its share price decline more than 25% from its peak in late July, while the gold price declined by just c.4% in AUD terms and actually increased by more than c.4% in USD terms. The share price of NST and other gold stocks had moved ahead of the gold price so this decline unwound some of this relative outperformance which had reduced the margin of safety in the sector.

We favour gold miners with diversified operations, low sovereign risk, strong free cashflow generation, low gearing and organic growth prospects. We try to minimise sovereign, financial and operational risk for an exposure which should offer uncorrelated risk diversification for the portfolios. NST’s balance sheet is net cash and it has operations in Australia (WA) and the US (Alaska), with considerable exploration potential and production growth through relatively modest capital expenditure. Its dividend yield is less than 2% but the payout ratio is only c.25%, so there is capacity to grow dividends at a faster rate than earnings in the future. 

Purchased National Australia Bank (NAB) The prospect of further interest rate cuts by the Reserve Bank of Australia has garnished the appeal for higher dividend yielding companies. We have re-introduced National Australia Bank (NAB) after an extended absence in the Australian Income Portfolio. A rejuvenated board and management team and the rebasing of its dividend to more sustainable levels should provide impetus for NAB to deliver more sustainable investment returns. In its most recent quarterly result NAB delivered “slightly higher group margins”, a commendable outcome in the current challenging banking environment. While loan growth is expected to remain at historically low levels, we feel that the regulatory imposts are now adequately recognised, and impairments have remained largely benign. 

NAB is trading at 13.5 times FY20 price-earnings ratio and a dividend yield of 6%, fully franked. NAB’s action at its 1H19 result to reduce its elevated payout ratio provides confidence that its dividend is now sustainable, providing investors with an attractive dividend yield.

Portfolio Update – Adding Spark NZ (SPK), National Bank (NAB) and Skycity Entertainment (SKC)

Recent changes to the Blended Australian Equities Portfolio & Australian Equities Income Portfolio

Purchased Spark New Zealand Ltd (SPK) We recently added Spark NZ back to the portfolios following its FY19 result, which showed cost discipline and modest revenue growth, while the company committed to maintaining its 25 cents per share dividend for a prospective yield of 6%. Spark NZ (formerly Telecom NZ) is the incumbent provider of digital communication services in New Zealand including mobile, broadband, entertainment media and cloud services.

Its FY19 result saw modest earnings growth from increased share of mobile revenue and connections through increased uptake of unlimited data plans, growing wireless broadband services and ongoing investment in preparation for the roll out of 5G mobile services. Revenue growth in Mobile (+2.7%), Broadband (+3.0%) and Cloud (+8.1%) offset ongoing decline in traditional voice revenue (-18%), while lower costs (-2.4%) improved gross margin and resulted in a 2.2% increase in net profit. Cost reductions are expected to continue in FY20 and free cash flow conversion to rise above 95%, underpinning the dividend guidance mentioned above.

We view the structure of Spark NZ’s markets more favourably than the communications markets in Australia, which combined with conservative leverage at c.1.2 times EBITDAI provides greater dividend sustainability than some comparable Australian companies.

Recent changes to the Australian Equities Income Portfolio

Purchased National Australia Bank (NAB) The prospect of further interest rate cuts by the Reserve Bank of Australia has garnished the appeal for higher dividend yielding companies. We have re-introduced National Australia Bank (NAB) after an extended absence in the Australian Income Portfolio. A rejuvenated board and management team and the rebasing of its dividend to more sustainable levels should provide impetus for NAB to deliver more sustainable investment returns. In its most recent quarterly result NAB delivered “slightly higher group margins”, a commendable outcome in the current challenging banking environment. While loan growth is expected to remain at historically low levels, we feel that the regulatory imposts are now adequately recognised, and impairments have remained largely benign. 

NAB is trading at 13.5 times FY20 price earnings ratio and a dividend yield of 6%, fully franked. NAB’s action at its 1H19 result to reduce its elevated payout ratio provides confidence that its dividend is now sustainable, providing investors with an attractive dividend yield.

Purchased Skycity Entertainment Group (SKC) SkyCity Entertainment Group (SKC) is New Zealand’s largest tourism, leisure and entertainment company. It is listed on both the New Zealand (NZX) and Australian (ASX) stock exchanges. SKC is one of three major publicly listed casino operators in Australasia. SkyCity operates integrated entertainment complexes in New Zealand (Auckland, Hamilton & Queenstown) and in Australia (Adelaide).

