Weekly review: get ready for much lower investment returns as global growth slows

Investment returns global economy Australia jobs 2019
WEEKLY MARKET REPORT

Occasionally a world expert says something that makes perfect sense but nobody wants to hear.

This week’s contribution from World Bank president David Malpass falls directly into that category, as hard as it might be to hear in Australia as we bask in the glow of a five week rise in the ASX 200 – the longest winning streak we have seen since May.

In simple terms, Malpass pointed out that the world is facing a “new normal’’ which will be foreign to most investors and governments alike.

Unlike most of the period since the second world war, this new normal over potentially several decades will see the world economy growing at a much slower rate than we are used to, with a consequent lowering of the investment returns that we have all become so accustomed.

Potentially decades to come of lower returns

In the case of share market returns – which most of us are most interested in – the very long run Australian market returns of 6.5% a year in real US dollar terms could well be a thing of the past.

Incidentally, those returns since 1900, as calculated by Credit Suisse, are the highest of 23 countries that were analysed and were even higher at 6.7% in Australian dollar terms and higher again if you factor in dividend franking credits.

Using Malpass’ reasoning we can expect those returns to roughly halve over the next period as the world adjusts to a time of much slower economic growth and much lower returns on all asset classes.

If you work that Australian equities result backwards, it quickly becomes obvious that some equity markets will be producing returns of just a couple of percent a year or even less – around the returns we are more used to seeing from safer investments such as Government Bonds.

It is those very bonds that Malpass uses to justify his forecast that returns on all asset classes are set to fall.

“The slowdown in global growth is broad based,” Malpass said in a Washington speech in which he also predicted a big fall in global economic growth rates.

Low single digits for world growth rate

Rather than the growth rate of around 6% that was achieved in 2017 and 2018, he thinks that the nominal growth rate will fall to less than 3% and below 2.6% in real terms.

“The global economic outlook, in both the near and long-term, is confronting substantial challenges,” said Malpass, who was US President Donald Trump’s senior economic adviser for his 2016 election campaign before he was appointed to head up the World Bank.

The reason for that slower growth can be sheeted home to the $22 trillion of government bonds that now carry yields that are zero or actually negative, which means investors have accepted “the market’s premise of very low or even negative returns for years, even decades.”

“This frozen capital implies slower future growth,” Malpass said.

It is a difficult diagnosis to argue against, given that the risk-free returns provided by government bonds have effectively been the baseline against which all other investment returns are measured.

It makes perfect sense that if that baseline is lowered a couple of percentage points due to slower economic growth, the returns provided by equities will come down by a similar amount.

Australian market still on a rising trend – for now

None of this predictive gloom cast a shadow on the Australian share market, which has now put together a solid five weeks of gains in its continuing recovery, notwithstanding a few daily fade outs near the end of trade which happened again on Friday.

Even after a fair chunk of the morning gains had been erased, the ASX 200 closed out the week up 13.3 points or 0.2% at 6730.8 points, making it a 0.9% rise for the week.

It was another week in which overseas influences were important – mainly the rate cut by the US Fed but also the resumption of trade talks between the US and China which is a precursor to top-level negotiations next month.

Softening outlook for jobs

Local Australian news also had an impact with the rising unemployment rate hitting a year high of 5.3%, with some states such as South Australia hit much harder.

The softening jobs market makes it much more likely that the Reserve Bank of Australia will be tempted to cut rates again in October which will mean that RBA Governor Dr Philip Lowe’s speech next Tuesday will be even more closely examined that usual.

The market’s rise was fairly broadly based with the gold miners, National Australia Bank (ASX: NAB) and Premier Investments (ASX: PMV) some of the highlights.

Premier Investments added an impressive 15.3% after producing a 27.7% lift in FY 2019 profit to $106.8 million – which caught some traders off guard given the malaise confronting most retailers.

Online spending was up by almost 32%, revenue rose 7.3% and the final dividend rose 12.1% to $0.37.

Shares in beleaguered money manager, IOOF (ASX: IFL) rose by 8% after it won a Federal Court case against APRA, which was trying to have five company executives disqualified from looking after other people’s money.

On the downside, Speedcast (ASX: SDA) continued a disappointing run, shedding 5.7% to $1.17.

Small cap stock action

The Small Ords index had another strong week, closing up 0.78% at 2896.9 points.

ASX 200 XJO Small Ords September 2019 chart
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

Kyckr (ASX: KYK)

Billionaire entrepreneur Richard White became a major shareholder of digital platform developer Kyckr this week after he took part in the two tranches of Kyckr’s recent $5.2 million capital raising.

His participation saw his holding grow to 19.6%, with Kyckr chief executive officer Ian Henderson claiming his addition to the company’s shareholder base will strengthen its market position.

“It is particularly rewarding that someone of Richard’s calibre has become a strategic investor which validates the strong appeal in [our] technology and business proposition,” he said.

Mr White is the founder and chief executive officer of $11 billion Australian logistics software company WiseTech Global (ASX: WTC).

Lithium Australia (ASX: LIT)

Lithium Australia has achieved a recycling breakthrough after recovering critical metals from spent lithium-ion batteries.

The achievement was made in conjunction with Australian Nuclear Science and Technology Organisation using Lithium Australia’s proprietary technology.

Lithium Australia’s partner Envirostream Australia collected, shredded and separated spent batteries to create a mixed metal dust.

The dust was processed to recover lithium phosphate which was further refined and shipped to Lithium Australia’s wholly owned VPSC pilot plant where it will be converted into lithium-ferro-phosphate and used to produce coin cell batteries.

