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Market Commentary

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

In every investment magazine and the business section of every weekend paper you will see a list of hot stock picks from fund managers, inevitably these picks won't represent the fund manager's top new ideas, but rather five large positions in the funds that they manage. You will never see the fund manager's recently uncovered gems in print, as the managers will be busily building these positions in their portfolios and certainly don't want other investors driving up the price! In the interests of disclosure I have been guilty of doing this myself. In this piece, I am not going to run through our top investment ideas, but rather take a step back and look at what actually makes a company attractive investment.

Tagged in: Australian Equities
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Casual readers of the financial press may have the impression that 2014 has seen a large degree of variation in the returns delivered to investors by Australian equities. Contrary to the headlines which have reported the end of the mining boom, budget crises and faltering domestic economy, if you look at the Australian market by industry sectors, 2014 has actually seen a historically low level of dispersion. As we are currently at just over the half-way mark of 2014, in this piece we are going to look at what is going on in Australian equities in this very benign start to 2014.

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To equity fund managers term deposits (TDs) are often seen as quite boring, lacking the growth potential in both capital and income that shares offer, but also giving investors none of the unpleasant downside variability in income and capital that can come from owning shares. The investor simply receives an agreed return paid for the life of the deposit, which is then returned at the end of the term.

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Since China started to have a greater impact on the global economy and indeed the companies listed on the ASX, investors are assailed with the contradictory extreme viewpoints that either "China is going to take over the world" (supposedly good for Australia) or that "China is a house of cards that will soon fall in a heap" (supposedly bad for Australian miners). This argument has only intensified in 2014 with a weakening in the iron ore price. We view that these two outcomes are simplistic and that the truth lies somewhere in between these two viewpoints. Earlier this week Philo Research returned from an extensive trip around China meeting with companies, state owned enterprises (SOEs) and government in the provinces of Beijing, Hebei and Shandong in the north, Hunan in the central and Jiangsu/Shanghai on the coast. The purpose of the visit was to gauge the future direction of the Chinese economy and to provide a view on the outlook for Australian companies whose profits are linked to China. In this piece we will look at the key messages coming out of China for Australian investors.

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Megaprojects capture people's imaginations. From the ancient Pyramids of Giza, to the Great Wall of China to the more modern Panama Canal and 163 floor Burj Khalifa, mankind has always sought to push the limits of engineering and be the one to build the next 'biggest thing'. While Origin Energy's APLNG project might not carry the historic or aesthetic appeals of more famous megaprojects, it remains worthy of the moniker.

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Over the last two days Woodside Petroleum's management have been in Sydney conducting their annual investor briefing. In addition to having the opportunity to meet operational management, research has also had the chance to speak with the CEO and CFO about the future direction of the company. When a company like Woodside is delivering both record hydrocarbons production and solid returns for our investors, these meetings can be pretty affable affairs commending management for their efforts and discussing a few points about their operations and the competitive environment. However these meetings have been a little different, as Woodside is sitting on a pile of cash and is currently pondering what to do with it. We currently expect Woodside to have zero net debt by the end of 2014 which is very unusual for a company with a market capitalisation of $34 billion! In this note we are going to look at the questions that Woodside's board face with the billions of shareholders' funds burning a hole in their back pocket. Historically we have observed that far too many companies have frittered away their excess cash on questionable acquisitions designed to buy growth.

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Over the last fortnight the four major banks have reported earnings of almost $13 billion dollars which resulted in some commentary in the press about banks being too profitable. Similarly one of the minor political parties suggested last week that the way to solve Australia's deficit is to tax the miners more. Whilst the banks and miners generate large profits as companies, what is ignored in much of the debate is that these profits have to be shared amongst millions of individual shareholders; for example Westpac has 3.1 billion shares outstanding. In this piece we are going to look at measures of corporate profitability for large Australian listed companies.

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Over the last fortnight investors have been digesting multi-billion dollar profit results for the major trading banks, wading through voluminous investor discussion packs whilst listening to bank CEOs and CFOs report their profit results. Indeed Westpac offered investors over 200 detailed charts in their 137 page investor presentation!

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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.  As part of the quarterly asset allocation process, the Philo Listed Research team provides a view of how we expect the Australian equity markets to perform over the coming year. This does not involve peering into a crystal ball or gazing at tea leaves or chicken entrails, but rather is derived from 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 the market to provide investors over the next 12 months.

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During the week portfolio stock BHP confirmed that they were looking at simplifying their portfolio and investigating a demerger of the company's aluminium, nickel and manganese businesses. Similarly former portfolio company United Group has been in the press discussing the sale of its painstakingly acquired property services business to private equity. In the last six months we have also seen Amcor demerge its Australian packaging assets (Orora) and Brambles demerged its document storage business Recall after an unsuccessful attempted trade sale.

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