AdviserVoiceglobal bonds Archives - AdviserVoice https://www.adviservoice.com.au/tag/global-bonds/ Financial planner information & financial planner education/CPD - AdviserVoice Wed, 22 Jul 2026 20:20:18 +0000 en-US hourly 1 https://wordpress.org/?v=7.0.2 Are bonds in a bubble? https://www.adviservoice.com.au/2012/02/are-bonds-in-a-bubble/ https://www.adviservoice.com.au/2012/02/are-bonds-in-a-bubble/#respond Sun, 05 Feb 2012 21:59:42 +0000 https://adviservoice.com.au/?p=13062 Outside of the troubled countries in Europe, government bond yields in developed countries have fallen to generational and in some cases record lows. Reflecting the capital gains that are generated when bond yields fall, returns from bonds have been very strong.

Over the last year global bonds returned 11.1% and Australian bonds returned 11.4%. Over the last two years they have returned 10% per annum and 8.7% pa respectively. With such strong returns it is worth asking whether they are in a bubble. Our answer is no, but they could certainly be considered poor value and there are much better return opportunities elsewhere.

Generational lows
Despite seeing their sovereign rating downgraded from AAA last year, US 10 year bond yields have fallen to their lowest level on record (based on data dating back to the 1850s). 
 


Australian bond yields are at their lowest level since 1951. 


 
Bond yields in the UK, Japan and Germany are also running around generational lows, if not record lows.

What has driven bond yields so low?
The sharp decline in bond yields from the early 1980s can be largely explained by the shift from a high inflation to a low inflation world. The more recent fall to extreme lows reflects a combination of factors, flowing from the Global Financial Crisis and its aftermath.

  • First, sub-par economic growth and benign inflation have further lowered equilibrium levels for bond yields.
  • Second, and related to this, market expectations for short term interest rates have been continuously revised down over the last few years. Several central banks have been cutting interest rates again since late last year (eg, the ECB, the RBA and central banks in emerging countries) while the US Federal Reserve, the Bank of England and the Bank of Japan have left interest rates near zero. Furthermore the Fed has indicated that rates are likely to stay near zero at least out to late 2014, after previously indicating out to mid 2013. The historical experience tells us that the longer short term rates stay low, the more likely it is that long term bond yields will converge on them as expectations of future short term rates are revised down. This is exactly what has happened in Japan over the last two decades, particularly during the 1996-98 period. The US, UK and Germany appear to be going through something similar

  • Third, the US Federal Reserve and the Bank of England have been actively buying government bonds as part of their quantitative easing programs, which are designed to keep private sector borrowing rates as low as possible and encourage banks to lend. This, and the expectation of more to come following recent comments from the US Federal Reserve, has had the effect of keeping bond yields lower than might otherwise have been the case.
  • Fourth, the US Federal Reserve introduced “Operation Twist” which involved selling short term bonds and buying long term bonds in September last year in order to further keep down long term bond yields and hence private sector borrowing costs.
  • Finally, safe haven demand for bonds from investors has been boosted in response to the worries last year about another global economic downturn, partly resulting from the intensification of the debt crisis in peripheral European countries. In this regard it’s worth noting that sovereign bonds in perceived core countries have been the best safe haven through recent bouts of share market turmoil. As such they have been in strong demand as a diversifier.

What about Australian bond yields?
Australian long term bond yields are a function of the level of bond yields globally and particularly in the US, expectations regarding short term interest rates as set by the RBA and perceptions regarding the riskiness of Australian government bonds. All of these have been pointing lower recently.

  • Global and US bond yields have been falling for the reasons noted above.
  • The Reserve Bank started to cut interest rates late last year and is expected to cut further.
  • Australia is one of a diminishing group of 11 countries to still have a safe AAA sovereign credit rating. This has resulted in safe haven demand for Australian bonds, subsequently benefiting the Australian dollar.

