Summary of Weekly Review Articles

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Top Ten Themes For Investment Markets

thebigpicture top ten themes summarise the publication’s views about the longer term trends likely to affect investment market outcomes.

Free Trade: What’s In It For Investors?

With the Australian economy having been opened to more competition over the last two decades and Australia's corporate regulatory regime progressively harmonised with that of the USA, the impact here of a trade agreement is likely to be quite limited.

USA-Australia Trade: Decision Time

This month marks the tenth anniversary of the North American Free Trade Agreement which has brought together Canada, Mexico and the USA in one of the world’s most important regional markets. It is also likely to be the month Australia is admitted to the club – or decides the sacrifice is too great.

The Angels Keep Falling

One of the most perplexing challenges for an Australian equity investor is dealing with the propensity for self inflicted wounds among Australian companies. The frequent conversion of market icons to fallen angels damages the standing of the Australian equity market and complicates investment decision making.

US Government Deficits: Going Up

The US government has foreshadowed that it will spend US$520.7 billion more than it raises in revenue in the 2004 fiscal year. The $757.2 billion adverse swing in its spending deficit from as recently as 2000 would be devastating for other economies but the US has a special position.

International Equities More Attractive

thebigpicture half yearly review of market conditions shows a macro environment more favourable for international equities. International equity market conditions will help support the Australian market but domestic profit momentum will be constrained by monetary policy changes.

Fed v RBA: Who’s Right?

There is a difference between the US Federal Reserve Board and the Australian Reserve Bank in the conduct of economic policy. The Fed seems more investor friendly than the RBA.

The Australian government has done a market access deal with the US administration. The US has conceded on matters which are not important to it. The Australian side has conceded on some of its priorities. Free trade it is not.

History says that Australia’s interest rates are too high unless inflation is about to surge from unsustainably low levels. This is a critical call being made by the Reserve Bank. One way or the other, there will be an impact on investment returns.

The government tried to drag the aging workforce to the centre of the policy stage to recreate some political momentum in an election year. Its relatively minor amendments to superannuation barely hint at some of the momentous changes ahead.

Stricter reporting standards should apply to announcements from early stage technology companies. For disclosure rules to be effective, firmer guidelines about what constitutes sound market communication need to be in place.

IPO’s may be an overrated investment opportunity. Changing pricing arrangements are making them less attractive. Now, research from the USA shows up a need for investors to be very choosy: a company’s history says a lot about its post-IPO risk of failure.

Capital raisings through share purchase plans are becoming a market fad with a rising chance that they are more for the convenience of small companies and less for the convenience of small shareholders.

The recent experience of National Australia Bank has raised questions about the roles of directors. Directors are becoming more like executives in terms of the expectations to which they are being subjected. This will not be good for corporate performance.

References to Australia’s miracle economy miss the point. Its relatively strong growth in recent years has been the result of considered policy changes not simply luck or divine intervention.

Big gains are being realised by private equity investors as they sell some of their holdings through public listings. Many of the high profile transactions are not repeatable. Returns reflect additional risk and are likely to decline.

The Reserve Bank is unequivocally Australia’s primary economic policymaker. Political leadership is now barely relevant to economic outcomes, a change most politicians are relishing. They do not want to be responsible for economic policy.

Shareholder value is a term bandied around investment markets by companies and investors without a lot of agreement about its meaning. There is a clear-cut definition which investors should bear in mind when making their decisions.

There are now clearer signs of a more robust US economic recovery. Beware some equity price volatility as the market gets used to this fundamentally good news.

Coincidentally, at the top three Australian listed companies, the best interests of investors are being subjugated to the self interest of others as needless information gaps raise investment risk. Despite the rules, investors are being forced to speculate.

The good news in the USA about its economic performance has prompted some selling of equities. This seemingly perverse reaction illustrates the trade-off between growth and inflation.

Fund managers encourage people to invest in international equities. The argument that they are going to be better off if they go offshore is an enticing one but is not as clear-cut as the marketers suggest.