For the 2019 financial year SKC reported a normalised Net Profit of NZ$173m marginally ahead of consensus estimates. SkyCity Auckland (80% of group turnover) delivered solid top-line trends. The completion of SkyCity Auckland/SkyCity Adelaide capital investment program is expected to deliver an attractive uplift in returns and improve free cashflow. There is also scope for returns to benefit form management’s greater focus on enhancing portfolio returns via the divestment of its SkyCity Darwin property and sale of its Auckland car parks. These transactions will release significant capital (c.$450 million) with proceeds used to reduce gearing levels. Overall, valuation multiples look undemanding with SKT trading on c.10 times EV/EBITDA multiple coupled with a 5% dividend yield. A combination of surplus cash due to asset sales saw SKC proceed with an on-market share buy back of up to 5% of issued capital.


Pendal Sustainable Future Australian Shares Portfolio

Market commentary
The S&P/ASX 300 fell -2.3% in August as China and the US dialled up the pressure in their trade dispute. The Australian reporting season painted a picture of a sluggish domestic economy but was, in aggregate, not as bad as many had feared. Discretionary retail spending, in particular, has shown some signs of resilience in recent weeks, helped by better sentiment on house, lower interest rates and tax cuts. Nevertheless, the market was in a defensive mood in the face of heightened macro-economic uncertainty. Ten year bonds yields fell 30bps in Australia – and 53bps in the US – which generally helped bond-sensitive stocks do well. This was reflected in the strong performance of the Real Estate sector (+2.4%) – one of the few to post a gain. Goodman Group (GMG, -2.0%) gave up some of it recent gains – while still outperforming. However Scentre Group (SCG, +4.2%) and GPT Group (GPT, +2.9%) both did better. Healthcare gained +3.4% to be the best performing sector. In this instance, its defensive qualities were augmented by strong results from CSL (CSL, +4.9%) which continues to build upon a strong market position and has seen a recovery in its Albumin volumes sold into China. Information technology (+0.7%) eked out gains as bond-sensitive growth stocks continued to outperform, led by Afterpay Touch (APT, +15.9%) and Wisetech Global (WTC, +15.6%).
A spike in trade and indications of a recovery in Brazilian iron ore production weighed heavily on the miners. BHP (BHP) fell -11.0% and Rio Tinto (RIO) -8.4%. Gold miners outperformed; however the Materials sector ended the month down -7.3%. Fears the effect of trade on global growth and demand also weighed on the energy stocks. Woodside Petroleum (WPL) fell -5.8% and Origin Energy (ORG) -3.9%. Santos (STO, +1.0%) delivered a well-received result and managed to buck the trend.

Stock specific drivers of monthly performance relative to benchmark

Underweight BHP Billiton (BHP) (-11.0% return)
BHP delivered results in-line with the market’s expectation, generating strong cash flow after a year of high iron ore prices. There are signs that capex will pick up as its rail network in the Pilbara is showing signs of strain – however it was a weaker iron ore price which weighed on the stock in August. BHP is excluded from the portfolio due to exposure from fossil fuel extraction.
Overweight Qantas (QAN) (+7.0% return)
QAN delivered a decent result despite the headwind of higher fuel costs and softer demand in the domestic market. It also dialled up their capital return by $100m to $600m for the half year, which was well received. At the same time, rival Virgin Australia (VAH) announced that it is looking to close unprofitable routes, helping keep a lid on capacity growth in the domestic Australian market.
Overweight CSL (CSL) (+4.9% return)
CSL delivered a strong set of results, helped by continued growth in its core range of products as well as a recovery of sales of Albumin into China, following a change to its distribution model there. CSL’s investment in plasma collection in recent years puts it in a good competitive decisions, with competitors struggling to boost production to meet strong demand.
Underweight Woolworths (WOW) (+6.0% return)
WOW’s result met market expectations. The key takeaway was that there are lower levels of grocery discounting, helping ease revenue pressure. We do not hold WOW.
Underweight CYBG (CYB) (-17.7% return)
CYB’s most recent updates have revealed that margin pressure is not abating as mortgage competition remains intense in the UK. Coupled with the disappointing margin outcome of its merger with Virgin Money, we now see the timeline of our investment thesis pushed out. As a result, we sold out of the position in August.
Overweight Ramsay Health Care (RHC) (-9.8% return)
RHC met the market’s expectation for FY19 but disappointed on the outlook, guiding to 2-4% eps growth as opposed to 8% consensus. We believe that there is a degree of management conservatism here and would not be surprised to see something in the order of 6%, before a better year in 2021.