Not a bubble, but not good value
Given the sound fundamental reasons for bond yields being so low it’s hard to agree they are in a bubble. Similarly, it’s unlikely we will see a big change in many of the fundamental factors that have pushed bond yields down any time soon. The global economic recovery is likely to remain anaemic and fragile for a while yet, global inflation is likely to fall further on the back of high levels of spare capacity, short term interest rates are expected to either remain low or fall further depending on the country, and further quantitative easing is likely in the US, UK and probably Europe. In Australia, the RBA has further easing ahead of it and safe haven demand for Australian bonds may have further to go as more countries are at risk of losing their AAA rating. Given this, it’s hard to get particularly bearish on bonds.

Against this though, bond yields at generational or record lows are poor value. (In the same way shares would be, for example, if dividend yields and earnings yields were at record lows.) Over the long term there is a rough relationship between bond yields and long term nominal economic growth (inflation plus real economic growth). The following table looks at current ten year bond yields relative to our assessment of their long term value based on each countries’ potential long term nominal GDP growth. On this basis, bond yields are well below long term sustainable levels.

Furthermore when bond yields are low, strong returns can only be had if yields fall further. This is what happened last year in Australia, for example, where the 10 year bond yield fell from 5.6% at the start of the year to 3.7% at the end, resulting in roughly 8% of capital growth for investors who held such bonds. Now with Australian bond yields much lower and sub 2% elsewhere, it’s now very hard to see this being repeated, unless there is a complete meltdown in Europe resulting in a return to global recession.

If bond yields track sideways, returns will be no more than current yields, eg, 1.8% in the case of US 10 year bonds and 3.7% in the case of Australian 10 year bonds. Alternatively, if bond yields back up by say just 1%, which will still leave them well below long term fair value measures, investors will suffer roughly a 4% capital loss taking returns negative.

What does this all mean for investors?
Global central banks want to keep bond yields low until a sustainable recovery is clearly underway. This might take some time so it would be premature to bet on a bear market in bonds. Similarly, sovereign bonds are a good diversifier in times of worries about the growth outlook so a core exposure should still be retained given that event risk still remains high regarding the European debt crisis.

However, against this, now is not the time to be boosting core country sovereign bond exposures. They have already rallied hard and the scope for further falls in yields, which would be necessary to provide decent capital growth and hence returns, is limited. By contrast, better medium term return opportunities exist elsewhere for investors:

  • Investment grade corporate bonds in Australia are yielding around 6.5% on average.
  • Australian listed real estate trusts are yielding around 6.2%.
  • Australian shares are yielding 6.3% once franking credits are added in.

With the global growth outlook improving and tail risks associated with a blow up in Europe receding somewhat, the prospects for these assets has improved compared to sovereign bonds in core countries which now have very low yields and hence more constrained return prospects.
Within fixed interest, Australian bonds with their higher yields probably make them better value than global bonds.

So overall, while there is still a strong case to include sovereign bonds in a multi asset portfolio as a diversifier, it makes sense to lighten exposures in favour of assets providing better yields and return prospects.

]]> Outside of the troubled countries in Europe, government bond yields in developed countries have fallen to generational and in some cases record lows. Reflecting the capital gains that are generated when bond yields fall, returns from bonds have been very strong.

Over the last year global bonds returned 11.1% and Australian bonds returned 11.4%. Over the last two years they have returned 10% per annum and 8.7% pa respectively. With such strong returns it is worth asking whether they are in a bubble. Our answer is no, but they could certainly be considered poor value and there are much better return opportunities elsewhere.

Generational lows
Despite seeing their sovereign rating downgraded from AAA last year, US 10 year bond yields have fallen to their lowest level on record (based on data dating back to the 1850s). 
 


Australian bond yields are at their lowest level since 1951. 


 
Bond yields in the UK, Japan and Germany are also running around generational lows, if not record lows.

What has driven bond yields so low?
The sharp decline in bond yields from the early 1980s can be largely explained by the shift from a high inflation to a low inflation world. The more recent fall to extreme lows reflects a combination of factors, flowing from the Global Financial Crisis and its aftermath.

