Sharemarket earnings season + extreme greed

Hi everyone, happy International Women’s Day.

On a personal front my youngest daughter is expecting our ninth grandchild, which is exciting. On this International Women’s Day, I’m proud to have raised strong women who are now raising the next generation of strong women.

A fair bit to get through on the finance front this week:

• The economy staggers along.

• Housing figures continue to look weak.

• Pretty good superannuation performances.

• How to beat the rise in private health insurance premiums.

• A wrap up of the sharemarket earnings season.

• Is the investment barometer at “extreme greed” and should we be worried?

Australian economy staggering along

The economic growth figures were released this week and the good news is that we haven’t dipped into economic recession. We’re still growing… but only just. 

Real gross domestic product (GDP) grew by a weak 0.2 per cent for the December quarter for annual growth of 1.5 per cent. That is a weaker figure than was forecast by the Reserve Bank. 

The figures show it’s Australian households that are slowing the economy – which is what the RBA has been hoping for to fight inflation. The RBA forecast annual household consumption of 1.1 per cent in the December quarter and it looks like the reality was just 0.1 per cent. 

I’ve talked about Australians going into the bunker (scared to spend) and these figures prove it is much worse than expected. There is no way the RBA will increase interest rates in this economic environment and, if the economy keeps going like this, it is on track to cut rates in the second half of the year. 

The RBA is getting the slowing economy it wants. Just keep an eye on the jobs figures. If they collapse and unemployment heads above 4.5 per cent then the RBA would bring those rate cuts forward. 

I was also interested in the analysis of the economic growth figures by the Australian Financial Review. They found federal government spending was equal to 11.1 per cent of GDP (the size of the economy) in 2023, only slightly lower than the 11.5 per cent record reached during the depths of the pandemic (when we had the big spending JobKeeper economic stimulus) and sharply higher than the 9 per cent average level from 2000 to 2015. 

Taxation revenue across all tiers of government amounted to a near-record 30.3 per cent of GDP in 2023. 

As I’ve pointed out over the last few months, the federal government is rolling in cash and spending up big.

Demand for home loans continues to fall

Higher interest rates and falling borrowing capacity are having an impact on the number of home loans being approved. 

The total value of new Australian home loan commitments fell by 3.9 per cent in January – investment lending was down 2.6 per cent with owner-occupied lending sliding 4.6 per cent. Lending to first home buyers dropped 6 per cent after a 6.1 per cent decline in December. 

But total loans are still 8.5 per cent stronger when compared with a year ago, with investor lending up 18.5 per cent.

The number of loan approvals for new construction also declined, down 4.3 per cent in the month and 6.1 per cent compared with a year ago; they are near the lowest level since 2008.

Overall, loans to build new homes to solve the lack of supply is just not happening. 

While Aussie home prices continue to lift, leading indicators of home building activity, such as building approvals and home sales have slowed. While strong inbound migration and a lack of housing stock is supporting housing demand and prices, stretched affordability because of higher interest rates will continue to be a problem in the Sydney and Melbourne markets.

How to fight the increase in private health insurance premiums

At a time when the economy is sagging and household budgets are being squeezed by high inflation and interest rate increases, this week’s government-approved lift in health insurance premiums on 1 April is the last thing Australians need right now. 

The fact the announcement was delayed until after the Dunkley by-election, and just three weeks before the increases flow through, is proof even the government knows how sensitive these premium rises are to the electorate. 

If you’re one of the 14.7 million people covered by private health insurance, you have just over three weeks to fight back and reduce the pain. 

First of all, understand the government’s 3.03 per cent rise in premiums is an average… it’s not a blanket rise. Some private health insurers will be lifting premiums higher than the 3.03 per cent while others will be lower. Even within the health insurers some plans will rise higher than others. 

I’ve heard of some funds notifying clients of a 10 per cent rise in premiums. Your insurer will notify you of your increase over the next week or so. 

But as a benchmark, the biggest premium increases are from these insurers: 

• CBHS Corporate Health (5.82 per cent)

• CBHS Health Fund (4.51 per cent)

• nib (4.10 per cent)

• HBF Health (3.95 per cent)

• Health Insurance Fund of Australia (3.87 per cent)

While the private health insurers passing on the lowest premium rises are:

•  Health Care Insurance Ltd (0.27 per cent)

• Defence Health (1 per cent)

• Australian Unity Health (1.42 per cent)

• Peoplecare Health (1.63 per cent)

• Health Partners (1.93 per cent)

As you can see, there are big differences. So it pays to give your current private health insurance policy its own financial health check to see if it’s still the right policy for you. There could be better deals out there. 

First of all, make sure your private health insurance cover still suits your individual needs and stage of life. Being a “senior citizen” I always had the top Gold cover because I figured I’d need it as I aged. That was until my wife Libby pointed out that it included obstetrics (we’re a bit past that). On top of that (brace yourself) we had extras cover for orthodontics. 

After a quick audit of the cover we needed we settled on Silver Plus and saved a fortune in premiums. When is the last time you looked at the actual services covered in your policy? 