The p/e is widely used as an investment decision making tool but it is not the simple valuation indicator many pretend. It can be very useful in some very limited circumstances. Under most other conditions, its usefulness is limited.

Did the recent Australian government budget really favour families? Without being able to assess the distributional effects of taxation and expenditure policies we cannot tell.

Internationally traded oil prices have hit record levels of over $40 a barrel, four times the price level in the early 1970s when the world was in the midst of a ‘crisis’. Everyone seems more sanguine now.

The choice of a new CEO for the Australian Stock Exchange (ASX) offers a chance to contemplate his unique role. His differing stakeholders make for potential conflicts.

One of the challenges faced by Australian executives is how to respond to the constant demands for newsworthy business decisions. The pressures might be pushing companies toward poor strategic outcomes.

Since the collapse of communism, Russia has become the forgotten giant. There were signs in the past week that President Putin was prepared to deal his way back to a position of greater influence.

According to recent economic statistics, the Australian economy is changing down a gear. However, a slowdown with higher interest rates seems to have already been factored into equity prices. The market appears slightly undervalued.

The US electoral cycle does have an effect on equity markets. Returns are more likely to be positive and above average in 2004 because a presidential election is due in November.

Corporations in the USA and Australia have been reluctant to employ or invest. The new regulatory environment is aggravating the reticence to take risks.

Asset revaluations on the accession of a new chief executive are now commonplace despite being contrary to the interests of shareholders.

High commodity prices have raised expectations about the performance of resource sector equities. However, some forecasters are expecting commodity prices to weaken in the 12 months ahead. This is the riskiest part of the cycle for equity investors despite company earnings looking so buoyant.

As in the USA, the Australian electoral cycle does appear to affect equity prices. Elections are good. The aftermath is not.

Continuing structural changes gnawing at the ‘two parents and children’ family model will burden governments and eventually impose a larger financial obligation on all households.

Opportunism is to be condemned. So say companies being subjected to public bids. Shareholders should actually demand more opportunism and reward it handsomely.

Conditions for Australian retailers have been about as good as they could get in the last year. Personal spending is likely to be facing more headwinds in the year ahead.

The US budget deficit is pushing toward record levels. There are more frequently expressed fears that this will force the US dollar lower. This has implications for global economic conditions as well as the competitiveness of Australian companies.

Control of the value chain is an important indicator of business sustainability.

The continuing propensity of commentators to sensationalise interest rate policy by breathlessly trying to link every economic statistic to the outcome of the next Reserve Bank board meeting is pushing them to the brink of professional misconduct.

Across the world there is a cleavage in corporate investment performance. In some countries, investment is very weak; in a minority of others quite strong. The cleavage partly explains why inflation pressures are relatively subdued.

From once being openly hostile to foreign direct investment, developing nations are now competing for it on the open market. Companies have been increasingly dictating where funds are flowing.

The flow of US economic statistics seems to have lost some of its lustre of late especially if the reaction of the US stock market is any guide. The balance of evidence seems to be pointing to an economy finding a more sustainable growth path and not one floundering.

Deciding what to look for in the mountain of information which comes with the annual reporting season is a challenge for an investor. Here are some guideposts to help take the value investor to the peak and back safely.

Anyone with an interest in good policy should be concerned at the disclosure rules which apply to the government as we approach a federal election. There might be some lessons to be drawn from the continuous disclosure regime applying to corporates.

Companies are presently channeling more resources into their accounting functions to make their public reporting conform to international accounting standards. This is to make them more attractive to offshore investors. However, investors want more than a change in accounting practices.

BHP Billiton (BHP) has made it clear that, in acting to maximise its own value, it is likely to put downward pressure on commodity prices.

Interest rates “always” go up under Labor governments according to the Prime Minister as he launched his re-election campaign. Has interest rate history been thrown overboard for the sake of politics?

Political leadership does not seem to matter to markets any more. The Reserve Bank is the primary economic policymaker.