  • First, sub-par economic growth and benign inflation have further lowered equilibrium levels for bond yields.
  • Second, and related to this, market expectations for short term interest rates have been continuously revised down over the last few years. Several central banks have been cutting interest rates again since late last year (eg, the ECB, the RBA and central banks in emerging countries) while the US Federal Reserve, the Bank of England and the Bank of Japan have left interest rates near zero. Furthermore the Fed has indicated that rates are likely to stay near zero at least out to late 2014, after previously indicating out to mid 2013. The historical experience tells us that the longer short term rates stay low, the more likely it is that long term bond yields will converge on them as expectations of future short term rates are revised down. This is exactly what has happened in Japan over the last two decades, particularly during the 1996-98 period. The US, UK and Germany appear to be going through something similar

  • Third, the US Federal Reserve and the Bank of England have been actively buying government bonds as part of their quantitative easing programs, which are designed to keep private sector borrowing rates as low as possible and encourage banks to lend. This, and the expectation of more to come following recent comments from the US Federal Reserve, has had the effect of keeping bond yields lower than might otherwise have been the case.
  • Fourth, the US Federal Reserve introduced “Operation Twist” which involved selling short term bonds and buying long term bonds in September last year in order to further keep down long term bond yields and hence private sector borrowing costs.
  • Finally, safe haven demand for bonds from investors has been boosted in response to the worries last year about another global economic downturn, partly resulting from the intensification of the debt crisis in peripheral European countries. In this regard it’s worth noting that sovereign bonds in perceived core countries have been the best safe haven through recent bouts of share market turmoil. As such they have been in strong demand as a diversifier.

What about Australian bond yields?
Australian long term bond yields are a function of the level of bond yields globally and particularly in the US, expectations regarding short term interest rates as set by the RBA and perceptions regarding the riskiness of Australian government bonds. All of these have been pointing lower recently.

  • Global and US bond yields have been falling for the reasons noted above.
  • The Reserve Bank started to cut interest rates late last year and is expected to cut further.
  • Australia is one of a diminishing group of 11 countries to still have a safe AAA sovereign credit rating. This has resulted in safe haven demand for Australian bonds, subsequently benefiting the Australian dollar.

Not a bubble, but not good value
Given the sound fundamental reasons for bond yields being so low it’s hard to agree they are in a bubble. Similarly, it’s unlikely we will see a big change in many of the fundamental factors that have pushed bond yields down any time soon. The global economic recovery is likely to remain anaemic and fragile for a while yet, global inflation is likely to fall further on the back of high levels of spare capacity, short term interest rates are expected to either remain low or fall further depending on the country, and further quantitative easing is likely in the US, UK and probably Europe. In Australia, the RBA has further easing ahead of it and safe haven demand for Australian bonds may have further to go as more countries are at risk of losing their AAA rating. Given this, it’s hard to get particularly bearish on bonds.

Against this though, bond yields at generational or record lows are poor value. (In the same way shares would be, for example, if dividend yields and earnings yields were at record lows.) Over the long term there is a rough relationship between bond yields and long term nominal economic growth (inflation plus real economic growth). The following table looks at current ten year bond yields relative to our assessment of their long term value based on each countries’ potential long term nominal GDP growth. On this basis, bond yields are well below long term sustainable levels.

Furthermore when bond yields are low, strong returns can only be had if yields fall further. This is what happened last year in Australia, for example, where the 10 year bond yield fell from 5.6% at the start of the year to 3.7% at the end, resulting in roughly 8% of capital growth for investors who held such bonds. Now with Australian bond yields much lower and sub 2% elsewhere, it’s now very hard to see this being repeated, unless there is a complete meltdown in Europe resulting in a return to global recession.

If bond yields track sideways, returns will be no more than current yields, eg, 1.8% in the case of US 10 year bonds and 3.7% in the case of Australian 10 year bonds. Alternatively, if bond yields back up by say just 1%, which will still leave them well below long term fair value measures, investors will suffer roughly a 4% capital loss taking returns negative.

What does this all mean for investors?
Global central banks want to keep bond yields low until a sustainable recovery is clearly underway. This might take some time so it would be premature to bet on a bear market in bonds. Similarly, sovereign bonds are a good diversifier in times of worries about the growth outlook so a core exposure should still be retained given that event risk still remains high regarding the European debt crisis.

