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Market Commentary

These articles provide commentary on specific aspects of the market both local and international. 

In last week's piece we looked at how falling cash rates are fuelling the search for yield, as at current rates even wealthy retirees who have amassed $1 million in a superannuation face a very meagre retirement if they are looking to live off their income rather than eat into their capital. Whilst the 2.6% rate on term deposits in Australia looks grim, spare a thought for retirees in the US who are currently being offered 0.2% for the same term from Citibank, or German investors also receiving 0.2% from Deutsche Bank! In this week's piece we are going to look at why dividends are important, and the dividend sustainability and growth factors that we look for in a security.

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Last week the RBA cut their target cash rate to 2.25% in an effort to boost consumer and business confidence and arrest growth in the unemployment rate. Whilst this move was positive for equity investors – and saw the ASX hit a six and a half year high as well as the domestic housing market – it was a negative for savers, especially retirees living off the income generated by their term deposits. On Monday ANZ cut its one year TD rate to 2.6% and with the inflation rate for 2014 running at 2.5%, savers are receiving close to a zero percent real return (after inflation) on their term deposits.

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After over four years of relatively stable global oil prices the price of oil per barrel (the equivalent of 159 litres) has more than halved since June 2014. Whilst this has placed a significant amount of stress on oil producers and in particular companies such as Santos that are constructing large projects that require a high oil price to generate commercial returns, the dramatic fall, if sustained, will have positive impacts for investors. In this week's piece we are going to look at the beneficiaries of the decline in hydrocarbon prices.

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In forecasting the future, especially the future direction of the equity markets, one prediction is sure to come true: that all predictions will be wrong. In the final Tales of the Trenches for 2014, the Philo Listed Research team provides a view of how we expect the Australian equity markets to perform over the next twelve months. This does not involve peering into a crystal ball or gazing at tea leaves and chicken entrails, but rather is derived by analysing the ASX on a "bottom up" or stock by stock basis. Whilst recognising the limitations of all forecasts, in this week's piece we are going to run through our current view on the returns we expect Australian equity investors to enjoy over the next 12 months.

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Over the last twelve months, listed property has been the "quiet achiever" in most investors' portfolios. Whilst Australian equities have faced concerns about a rising and then falling AUD, falling commodity prices, global growth and a financial system inquiry, listed property has sailed under the radar and the index has posted a total return of +28% over the past 12 months bettering equities by 20%! In this note we will look at what is going on in listed property together with our positioning in the various property sectors.

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The "Dogs of the Dow" is an investment strategy that is based on buying the ten worst performing or highest yielding stocks in the Dow Jones Industrial Average (DJIA) at the beginning of the year. The strategy then sells these stocks at the end of the year and then buys the ten worst performers from the year that has just finished. Following energy titan Santos' 30% fall over the last five trading days (which wiped A$3.5 billion off its market capitalisation), in this week's piece we are going to look at the "dogs" of the ASX focusing in on large capitalisation Australian companies with falling share prices.

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Funds management and in particular the vertical integration of advice, administration and management has generated much debate this week, with the government's plans to wind back some of the investor protections in Labor's Future of Financial Advice (FOFA) being strangled in the senate. In this week's piece we are not going to debate the merits of requiring financial advisers to act in their clients' best interests nor conflicted payments and fee disclosures. This week we are going to have a closer look at the funds management landscape in Australia, and in particular the dominance by the largest players of this A$1.9 trillion industry.

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Since late 2011 Australian investors have seen one year term deposit rates compress from 6% to 3.2%, as bank competition for deposits continued to decline. For investors funding their retirements from the income produced by their portfolios this is clearly a concern. As the inflation rate is currently 3%, Australian investors are now practically getting a zero real return from investing in term deposits. Whilst this looks bleak, spare a thought for European retirees who are currently receiving 0.1% for short term deposits and soon face the prospect of negative yields with European Central Bank money printing! One of the key goals of the Core Equity Portfolio is to provide a sustainable (and franked) dividend yield that is higher than the ASX 200, but we are often asked about the possibility of "juicing up" the yield of the portfolio. In this piece we are going to look at the results from simply investing in the highest yielding equities at three different points in time.

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Over the last eight days we have been digesting multi-billion dollar profit results for the major trading banks and listening to bank CEOs and CFOs commenting on their profit results. In aggregate the four major banks generated $28.6 billion in cash profits over the 2014 financial year, which represented an increase of 5% on the previous year. In this piece we are going to look at the common themes arising out of the results, differentiate between the banks and hand out our reporting season awards to the stocks that comprise a large weighting in most investors' Australian equity portfolios. The large overall size of bank profits reflects that their core business of transforming savings into lending as loans to borrowers remains a very profitable task. Indeed over the past decade (inclusive of the GFC) the big four banks have generated approximately $200 billion in profits after tax.

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Earlier this week Medibank Private released a 200 page prospectus for what will be the largest Federal Government privatisation since the T3 Telstra share float in 2006. Medibank will also be the largest government enterprise to be taken private since the $4.6 billion sale of Queensland rail freight company QR National in 2010. As tens of thousands of words have been written about Medibank this week in the media and by the investment banks, we are not going to add to the debate but rather look at previous privatisations and how they have performed.

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Level 11

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Tel: 1300 303 323

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