Market Outlook

  • August’s reporting season certainly reflected the fact that economic growth and consumer demand has slowed over the past twelve months, however it was not as bad as many feared would be the case. While the overall market declined, this was driven more by macro uncertainty over the US-China trade dispute – which saw the MSCI World TR index fall -2.33% in August – rather than an overly negative reporting season.
  • Around 42% of companies which reported downgraded their earnings guidance for the next twelve months, versus an historical average of just over 30%. Conversely, only 10% upgraded compared to the historical average of just under 20%. The greatest pressure came in areas such as steel – which saw earnings estimates for the next twelve months fall 15% – and also in media (down -13%) and telcos (-10%). Very few sectors of the market saw aggregate upgrades – and where they occurred, they were small. Consumer Discretionary (+1%) and health care (also +1%).
  • In aggregate, earnings expectations for the ASX200 for the next twelve months fell 3%, which reflects an environment in which housing construction has slowed and where weaker house prices have weighed on consumer demand.
  • That said, price action tended to reflect the both the view that broad outcomes were not as bad as some had feared. There is also a broad expectation that stimulus – in the form of cuts to interest rates and taxes as well as the possibility of more fiscal spending – could help underpin demand and prevent further falls. Signs of an improvement in the housing market are helping in this regard.
  • Hence media and steel – the two sectors with the largest downgrades – both outperformed the market and posted positive gains in August. Building materials did likewise, despite downward revisions. Discretionary stocks also did very well as companies like JB Hi-Fi noted in their outlook that demand and sales had started to tick up again in recent weeks.
  • All in all growth remains muted, however further signs of an uptick in the domestic economy could drive stock specific opportunities given how cheap many domestic industrial cyclicals are. We retain our exposure via positions in Qantas and Nine Entertainment among others.
  • We are mindful that both growth and defensive yield stocks have had a strong twelve month run on the back of falling bond yields. Yields are likely to remain depressed for a period – now is not the time to go aggressively underweight. However these stocks are unlikely to replicate the same degree of outperformance over the coming year unless Australian bond yields fall to near zero. Our preferred growth stocks include CSL and Xero, while we continue to like Transurban and Atlas Arteria among the defensive yield stocks.

New stocks added and/or stocks sold to zero during the month

Sell to zero in CYBG Group (CYB)

The portfolio is liquidating its small position in CYBG, owner of the Clydesdale and Yorkshire Bank and Virgin Money brands in the UK. The investment thesis is grounded in the view that the company’s ability to deliver earnings growth on the back of increased loans and material cost savings was not reflected in valuations. We also see the risk from Brexit as relatively asymmetric, in that a lot of the negativity had already been priced in. That said, we have been mindful of this exogenous risk, which is why the position has always remained relatively modest. Recent updates from management have revealed that the combination of the additional loan book acquired from Virgin Money, coupled with strong mortgage competition, continues to weigh on group lending margins. This has pushed out the timeline of our thesis and, while CYB continues to offer a decent yield, we are redeploying this capital into other opportunities, including a new position in Metcash.

Buy new position in Metcash (MTS)
Metcash is a wholesale distribution and marketing company. The introduction of new management with a strong focus on cost control and revenue growth in the last three years, combined with the sale of non-core assets, has allowed the company to manage a good turnaround despite the structural challenge that increased competition has posed for the Australian supermarket industry.
MTS’s recent underperformance reflects consensus downgrades for FY20 following their FY19 result. Some of this is driven by a moderating outlook for its hardware business, however we believe it also implies an overly negative outlook for its IGA wholesale business and the supermarket sector in general. There are signs the grocery price deflation – a key headwind for supermarket earnings in recent years – is easing on reduced promotional discounting across the sector. At the same time we believe that MTS’s Diamond Store Accelerator programme will help it generate a better than expected share of sales. There are also signs that its cost reduction strategy could also exceed consensus estimations.
From a sustainability perspective, Metcash has been utilising its IGA Community Chest Trust Fund for over 30 years to support the local communities reached by its widespread store network. The company has a focus on diversity and gender equality with key initiatives including reporting on gender targets, strong representation on the board (66%) as well as being cited as a WGEA Employer of Choice for Gender Equality. Other sustainability initiatives includes reporting on Modern Slavery as well as reducing waste and responsible sourcing of products particularly for its private label brands.
MTS trades on 12.9x price-to-next-12-month consensus earnings versus 19.6x for COL. While we believe that MTS should trade at a discount to COL, we see MTS as below its intrinsic value and implying a very depressed valuation for the supermarkets business. Given its greater upside in terms of cost control and leverage to signs of a reduction in grocery price deflation, MTS is our preferred exposure in this sector.