However, against this, now is not the time to be boosting core country sovereign bond exposures. They have already rallied hard and the scope for further falls in yields, which would be necessary to provide decent capital growth and hence returns, is limited. By contrast, better medium term return opportunities exist elsewhere for investors:

  • Investment grade corporate bonds in Australia are yielding around 6.5% on average.
  • Australian listed real estate trusts are yielding around 6.2%.
  • Australian shares are yielding 6.3% once franking credits are added in.

With the global growth outlook improving and tail risks associated with a blow up in Europe receding somewhat, the prospects for these assets has improved compared to sovereign bonds in core countries which now have very low yields and hence more constrained return prospects.
Within fixed interest, Australian bonds with their higher yields probably make them better value than global bonds.

So overall, while there is still a strong case to include sovereign bonds in a multi asset portfolio as a diversifier, it makes sense to lighten exposures in favour of assets providing better yields and return prospects.

The post Are bonds in a bubble? appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2012/02/are-bonds-in-a-bubble/feed/ 0 Credit shines and bond yields to head upwards, says INGIM https://www.adviservoice.com.au/2011/03/credit-shines-and-bond-yields-to-head-upwards-says-ingim/ https://www.adviservoice.com.au/2011/03/credit-shines-and-bond-yields-to-head-upwards-says-ingim/#respond Wed, 16 Mar 2011 07:23:51 +0000 https://adviservoice.com.au/?p=6549 Credit is expected to shine over the coming quarter while Australian bonds will continue to outperform their global counterparts, according to the latest fixed income outlook from ING Investment Management (INGIM).

Greg Michel, head of fixed income at INGIM said the global appetite for Australian bonds is likely to continue with investors drawn to current yields of 5% to 6%, outstripping available yields available from global alternatives.

“The Australian economy has proven to be resilient to the effects of the GFC and continues to expand at a robust pace. The bond market has been in a bear market phase since early 2009 and bond yields are now close to long term average levels,” he said.

Global bonds are a different story, and INGIM expects flat to negative returns in 2011.

While the major European economies are expanding strongly, aided largely by a weak currency and accommodative monetary policy, the peripheral Euro markets continue to be held down by the large levels of sovereign debt and associated funding challenges.

“On balance we believe the combination of improving economic growth and high sovereign debt levels will result in Euro bond yields continuing to head higher in 2011,” said Mr Michel.

Credit best performing sub-sector

Turning to fixed income sub-sectors, INGIM said credit is expected to be the best performing assuming the default cycle pans out as expected.  While underlying interest rates will rise, continued credit spread contraction should see credit perform in a relative sense.

“The rally we have seen in credit markets over the past two years has been strong, supported by improving fundamentals and monetary and fiscal stimulus in the economy.  That being said, there is a sense the rally has overshot the fair value mark and there are few catalysts to drive spreads tighter,” INGIM’s head of credit research, Scott Rundell said.

For issuers, Mr Rundell said offshore markets continue to be more competitive than the Australian bond market with some suggesting several large players are demanding unpalatable spread levels.

“It’s relatively easy for investment grade credit to issue long dated loans or bonds into the US market.  New issuance is likely to be low and we expect few first time local issuers in Australia,” he said.

Global government bond yields on rise

Looking to Australian government bonds, INGIM is expecting limited further tightening in monetary policy in 2011 and now expects government bond yields will remain at or near current levels for the rest of the calendar year. Demand for local government bonds will continue to be dominated by offshore investors.

Despite recent geo-political tensions in the Middle East and North Africa, global government bond yields are expected to continue to rise over the medium term.  US government bonds yields are also expected to continue their upward rise as the market prices in the recovery.

“We’re now seeing ongoing evidence of a broad based economic recovery in the US and government bond yields are set to continue to rise through 2011 as the global economic recovery gathers pace,” said Mr Michel.

World issues cause headwinds

Meanwhile European sovereign debt challenges will continue to cause headwinds for fixed income. In particular, forced losses (or ‘haircuts’) on Irish senior bank debt could create contagion risk to other EU banks, causing the cost of bank funding to spike.

“We also advise monitoring changing bank regulatory regimes and structures as they will impact capital flows and the cost of credit in general,” Mr Rundell said.