Lithium Australia anticipates it can also extract nickel and cobalt from spent batteries and ship a concentrate to end-users for further processing and use in new batteries.

Antisense Therapeutics (ASX: ANP)

A review of a phase two clinical trial using Antisense Therapeutics’ immunomodulatory therapy drug ATL1102 has shown it positively affects patients with non-ambulant Duchenne muscular dystrophy.

Six patients who completed 24 weeks’ treatment with ATL1102 showed a positive effect on disease progression at muscle strength and functioning.

ATL1102 inhibits CD49d expression on certain immune cells (or T-cells), with DMD patients possessing more T-cells with high levels of CD49d. The more T-cells and levels of CD49d, the more severe and rapid the disease progresses.

Antisense’s strategy is to use ATL1102 as an alternative to current treatments in DMD sufferers which include corticosteroids that come with a range of serious side effects during prolonged periods of use.

BPH Energy (ASX: BPH)

BPH Energy’s venture into the medicinal cannabis space has advanced with its 10%-owned Patagonia Genetics SPA purchasing its first bulk order of cannabis fertiliser and biostimulants.

The company locked-in an initial 10% interest in Patagonia earlier this month and has the option to grow it stake to 49%.

Meanwhile, BPH’s investee Advent Energy has secured a five-year renewal to its retention licence for its asset in the onshore Bonaparte Basin in the Northern Territory.

The basin is believed highly prospective for oil and gas.

Alt Resources (ASX: ARS)

Gold explorer Alt Resources will wholly-own the Bottle Creek asset well ahead of schedule after executing a $4.5 million funding package this week.

The package covers the final payment for the asset which is due in November 2020 and enables Alt to fast-track exploration and development across the greater Mt Ida project in WA.

Alt executive director Andrew Sparke said the package was secured on “very attractive” terms and locks-in the asset, which is the “backbone” of the company’s resource base.

“This financing is a strong endorsement of the results we have achieved, and the inherent value investors see in Alt,” he added.

Strategic Elements (ASX: SOR)

It was a big news week for pooled development fund Strategic Elements, which capped it off by announcing a joint venture between its artificial intelligence robotics company Stealth Technologies and Global Integrated Operations to apply AI technology to fixed plant processes in mining operations.

Stealth will work with GIO to apply the AI and deliver a software-as-a-service solution.

Earlier in the week, Stealth revealed it was working with the CSIRO and Defence Science and Technology to fast-track its AI technology in the defence space.

Additionally, Strategic’s Maria Resources received Aboriginal heritage clearance to drill a potential meteorite impact structure in the Gibson desert for nickel, copper, gold and rare earths.

Azumah Resources (ASX: AZM)

West African gold explorer Azumah Resources’ share price rocketed 100% on Wednesday after its major shareholder and Wa gold project joint venture partner Ibaera Capital bypassed the company’s board and took an unsolicited takeover bid straight to shareholders.

Ibaera has offered Azumah’s shareholders $0.028 for the remaining equity in the company, which was a 100% premium to Azumah’s closing price of $0.014 on 17 September.

Azumah’s board supplied an official response on late Wednesday advising shareholders to “take no action”, claiming Ibaera’s offer was “highly opportunistic” given the strength of the gold price and feasibility study nearing completion at Wa.

The company followed up with a statement on Friday to say that Ibaera had previously paid $0.037 per share to acquire its stake in Azumah, well above the current offer.

At the time of the offer, Ibaera held a 9.21% stake in Azumah. However, the company quickly etched this up to reach 17.66% by scooping up a further 978 million Azumah shares.

Meteoric Resources (ASX: MEI)

Brazilian explorer Meteoric Resources uncovered a 20.6m intersection grading 94.9g/t gold from its flagship Juruena project in the country’s Alta Vista Belt.

The high-grade intersection comprised a 3.65m interval grading 508.4g/t gold, with Meteoric managing director Dr Andrew Tunks claiming the result was the best he’s been involved in his entire career.

Dr Tunks said although he anticipated “something special” from the first holes at Juruena, today’s results had “exceeded” even his expectations.

Previous exploration at Juruena has firmed up global resources of 1.3Mt at 6.3g/t gold for 261,000oz and Meteoric currently has assays pending from a further six holes at the project.

Winchester Energy (ASX: WEL)

Winchester Energy’s Arledge 16#2 well in Texas has doubled its flow rate since the company’s last update.

The well is part of the company’s Lightning oil prospect and was recently put on a small quarter-inch choke after fracture stimulation and swabbing and flowed 103 barrels of oil in 20 hours – equating to 125bbl of oil per day.

Earlier this week, now on a half-inch choke, Winchester said the well was flowing oil to surface at 250bopd.

As a result, Winchester is mobilising production facilities to Arledge 16#2 with oil produced to-date stored in frack tanks for imminent sale.

The week ahead

While there are not many statistical highlights in the coming week, there are two really important things to watch out for on the local scene.

One is RBA Governor Dr Philip Lowe’s speech on Tuesday which could help to firm up the chances of an October rate cut and the other is the fate of a massive payout of about $12 billion of dividends to shareholders.

If investors are feeling expansive, then a considerable percentage of those dividends from big companies including BHP, Telstra, Qantas, Commonwealth Bank and Coles will end up being ploughed back into buying more shares – which should be a market boost, all other things being equal.

If investors are feeling hesitant about the outlook, they are much more likely to repay debt or save the cash.

The other central bank announcement to watch for is New Zealand, which is due on Wednesday.

Other announcements to keep across include figures for US economic growth, inflation, trade and housing data, as well as local releases on job vacancies, infrastructure spending and wealth.

This week’s top stocks

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.