Many people are scared to change their health insurer if they’ve developed a medical condition and another insurer either won’t cover them or charge them a huge premium. It’s understandable because home and contents insurance premiums are set depending on your risk profile (whether you live in a bushfire, flood or dangerous zone). 

But private health insurance cover is not risk rated, it’s community rated. So no matter what ailments you have, your premium is rated as exactly the same as anyone else of your age. So switching to another provider shouldn’t be a problem. 

Another misconception about changing health insurers is that you’ll have to sit through a waiting period before being eligible for some cover. 

Not necessarily. If you switch to the equivalent cover (or lower cover) with another provider, no waiting periods apply. If you switch to a higher level of cover then waiting periods may apply. 

But at this time of year a range of private health insurers will offer attractive incentives to switch insurers, which includes waiving waiting periods even if you opt for a higher level of cover. 

It is so easy to compare your health insurance cover these days using one of the online comparison websites. 

I know a lot of people are tempted to just ditch private health insurance altogether and pay the Medicare Levy Surcharge (MLS) on those earning over $93,000 a year and $186,000 for a couple. Do your sums carefully first. Depending on your income tax tier, ditching could cost more. 

Basic hospital cover will help you avoid the MLS but, for a bit extra, you could get a lot more cover by choosing a Bronze policy. 

Be careful because cheaper “extras” health cover won’t offset the levy. A bloke this week was telling me he was avoiding the MLS with a cheap “extras, dental” policy. Should have seen his face when I said it didn’t qualify and for the last five years he had unknowingly been paying the surcharge… 

I know private health insurance can seem complex, and there are a lot of misconceptions around, but it is worth using the next three weeks to review your cover to make sure you’re not paying for services you don’t need.

The American sharemarket continues to surge

The US sharemarket is the biggest in the world and sets the trend for other global markets like ours. So the US profit reporting season is always worth following as it provides an insight into the financial health of their major listed companies. 

The fourth quarter profits of US listed companies grew almost 8 per cent when the markets were expecting just 1.2 per cent; 76 per cent did better than expected. According to financial analysts at Bloomberg Intelligence the results outperformed the 10-year average. 

Five Wall Street stockbroking firms have already lifted their forecasts for the S&P 500 index, which is up over 7 per cent since the start of the year, after rising 24 per cent in 2023.

And history is providing an optimistic outlook as well. 

The team at US-based CFRA Research has looked historically at what happens in the US after sharemarket gains in both January and February.  

There have been 21 examples going back to 1971. And literally every year where the sharemarket gains in both January and February has been a positive year overall for the S&P 500. There were a couple of examples where, in the final 10 months, the stock market pulled back, but the key word there is “a couple”… just two years out of 21 (1987 and 2011).  

In other words, 90 percent of the time when the S&P 500 index is up in January and February, it continues to climb for the rest of the year.  And the average return in those 10 months that follow January and February is 13 percent.

Buy fear, sell greed

The world’s most prominent investor, Warren Buffett, once said “be fearful when others are greedy and be greedy only when others are fearful.” 

The rationale is that when others are greedy, prices for investments typically boil over and investors should be cautious as they are likely overpaying for an asset. Buying at the top of the market usually leads to poor future returns as values inevitably pull back and readjust to a normal valuation. 

With the US, and so many other, sharemarkets (including ours) at record high levels it begs the question are we at “peak greed”? If so, should we be selling in anticipation of a correction in values? 

It’s a question I put to the panellists on The Call this week – my sharemarket show on the ausbiz streaming network (ausbiz.com.au , SevenPlus, Samsung smart TVs). 

Most agreed that, at these record levels, you could conclude we are at peak greed. But there were differing views at what investors should be doing.

Some pointed out that “extreme greed” could last a while. In other words, when extreme greed is reached it often stays there for a while and does not pull back immediately. 

Others said it is a time to be wary rather than panic and sell out too early. They said watch your portfolio carefully and act quickly if there is a major correction. 

Others believe no-one can pick the perfect time to buy or sell. So if an investment has performed well there is no harm in trimming your holding (defined as selling 20-30 per cent of your holding) and taking some profits.

Confession season shows Australian listed companies in pretty good shape

February is confession time for most Australian listed companies, when they have to open their books and reveal their half year results and how they performed in the July-December period. 

It is a barrage of information and can be pretty overwhelming. There were fears higher interest rates, inflation and a slowing economy would take its toll on corporate bottom lines. 

But it’s fair to say the results proved to be mixed considering the expectations. But market reaction to results was severe if they didn’t meet expectations. 

Investment platform FNArena tracked companies that beat or missed analyst forecasts on key metrics such as revenues or profit, and those that recorded metrics in line with expectations. For the S&P/ASX 200 group, 35.5 per cent of companies ‘missed’ or fell short of analyst expectations; 32.2 per cent ‘beat’ expectations and similarly 32.2 per cent of companies met expectations. 