Other world factors to watch include Chinese growth and demand for raw materials and the impact of recent events in the Middle-East and North Africa on oil prices.

“The management of many global companies may look to appease shareholders who have experienced negligible growth with capital initiatives aimed at increasing their returns. This could also be a negative credit event,” Mr Rundell said.

]]> Credit is expected to shine over the coming quarter while Australian bonds will continue to outperform their global counterparts, according to the latest fixed income outlook from ING Investment Management (INGIM).

Greg Michel, head of fixed income at INGIM said the global appetite for Australian bonds is likely to continue with investors drawn to current yields of 5% to 6%, outstripping available yields available from global alternatives.

“The Australian economy has proven to be resilient to the effects of the GFC and continues to expand at a robust pace. The bond market has been in a bear market phase since early 2009 and bond yields are now close to long term average levels,” he said.

Global bonds are a different story, and INGIM expects flat to negative returns in 2011.

While the major European economies are expanding strongly, aided largely by a weak currency and accommodative monetary policy, the peripheral Euro markets continue to be held down by the large levels of sovereign debt and associated funding challenges.

“On balance we believe the combination of improving economic growth and high sovereign debt levels will result in Euro bond yields continuing to head higher in 2011,” said Mr Michel.

Credit best performing sub-sector

Turning to fixed income sub-sectors, INGIM said credit is expected to be the best performing assuming the default cycle pans out as expected.  While underlying interest rates will rise, continued credit spread contraction should see credit perform in a relative sense.

“The rally we have seen in credit markets over the past two years has been strong, supported by improving fundamentals and monetary and fiscal stimulus in the economy.  That being said, there is a sense the rally has overshot the fair value mark and there are few catalysts to drive spreads tighter,” INGIM’s head of credit research, Scott Rundell said.

For issuers, Mr Rundell said offshore markets continue to be more competitive than the Australian bond market with some suggesting several large players are demanding unpalatable spread levels.

“It’s relatively easy for investment grade credit to issue long dated loans or bonds into the US market.  New issuance is likely to be low and we expect few first time local issuers in Australia,” he said.

Global government bond yields on rise

Looking to Australian government bonds, INGIM is expecting limited further tightening in monetary policy in 2011 and now expects government bond yields will remain at or near current levels for the rest of the calendar year. Demand for local government bonds will continue to be dominated by offshore investors.

Despite recent geo-political tensions in the Middle East and North Africa, global government bond yields are expected to continue to rise over the medium term.  US government bonds yields are also expected to continue their upward rise as the market prices in the recovery.

“We’re now seeing ongoing evidence of a broad based economic recovery in the US and government bond yields are set to continue to rise through 2011 as the global economic recovery gathers pace,” said Mr Michel.

World issues cause headwinds

Meanwhile European sovereign debt challenges will continue to cause headwinds for fixed income. In particular, forced losses (or ‘haircuts’) on Irish senior bank debt could create contagion risk to other EU banks, causing the cost of bank funding to spike.

“We also advise monitoring changing bank regulatory regimes and structures as they will impact capital flows and the cost of credit in general,” Mr Rundell said.

Other world factors to watch include Chinese growth and demand for raw materials and the impact of recent events in the Middle-East and North Africa on oil prices.

“The management of many global companies may look to appease shareholders who have experienced negligible growth with capital initiatives aimed at increasing their returns. This could also be a negative credit event,” Mr Rundell said.

The post Credit shines and bond yields to head upwards, says INGIM appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2011/03/credit-shines-and-bond-yields-to-head-upwards-says-ingim/feed/ 0 Aviva Investors Market Monitor – 09 February 2011 https://www.adviservoice.com.au/2011/02/aviva-investors-market-monitor-09-february-2011/ https://www.adviservoice.com.au/2011/02/aviva-investors-market-monitor-09-february-2011/#respond Wed, 09 Feb 2011 02:02:20 +0000 https://adviservoice.com.au/?p=5663 Reporting season – week 2

With the earnings season now in progress, the past week was full of important corporate announcements that have impacted share performance. This week we discuss the News Corporation earnings report, significant profit downgrades from Myer and AGL Energy, a favourable result from JB Hi-Fi, a new CEO for Asciano and a strong rally for QBE Insurance following news that it will acquire the renewal rights to US insurer Balboa.

