It is one of the enduring mysteries of 2019 as the year gets closer to drawing to a close.
For a whole year we have had a virtually relentless flow of bad economic news and yet most investment classes and markets have had a solid to great year, despite some bouts of volatility.
So how can we all be making money with shares and property climbing strongly again while at the same time world and Australian economic growth has been slowing, wage growth is virtually non-existent, consumer debt is high, interest rates have been slashed to record lows in a vain bid to spur some more activity and trade wars and geopolitical instability have been painfully apparent?
There are some reasons for the apparent contradiction but as the year gets closer to ending there are also plenty of reasons to be cautious about 2020 even after 2019 has proved once and for all the benefits of remaining invested no matter how bleak the outlook initially appears.
Falling rates causing massive valuation changes
One of the prime reasons for the good performance of so many investment classes is directly linked to falling interest rates which have been introduced or in some cases re-introduced around the world to try to rev up falling rates of economic growth.
As the risk-free rate of return on new government bonds falls, that makes the returns being produced by everything from existing bonds and real estate to shares look very good in comparison and encourages price rises to bring the comparative asset classes back into line.
That is why individual asset classes might appear overvalued judging by the usual yardsticks but if you look right across the spectrum, the relative prices between asset classes appear fairly normal.
It also suggests a pointer as to when price rises might reverse course – ironically, when governments and central banks become more confident about the economic outlook and begin to “normalise’’ interest rates by gradually increasing them.
So, in a perverse way, market gains have come not to reflect rising company productivity and profits but instead increasing economic worries and earnings that are only flattering because of the contrast with falling interest rates.
Australian market returns above 20%
The Australian share market is a great example, even after it has been savaged this week by trade worries and some poor corporate news, the Friday close of 6707 points for the ASX 200 is up almost 19% for the year – a result most investors would have been more than happy to take at the start of the year.
Add in dividends and you are somewhere well north of 20%, which is not a bad return even in a sunny economic climate.
Go back another week when the index closed at 6862 points and you can see that those still impressive returns came after a nasty trading week in which a sell off that started on Tuesday stripped 2% from the market.
It is a similar story wherever you look – after a couple of poor years, real estate is back on the rise in Australia and looking strong, most bond funds are well up for the year leaving only cash as something of a laggard as low interest rates shrink returns to miniscule levels.
The impressive stock market only makes sense if you factor in a scenario of very low long-term interest rates, which is effectively a super kind result for the market but a fairly bleak one for the broader economy.
After all, at the start of 2019 the International Monetary Fund was projecting global economic growth of 3.7% for 2019 but has now dialled that down to a GFC type level of just 3%.
Boral hits a very big problem
Within the share market, of course, there are hundreds of individual company stories and big building materials company Boral (ASX: BLD) rolled out a horror story after the market closed on Thursday.
The company’s 2017 acquisition of US building materials industry peer Headwaters was said to be chief executive officer Mike Kane’s big move to reshape the company and grow bigger in the US, but it took a nightmarish turn when Boral announced that serious financial irregularities had been found inside its North American Windows business.
Those irregularities relate to inventory levels, raw materials and labour costs and you can bet your bottom dollar they are not going to come out to be more favourable, with early indications being that profits inside the business have been deliberately inflated.
The impact on Boral is predicted to be a one-off $44 million but that is just an estimate at this stage and could get worse and the whole affair is a serious blow also to the company’s reputation for internal financial management.
The news sent Boral’s shares down 6.3% to $4.61 and a cloud will remain over the stock until investors are convinced that management have their arms around the situation and there won’t be any further nasty surprises.
Some stocks hit new records
There was much better news in other parts of the market with carsales.com (ASX: CAR) rising almost 4% to hit a record price of $16.74 a share.
Small cap stock action
The Small Ords index took a beating this week dropping 1.63% to 2869.9 points.
Small cap companies making headlines this week were:
AppsVillage Australia (ASX: APV)
AppsVillage Australia revealed this week it would exceed growth expectations in the current quarter.
The software as a solution company noted it anticipates its monthly recurring revenue for December quarter to expand 50% on the prior September quarter.
AppsVillage has attributed the faster than expected growth to its expansion into emerging markets such as India, Malaysia, the Philippines and several African countries.
December monthly recurring revenue is estimated at $105,000 – up from $33,293 in January this year.
Red Emperor Resources (ASX: RMP)
Oil and gas explorer Red Emperor Resources has agreed to acquire a 70% stake in a large offshore oil and gas block in WA’s North Perth Basin.
The company will be joining Pilot Energy and Key Petroleum, which will dilute their interests to 18% and 12% respectively, making Red Emperor the operator.
To secure its 70% interest, Red Emperor will fund the existing work program’s completion – capped at $150,000.
Pending the permit renewal, Red Emperor will then pay Pilot and Key $500,000.
Esports Mogul (ASX: ESH)
Esports Mogul is entering into India, which is the world’s second most active mobile gaming market, via an eSports partnership with Critical X.
According to Mogul, the deal will enable it to deliver the world’s most advanced pure-play online eSports tournament platform to the Indian market.
The companies will host free tournaments on the Mogul platform with Critical X to bring its Indian eSports audience of several million dedicated gamers across the country.
Under the deal, Critical X will launch the Mogul hub and offer paid monthly subscriptions that will include access to exclusive tournaments, priority registration and raffles for gamers and eSports contestants.
Noxopharm (ASX: NOX)
Noxopharm’s NOX66 DARRT treatment has had positive effects in a phase 1b trial in men with late-stage prostate cancer.
Two-thirds of the participants in the trial responded with stable disease, or better, after six months of treatment.