Investment giant CommSec always puts out a terrific confession season summary. Some of their observations were: 

• The recent sharemarket rally has been driven by the Artificial Intelligence (AI) frenzy, with tech stocks like WiseTech Global, Altium and Weebit Nano soaring between 24.7 per cent and 30.4 per cent in February. Data centres like NEXTDC were also strong performers, up 25.9 per cent.

• Surprisingly Consumer Discretionary shares jumped 8.2 per cent in February at a time when borrowing costs and inflation are high, pressuring consumer sentiment and demand. Fashion retailer Lovisa soared 40.9 per cent, atop of the ASX 200 index. Retailers cleared excess stock, input costs generally eased and shops engaged in price discounting, with margins defended.

• Westfield owner Scentre Group reported that visitation was up 6.7 per cent at its shopping malls in 2023! Temple & Webster said it had record customers shopping online and Kmart owner Bunnings highlighted that frugal Aussies were buying cheaper brands during the cost-of-living crisis.

• The miners remained under pressure with commodity cost curves steepening and labour conditions challenging amid supply challenges due to rising geo-political risks.

• Companies were relatively restrained in providing guidance over the reporting season. But a number of companies saw light at the end of the tunnel with interest rates, believing that rate cuts would be positive for financials and real estate companies.

• Around 81 per cent of companies made a profit, but this is the lowest result in seven reporting periods and below the average of 87 per cent. Aggregate profits have fallen by 35 per cent. As a result of weaker profits, cash levels have been reduced – down by 25 per cent over the year. Still cash totalling near $200 billion is still higher than before COVID.

• Despite weaker profits and lower cash levels, companies have tried to keep paying dividends. Aggregate dividends have only eased by 2 per cent. For companies in the S&P/ASX 200 index, dividends totalling $33.9 billion will be paid in coming months. That is down only modestly on the $34.8 billion of companies that announced dividends at the same juncture in 2023. 

For CommSec, a number of investment themes emerged from results season which affected particular stocks:

• Moderating food inflation (Coles and Woolworths)

• Lower airfares (Qantas)

• Inflation-cost headwinds (Domino’s, Woolworths, Medicare, Brambles, Sims)

• Global connectivity, AI proliferation, data consumption (Altium, NEXTDC)

• Write-downs of the value of assets by real estate firms, especially offices (Dexus, Lendlease)

• Lower commodity prices for resource companies (BHP, Lynas, IGO, Wesfarmers, Iluka, Santos) and higher operating costs (BHP)

• Energy transition (Lynas Rare Earths, Santos)

• Resilience of retailers (JB Hi-Fi, Eagers Automotive, Lovisa, Universal Stores, Temple & Webster, Nick Scali, Adore, Scentre, Kogan)

• Reduced demand for gaming services (Tabcorp, PointsBet, Endeavour), but record Lotto expenditure (The Lottery Corporation)

• Transition to digital from traditional (Tabcorp, Seven West, Nine Entertainment)

• Positive outlook for housing and building activity (Mirvac, James Hardie, BlueScope Steel, Reece, Lifestyle Communities, Stockland, Domain, REA Group, Seven Group)

• Rising interest rates and heightened competition (CBA, Westpac, Bendigo and Adelaide Bank)

• Travel demand (Flight Centre, EVT)

• Impact from cost-of-living crisis/cost cutting (some travel companies, retailers, gaming, health)

At the same time, corporate activity has picked up during the reporting season. Notable deals include French building giant Saint-Gobain’s $4.3 billion bid for CSR and Seven Group’s bid to take full control of concrete company Boral. 

So reporting season was, at best, an okay result. But the market performed more than okay and is at record highs. Has it got ahead of reality and is the market headed down from these lofty levels?  

According to CommSec there are a raft of factors to watch during 2024: China’s slowdown; the Artificial Intelligence theme, weight-loss drugs, the Israel-Hamas war, war in the Ukraine, and the increasing need for security of IT systems. 

On a valuation basis the ASX 200 index price/earnings ratio (P/E) is now at 16.2 times, above the long-term average, while the 12-month forward dividend yield is at 4 per cent, below the historical average. Large cap valuation metrics are less attractive than small cap metrics with emerging companies positioned to benefit from an eventual easing in financial conditions, a soft economic landing, moderating inflation and lower borrowing costs. 

CommSec expects the Aussie sharemarket to drift through to mid-year as the focus intensifies on possible rate cuts. The S&P/ASX 200 index is currently around 7,700 points and CommSec expects it to end this year higher, in the 7,750-8,050 point range.

Strong sharemarket provides solid results for your superannuation

Super returns maintained their momentum over February as confidence that inflation is coming under control continued to build. Leading superannuation research house SuperRatings estimates that the median balanced option generated a return of 1.8 per cent for February. 

This brings the return to an estimated 6.7 per cent for the median balanced option after the first eight months of the financial year. The median growth option gained an estimated 2.3 per cent for the month, while the median capital stable option also rose by an estimated 0.7 per cent.

Pension returns also grew over February, with the median balanced pension option increasing by an estimated 1.9 per cent. The median capital stable pension option is estimated to have grown by 0.7 per cent over the month while the median growth pension option is estimated to increase by a 2.5 per cent for the same period.