News Corporation’s Q2 earnings report was close to expectations and management confirmed that the company is on track to deliver on its full year earnings guidance. In terms of operational highlights, the television segment performed very strongly, underpinned by advertising growth in excess of 20%. Cable network negotiations are also driving strong revenue growth. The weakest segments were publishing and films but this was widely expected.

Myer provided the market with a trading update which revealed a 3.5% fall in sales in the six months ending 29 January 2011. Like-for-like sales declined 5.2% in the same period. This was much weaker than expected and will negatively impact net profit for FY11. Comments from management suggest a competitive retail environment (including consumers purchasing from offshore due to the strong $A), coupled with weaker consumer demand, particularly following the January flooding, were the main reasons for the sales decline. In November 2010, Myer’s guidance suggested growth in net profit after tax (NPAT) in
FY11 of between 5% and 10%. This has now been revised down significantly with Myer forecasting a fall in NPAT of up to 5%.

In stark contrast to Myer, JB Hi-Fi announced a record half year net profit of $87.9 for the six months to end December 2010. Sales rose 8.3% over the period and the company will pay a fully franked interim dividend of 48.0 cents per share. Thirteen new stores were opened in Australia and New Zealand over the period and there are plans to open another 5 in the second half. JB Hi-Fi seems to be addressing the challenge of on-line retailing which is affecting many traditional retail businesses like Myer. The company’s online sales rose 35% over the half year and were up 49% in December. Although sales guidance was
downgraded slightly, the overall result was favourable and defies the weaker trend being experienced by many companies in the retail sector.

AGL Energy announced that recent severe weather events, including the Queensland floods, extreme heat in New South Wales, Victoria and South Australia, and Cyclone Yasi, are expected to reduce forecast underlying NPAT in FY11 by between $30 and $35 million. AGL’s previous forecast for NPAT in FY11 was between $450 million and $480 million. This range has now been revised down to between $415 million and $440 million.

Asciano announced the appointment of John Mullen to succeed Peter Rowsthorn as the company’s new managing director and chief executive officer. Mr Mullen has extensive experience in transport and logistics as he was previously the CEO of DHL Express. He will formally commence as Asciano’s CEO on 14 February 2011.

QBE Insurance performed very strongly on Friday (+7%) following the announcement that it had acquired the renewal rights to US insurer Balboa for a consideration of $700 million. Balboa is currently owned by Bank of America and this attractively structured deal is part of an initial 10-year distribution agreement. Both the purchase price and deal structure are extremely attractive for QBE. Balboa is a very profitable business and it makes good commercial sense for QBE to purchase this US asset at a time when the Australian dollar is trading close to parity with the US dollar. QBE also announced a forecast NPAT for calendar year 2010 that was in line with analysts’ expectations.

Global markets

Major equity markets rallied convincingly as purchasing managers’ surveys from the US, Europe and Asia pointed to accelerating manufacturing and services output. The S&P 500 advanced two per cent to just over 13,000, and the FTSE 100 almost two per cent, closing three points below 6,000. The Nikkei 225 moved up 1.8%, despite corporate releases suggesting Japanese exporters remain hampered by the strength of the yen.

While the equity bull-market that began at the end of August 2010 shows little sign of abating, investors continue to shun ‘core’ bonds forcing yields up, and US ten-year yields hit a nine-month high last week. In the UK, where rising domestic prices are of particular concern, government bond yields rose for a fifth consecutive week, and sterling spiked as high as $1.62, in anticipation of bank base-rate rises in 2011.

The price of copper crossed $10,000 a tonne (or 434 cents a pound), while oil spiked to $103 a barrel midweek on uncertainty over developments in Egypt and the Middle East more generally, before closing a shade below the $100 mark.

