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Uncommon times

By Simon Angelo

There is a lot of talk going around that when it comes to world stock markets, particularly in the US, we're now in the longest bull market in history. We're due for a major decline, even a crash! As a stock picker, this predictably makes me a little nervous, particularly as I know we've had a good run. However, as with all fear, you need to think about it clearly and understand where it's rational, where it's not and where it's being used by journalists to glue anxious eyeballs to their posts.

The facts - then and now

It is true, some stocks have become very expensive. It's also true that there are geopolitical factors at play impacting on world markets, more than usual. There's Brexit and ongoing migration pressures weighing on the EU, not to mention Trump's cut and thrust approach to navigating his trade deficits. However, none of these seem as insurmountable or widespread as the credit crisis of 2008, the dot com crash of 1998 or 1987's Black Monday - which resulted from a heady cocktail of overvaluation, deficits, computer trading and illiquidity.

Continuous demand in the markets

We're now in much more uncommon times. Interest rates are about the lowest they've ever been (and look to remain so for some time). There's more people than at any other time in history living on unearned income and reliant on fund investments. The world is liquid and awash with inexpensive money. With property investment becoming less attractive due to high prices and government curbs such as foreign buyer bans and stamp duty, investors continue to turn to stock markets.

You can see this with each passing day on the trading screen. When there's a strong dip in a value stock, it's followed quite quickly with a spike in buying, pushing it back to where it was.

Our strategy

Amidst this backdrop, a prudent focus is to be very careful you don't buy anything that might be overvalued and to favor defensive businesses that produce (and yield) good income. Strategically you also want to buy some good dips, either in stock price or currency. A good company is a good company for the long term regardless of what happens to the short term stock price. In my view, any major downturn will be short lived and long term investors in quality will do well.

Performance update

Designs for AstraZeneca's new global R&D center and corporate HQ in Cambridge, England.

August 2018 saw a 0.06% rise in NAV for the composite portfolio (comprising those accounts containing the full strategy positions).* Constrained European markets weighed on returns but we saw continued uplift in Australia and the US. New Zealand pulled down returns as high stock prices eased alongside business confidence worries with the Ardern government.

The annualized return now sits at an average rate of 17.67% pa from inception in 2014.* You can view the full performance chart here.

Among our British stocks, AstraZeneca has been a standout performer. We started buying the stock whenever we noticed it below 50 pounds. Although it was expensive in terms of price to earnings; the size of the business, the dividend yield and the strength of the margins made it a less risky bet than at first glance. In addition there has been the huge upside of the cutting edge drug pipeline, particularly in high potential areas such as oncology.

Holders of the stock have enjoyed a price climb of approx. 20% to date while earning a 4% dividend along the way.

The British pound continues to experience softness and volatility with Brexit uncertainty. We've managed to buy GBP at record lows in order to invest in the FTSE. There are of course risks that Brexit will go badly but in my view the market is over-factoring these.

Germany for example still relies on the British market to buy 1 in 5 of their BMWs. The UK, as one of the largest and most stable economies in Europe has a degree of leverage which may have been underestimated.

Stock take

New River REIT listed on the main board of the London Stock Exchange a while back and has grown to become the largest owner and manager of shopping centers in the UK.

New River REIT is a real estate investment trust that primarily owns shopping malls, large format retail and other commercial properties (including a pub portfolio that comprises around 20%). It has presented great value lately, with the opportunity to buy at a 10% discount to book value and enjoy a dividend in excess of 8% pa, paid quarterly.

Brexit property concerns have weighed on the company as have wider concerns about retail (analysts see more and more shopping moving online). However, I think this is overdone. New River has maintained an occupancy rate of around 97% and focuses on convenience retail - where you need to get to the store.

Primark is also a major tenant which doesn't sell online. There were queues snaking around the shop last time I visited a Primark in London. There could be considerable upside as the Brexit situation clarifies and the lures of the sociable shopping mall trump lonely online shopping carts.

The month ahead

I'm enjoying a new espresso machine. Much as the economy seems to need this low interest rate environment to feel 'normal' - I need my morning cappuccino.

It takes some care to make a great coffee and you need to get a number of factors just right. With frothy stock values, exercising caution in valuation and getting the blend just right in terms of what we buy (and continue to hold) in the markets is going to be similarly vital.

With the pound bounding back, we're continuing to look at Aussie positions this month. The lucky country has a plethora of great companies in a strong, resource rich economy experiencing population growth.

We will also be looking for a little softening of the AUD due to Turnbull's resignation. He's had a hard time. On that note I wish you a successful September and positive returns ahead.

If you're a client, thanks for taking the long view with Vistafolio. If you'd like to find out more about our innovative, managed account solutions for eligible or wholesale investors, please visit vistafolio.com

*Past performance is not an indicator for future performance. Your actual portfolio will differ from the composite portfolio mentioned. Annualized returns are after management fees and after withholding taxes. The information contained in this document does not constitute an offer to sell or a solicitation to buy an investment, nor should it be construed as investment advice. It is recommended that potential investors take appropriate tax and/or investment advice before making any investment.