Mr Freeman said the house price downturn in Sydney and Melbourne had come after robust rises over a long period, but the declines would have an impact on confidence. It was too difficult to predict whether those house price drops would continue at similar levels, with the direction of house prices plus the Hayne Royal Commission recommendations to have a large impact on the direction of bank share prices.
“We’re in the adjustment process. I don’t know how long it’s going to go,” he said, referring to the house price declines.
“We’re watching the bad debt charges carefully. If the bad debts tick up too much then those yields aren’t sustainable”.
Fair price
AFIC has a portfolio worth $7.3 billion, which was down 6.4 per cent for the six months ended December 31, 2018. The S&P/ASX accumulation index was 6.2 per cent lower over the same time. The Commonwealth Bank was its top holding at December 31.
Mr Freeman said the sharemarket slide from early October to the end of December had meant some decent value had emerged again.
“With the pullback, we’ve seen companies getting back closer to long-term averages. I can see there’s good businesses at fair prices”.
But he emphasised they had returned only to “fair value” in most cases, although the bounce over the past few days had altered the dynamics again. Stocks were nowhere near the “cheap” valuation they reached during the global financial crisis in 2009.
AFIC’s profit after tax for the first half of 2018-2019 was $239.8 million, up 75 per cent from $137 million a year earlier. Revenue was up 63 per cent, mainly because of de-merger dividends from the Coles supermarket business from Wesfarmers, and AFIC’s participation in off-market buybacks by Rio Tinto and BHP.
AFIC cut its holding in Rio Tinto by $106 million through the off-market buyback.
Mr Freeman said the management of both BHP and RIo Tinto were doing a much better job of maintaining discipline after some excesses by previous executives during the last mining boom. “They are cyclical businesses. I think they are respecting those assets,” Mr Freeman said, referring to the generally high-quality mining operations in their respective portfolios.
AFIC is steering clear of discretionary retailers, with online retailers making solid headway and the housing “wealth effect” impacting on consumer confidence.
from A Viral Update http://bit.ly/2FMME6K
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