Global equities

In a busy week for energy majors, ExxonMobil, the world’s largest company by market capitalisation, registered a near record 53% increase in Q4 net revenue, buoyed by rising oil prices. In the UK, BP announced a full-year loss of $4.9bn – it’s first in nearly twenty years, as the energy giant digested a $41bn charge relating to last year’s Gulf of Mexico disaster – and also the return of dividend payments, which have been suspended for three consecutive quarters. Anglo-Dutch rival Shell shed 3.3% despite reporting a near doubling of 2010 profits to $18.6bn. Elsewhere, GlaxoSmithKline rallied 3.5%, notwithstanding a slump in full-year profits from £8.7bn to £4.5bn, as the UK-based pharma giant announced a £2bn share buy-back programme. US corporate earnings for the final quarter of 2010 have generally surpassed forecasts – and companies as varied as Time Warner, UPS, Dow Chemical, Kellogg and fashion retailer Gap all saw their shares boosted as their revenues exceeded expectations
Over in Asia, Nippon Steel and Sumitomo Metal, two of Japan’s largest steelmakers, unveiled a $24.5bn merger aimed at cutting costs and matching the competitiveness of fast-growing emerging market rivals – while Baidu, China’s largest internetsearch, beat forecasts with a doubling of Q4 net revenue.

Sweden’s government is to sell its 6.3% in Nordea, the Nordic region’s largest bank, in a deal that would raise around $3bn – while LVMH, the world’s largest luxury goods company, reported 2010 sales up 19% to €20.3bn, boosted by rapid growth in Asian markets, and China in particular.

Global bonds

Ben Bernanke on Thursday restated the Federal Reserve’s commitment to a second round of asset purchases, or quantitative easing, which generally supports bond prices. Nonetheless, prices of US government bonds, or Treasuries, slid sharply as the Fed Chairman also voiced concern about the scale of the US budget deficit – which is forecast to hit a mammoth $1,480bn this year, or 10% of GDP. As a result, ten-year yields advanced a chunky 32 basis points to 3.65%.

UK ten-year yields marched up 17 basis points to 3.82% as investors continue to fret about the medium-term outlook for inflation, which could rise to four per cent during 2011. German ten-year yields also increased, although by a less marked 11 basis points to 3.26%, as the European Central Bank considers its response to Eurozone inflation now running at an annualised 2.4% – well above its target of ‘below but close’ to two per cent.

In a relatively quiet week for peripheral bonds, Spain issued €3.5bn of three- and five-year securities in a poorly subscribed auction, raising less than its €4bn target. Nonetheless, benchmark Spanish ten-year yields dropped from 5.51% to 5.16% as Madrid continues to insist the country is not in the same category as other highly indebted Eurozone nations such as Ireland and Portugal.

The above information is of a general nature and has been prepared without taking account of your individual investment objectives, financial situation or particular investment needs. It is not intended as financial advice to retail clients. Before making an investment decision, you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. We recommend you consult with your financial adviser, who can help you determine how best to achieve your financial goals and whether investing in a fund is appropriate for you. Aviva Investors Australia Limited ABN 85 066 081 114. AFS Licence No. 234483. Level 28 Freshwater Place, 2 Southbank Boulevard, Southbank 3006 GPO Box 2007, Melbourne VIC 3001 Telephone: (03) 9220 0300 Facsimile: (03) 9220 0333 Email: investorservices.au@avivainvestors.com Website: www.avivainvestors.com.au Part of the international Aviva plc group.
]]> Reporting season – week 2

With the earnings season now in progress, the past week was full of important corporate announcements that have impacted share performance. This week we discuss the News Corporation earnings report, significant profit downgrades from Myer and AGL Energy, a favourable result from JB Hi-Fi, a new CEO for Asciano and a strong rally for QBE Insurance following news that it will acquire the renewal rights to US insurer Balboa.

News Corporation’s Q2 earnings report was close to expectations and management confirmed that the company is on track to deliver on its full year earnings guidance. In terms of operational highlights, the television segment performed very strongly, underpinned by advertising growth in excess of 20%. Cable network negotiations are also driving strong revenue growth. The weakest segments were publishing and films but this was widely expected.