Additionally, patients reported lower pain levels.
“NOX66 DARRT has delivered a very meaningful anti-cancer effect in a high proportion of men, halting progression of their disease and providing an average 80% reduction in their pain levels, including some men becoming pain-free,” Noxopharm executive chairman and chief executive officer Dr Graham Kelly said.
Noxopharm is also spinning out its majority owned subsidiary Nyrada, which plans to list on the ASX and raise $8.5 million.
Blackstone Minerals (ASX: BSX)
Korea’s largest electric vehicle battery cathode manufacturer Ecopro BM Co is teaming up with Blackstone Minerals to develop a downstream processing facility for Blackstone’s Ta Khoa nickel project in Vietnam’s north.
The duo plans to develop nickel, cobalt, and potentially other chemicals for use in lithium-ion batteries.
Blackstone has begun a scoping study on the proposed facility, with the project located 160km west of Hanoi.
The project includes the Ban Phuc nickel mine which was operated for three years through to 2016 and has been on care-on-maintenance since due to the nickel price plunging at the time.
Freehill Mining (ASX: FHS)
Drilling at Freehill Mining’s Yerbas Buenas project has uncovered more thick and “extremely high-grade magnetite” at the YB6 target.
A handheld susceptibility meter indicated results of 104m at 38% iron from 34m, 91m at 47% iron from 37m, and 70m at 46% iron from 110m.
Based on previous testing on similar ore from the project, Freehill expects this ore can be readily upgraded to high-quality magnetite concentrates grading between 64-68% iron.
Freehill chief executive officer Peter Hinner described the drill core as “visually stunning” adding that he anticipates the assays will correlate with the magnetic susceptibility readings.
ASX floats this week
The latest companies to make their way onto the ASX this week were:
Macarthur Minerals (ASX: MIO)
Advanced iron ore explorer Macarthur Minerals floated on the ASX on Friday after raising more than $5 million via the issue of 20 million shares at $0.25 each.
Offer proceeds will help fund a bankable feasibility study for the company’s flagship Lake Giles iron ore project in WA’s Yilgarn region.
Macarthur is proposing to ship a premium magnetite concentrate grading in excess of 65%, which it claims will be favourable to Chinese steel makers due to lower impurities and higher grade.
On its first day of trade on the ASX, Macarthur opened at $0.28 and climbed further to end its first day and week at $0.31.
Amaero International (ASX: 3DA)
A spin-off from Monash University, Amaero International specialises in additive manufacturing – otherwise known as 3D printing.
The company uses its 3D printers to create large and complex bespoke metal components for customers across North America, Europe, Asia and Australia – focusing on aerospace and defence sectors.
In its heavily oversubscribed IPO, Amaero raised $8 million via the issue of 40 million shares at $0.20 each. Offer funds will be used to purchase new 3D printers and capitalise on growth opportunities in Australia and North America.
Amaero closed out its first week on the ASX at $0.40 – up 100% on its $0.20 offer price.
Tyro Payments (ASX: TYR)
Sydney-based eftpos machine provider and business lender Tyro Payments has raised $287.2 million via the issue of almost 104.5 million shares at $2.75 each in its IPO.
Competing with payment processing companies such as Square Inc in the US, Tyro sells eftpos machines and payment services to businesses via a digital app, in addition to offering business loans up to $100,000.
Additionally, Tyro claims it is the fifth largest merchant-acquiring bank, with more than 29,000 clients.
IPO proceeds will provide financial flexibility to underpin Tyro’s growth strategy.
On its first day of trade, Tyro surged to finish at $3.38.
Elanor Commercial Property Fund (ASX: ECF)
Established in 2016, real estate investment trust Elanor Commercial Property Fund’s offer managed to generate $173.6 million for the company via the issue of almost 139 million fully paid stapled securities at an issue price of $1.25 per stapled security.
The company’s portfolio contains six commercial properties worth $306.4 million with a 96.8% occupancy rate and located across WA, Queensland and South Australia.
Tenants account for 89% of Elanor’s income with the top 10 tenants including National Australia Bank, Coles, Optus, Wesfarmers, CIMIC, DXC technology, Hub, Kaelus, Clemenger BBDO and government occupants.
Elanor’s strategy is to provide investors with above average risk adjusted returns through capital growth and regular distributions.
The fund plans to do this by investing in commercial properties in metropolitan areas and established commercial precincts.
Elanor closed its first day on the ASX at $1.22 – down on the $1.25 IPO price.
The week ahead
It is beginning to look a lot like Christmas and it shows with a bit of a reduction in the usual pace of economic announcements both here and overseas.
There is a bit of action on Tuesday with the Reserve Bank Governor, Dr Philip Lowe, delivering a speech at the AusPayNet Summit in Sydney and the National Bank business survey hopefully showing a continuing improvement in business conditions and consumer sentiment.
The Bureau of Statistics figures on residential property prices could also be interesting, although it is widely expected to echo the CoreLogic numbers that are already out and show renewed strength in the big Melbourne and Sydney markets.
On Wednesday the Westpac and Melbourne Institute December consumer sentiment index is released which is likely to confirm the recent bleak trend.
Thursday brings some Bureau of Statistics figures on tourism and migration flows which are likely to show that China remains our major source of tourists.
The Reserve Bank is also releasing its Bulletin which can cover a variety of economic developments and is also releasing October data on credit and debit card lending.
Overseas the biggest news will be the final 2019 meeting for the US Federal Reserve on Tuesday and Wednesday.
While there is no change expected for interest rates, the commentary from Fed chair, Jerome Powell, will be very closely watched given the central place interest rates are playing in the world economy.