Meet the Manager Series

These ‘Meet the Manager Luncheons’ are hosted by Powerwrap as part of the Step Ahead Program. We provide a open forum that allow fund managers the opportunity to meet and discuss their products or macro or micro issues with Powerwrap’s Dealer Group clients.

Set-Top Boxes, Conference, Interior Design, Tv

Upcoming Meetings

DateFund ManagerDetailsLocation
22 October 2019Adviser Forum 2 – Melbourne
3 Fund Manager Event – See below
12:15 for 12:30pm start – 2pm
Colins Quarter
Private Dining Room
86 Collins Street
Melbourne
14 November 2019Schroders – Meet the Manager Thursday 14 November
12:15pm for 12:30 start – 1:30pm
Schroders Level 20 Angel Place
123 Pitt Street, Sydney
Sydney

October 22 – Adviser Forum 2

Powerwrap would like to invite you to the Adviser Forum 2 luncheon on “Generating high returns in a low yield world”. Speakers for the day are Hamish McCathie (Multi Asset Diversified), Andrew Walton (Renewable Investment) and Matt Harry (Bitcoin).

November Event – Schroders & Powerwrap “Delivering Income in a yield constrained world”

Recent additions to the Powerwrap Approved Products List – September 2019

Recently, Powerwrap has added the following funds to our Approved Products List (APL). Some are subject to close. If you are an adviser who would like access to any of these funds please raise a ticket through Hive or the Service Desk. 

APIR CodeFund name – Fund manager Description
DFA0029AUDimensional World Allocation 70/30 Trust (Wholesale)Equities & Fix Interest
Off-Platform FundAustralian Diversified Bond Series II Bonds
RGL5177AU  The Regal Global Equity Income Fund  Listed and unlisted options and futures
Off-Platform FundCloudbreak Bitcoin Investment trustBitcoin
Information MemorandumTEM – Kilara CapitalESG – Creation, purchase, trading and marketing of carbon credits
GTU5547AU Invesco Global Property Fund  Property Fund
FSF7298AU Affirmative Global Bond Fund Bonds
Information Memorandum Foresight Renewable Energy Income-Fund (WINSTON) Debt Fund – Infrastructure Solar
PIM6769AU ATLAS Infrastructure Australian Feeder Fund Infrastructure
Information Memorandum KM Property Funds – Laverton North Property Fund Property Fund
ELLERJAADE Ellerston JAADE Australian Private Assets Fund (Retail)  Pre IPO investment fund
Information Memorandum JP Morgan – Global Transport Fund to Power Wrap. Infrastructure

Participate in the IPO of the KKR Credit Income Trust (ASX:KKC)

Dear Adviser,

Opportunity to participate in the IPO of the KKR Credit Income Trust (ASX:KKC)

Powerwrap clients have been offered the opportunity to participate in the KKR Credit Income Trust IPO and Powerwrap will be acting as a co-manager of this capital raising.

As a valued client of Powerwrap, we would like to invite you to participate in this IPO offering by placing bids through the Powerwrap platform.

Advisers that are eligible for the offer will receive 1.25% selling fee (incl. GST) for their allocation on this transaction.

By way of background, KKR is a leading global investment firm with 42 years of experience and a strong track record of investment excellence.  KKR has US$200B+ in AUM globally, and is a leader in Credit investing, with 120 dedicated credit investment professionals managing ~US$70B in AUM.

KKC seeks to provide a differentiated return profile as compared to Australian income securities through exposure to income generating global credit. The strategy seeks to produce a high return relative to volatility, targeting a net return of 6-8% p.a. with a target net cash yield of 4-6% p.a. through the market cycle.

The Trust seeks to provide this exposure by investing in to two underlying KKR credit investment strategies:

  • Global Credit Opportunities Fund (GCOF): long-term target portfolio allocation of 50-60%; and
  • European Direct Lending (EDL): long-term target allocation of 40-50%  investment strategy.  

Below is a copy of the DRAFT PROSPECTUS which is due to be lodged on Monday 16th September and have also outlined Terms of the proposed transaction with the associated timeline.  

To read the PDS please click here.

If you wish to run through the capital raising in more detail, please feel free to call me or our Investments Manager – Ishan Dan on +61 3 8681 4658 . Otherwise please complete the below form to lodge your interest / bid and we will contact you as soon as possible.

Regards

Ishan Dan | Investments Manager