With June year end companies having to report annual results by 31 August, a mountain of corporate financial information from listed companies became available in the past few weeks.

The US Congress might have to think about adopting formal rules to keep the US budget deficit under control.

The disparity between corporate and government disclosure standards has grown starker through the course of Australia’s election campaign.

Corporate governance strictures seem likely to burden companies without providing compensating investor benefits.

Official statistics are pointing to some of the best conditions encountered by Australian business in recent history. The macro-economic measures of corporate profitability showed a sharp rise in the June quarter.

Australia's larger listed companies significantly improved their financial performance in the past year. They continued their relatively conservative approach, relying more on better use of existing assets than expansion of their asset bases to boost results.

Looking at value from the perspective of the return on equity also highlights how managers have been working to get more from physical assets but have been reluctant to use gearing aggressively to add value.

Share buybacks are not what they were originally intended. Amidst the current share buyback fad, there might be as many benefits for a departing shareholder as one remaining.

A company can raise its equity market value by widening the spread between its return on funds and its cost of capital. This is the underpinning for a share buyback.

With crude oil prices having topped $50 a barrel, gold buys less oil than ever before – just eight barrels an ounce. Does that mean gold is too cheap?

There should be little excuse for active fund managers failing to beat the market in the last quarter. Unless a fund manager had a manic attachment to the banking sector, stock selection should have been relatively straightforward and rewarding.

The improvement in the financial performance of Australia’s smaller companies has been a feature of the Australian market in the past year.

Today’s corporate governance rules imply that family control of public companies is not in the best interests of portfolio shareholders. This is too simplistic a view of life according to some recent research.

Shareholder activists are ready for another AGM season. Directors are bracing their defences. And, amidst the posturing, many of the real needs of genuine investors are forgotten. There is a better way.

Policy makers, with their fingers on the interest rate trigger, keep being told by the inflation statistics that their anxieties are misplaced.

Senate manoeuvrings may become more intense after the election despite preoccupations about the newfound power of the Prime Minister. The Labor Party might actually be better off with a coalition majority in the Senate. Meanwhile, the Reserve Bank will continue to manage economic policy.

AGMs can say a lot about a company - even when it is unintentional.

The longer term prospects for economic growth in Australia suggest that interest rates might still be too high to make investment attractive.

A ferocious attack by the CEO of National Australia Bank on the bank’s previous management has highlighted two important features of the Australian equity market.

In making a bank investment, an investor needs to make a stock selection and an asset allocation decision.

Individuals do learn from their investing experiences.

There has been increasing emphasis on earnings guidance as companies report their results. The nature and value of the guidance on offer varies considerably.

The sharp improvement in the financial performance of Australia’s smaller companies, driven by margin improvement, has made these companies more secure investments.

As the Australian economy has become more sophisticated, the winners and losers from an exchange rate appreciation are harder to fathom.

How Misleading Is Unemployment?

An employment rate is a more meaningful indicator of labour market conditions than the more frequently used unemployment rate which usually receives the headlines.

Telstra has hit the headlines again as it fights to extricate itself from a web of poor governance practices, structural failings and populist policy making. The bigger picture is that its behaviour will have an impact on how people around the world judge the Australian market.

Official international economic agencies have been reviewing their forecasts and coming up with the same conclusions. The global cycle is decelerating and Europe is still struggling to achieve acceptable growth outcomes.

Amcor: Boxed-in By Circumstances

Amcor’s position in the industrial value chain might have had something to do with its recently disclosed trade practices predicament.

Directors Take A Stand On Value

National Foods showed that there is a different way of handling an unwanted takeover bid. But it requires directors to be confident about the value of their company. Few appear to be.

End Of Year: Macro State Of Play

The Australian equity market is hitting record new levels as the year ends. This issue summarises the year end bigger picture. The first edition of thebigpicture in 2005 will look further ahead at what might unfold.

US Economy: Settling In