Myer provided the market with a trading update which revealed a 3.5% fall in sales in the six months ending 29 January 2011. Like-for-like sales declined 5.2% in the same period. This was much weaker than expected and will negatively impact net profit for FY11. Comments from management suggest a competitive retail environment (including consumers purchasing from offshore due to the strong $A), coupled with weaker consumer demand, particularly following the January flooding, were the main reasons for the sales decline. In November 2010, Myer’s guidance suggested growth in net profit after tax (NPAT) in
FY11 of between 5% and 10%. This has now been revised down significantly with Myer forecasting a fall in NPAT of up to 5%.

In stark contrast to Myer, JB Hi-Fi announced a record half year net profit of $87.9 for the six months to end December 2010. Sales rose 8.3% over the period and the company will pay a fully franked interim dividend of 48.0 cents per share. Thirteen new stores were opened in Australia and New Zealand over the period and there are plans to open another 5 in the second half. JB Hi-Fi seems to be addressing the challenge of on-line retailing which is affecting many traditional retail businesses like Myer. The company’s online sales rose 35% over the half year and were up 49% in December. Although sales guidance was
downgraded slightly, the overall result was favourable and defies the weaker trend being experienced by many companies in the retail sector.

AGL Energy announced that recent severe weather events, including the Queensland floods, extreme heat in New South Wales, Victoria and South Australia, and Cyclone Yasi, are expected to reduce forecast underlying NPAT in FY11 by between $30 and $35 million. AGL’s previous forecast for NPAT in FY11 was between $450 million and $480 million. This range has now been revised down to between $415 million and $440 million.

Asciano announced the appointment of John Mullen to succeed Peter Rowsthorn as the company’s new managing director and chief executive officer. Mr Mullen has extensive experience in transport and logistics as he was previously the CEO of DHL Express. He will formally commence as Asciano’s CEO on 14 February 2011.

QBE Insurance performed very strongly on Friday (+7%) following the announcement that it had acquired the renewal rights to US insurer Balboa for a consideration of $700 million. Balboa is currently owned by Bank of America and this attractively structured deal is part of an initial 10-year distribution agreement. Both the purchase price and deal structure are extremely attractive for QBE. Balboa is a very profitable business and it makes good commercial sense for QBE to purchase this US asset at a time when the Australian dollar is trading close to parity with the US dollar. QBE also announced a forecast NPAT for calendar year 2010 that was in line with analysts’ expectations.

Global markets

Major equity markets rallied convincingly as purchasing managers’ surveys from the US, Europe and Asia pointed to accelerating manufacturing and services output. The S&P 500 advanced two per cent to just over 13,000, and the FTSE 100 almost two per cent, closing three points below 6,000. The Nikkei 225 moved up 1.8%, despite corporate releases suggesting Japanese exporters remain hampered by the strength of the yen.

While the equity bull-market that began at the end of August 2010 shows little sign of abating, investors continue to shun ‘core’ bonds forcing yields up, and US ten-year yields hit a nine-month high last week. In the UK, where rising domestic prices are of particular concern, government bond yields rose for a fifth consecutive week, and sterling spiked as high as $1.62, in anticipation of bank base-rate rises in 2011.

The price of copper crossed $10,000 a tonne (or 434 cents a pound), while oil spiked to $103 a barrel midweek on uncertainty over developments in Egypt and the Middle East more generally, before closing a shade below the $100 mark.

Global equities

In a busy week for energy majors, ExxonMobil, the world’s largest company by market capitalisation, registered a near record 53% increase in Q4 net revenue, buoyed by rising oil prices. In the UK, BP announced a full-year loss of $4.9bn – it’s first in nearly twenty years, as the energy giant digested a $41bn charge relating to last year’s Gulf of Mexico disaster – and also the return of dividend payments, which have been suspended for three consecutive quarters. Anglo-Dutch rival Shell shed 3.3% despite reporting a near doubling of 2010 profits to $18.6bn. Elsewhere, GlaxoSmithKline rallied 3.5%, notwithstanding a slump in full-year profits from £8.7bn to £4.5bn, as the UK-based pharma giant announced a £2bn share buy-back programme. US corporate earnings for the final quarter of 2010 have generally surpassed forecasts – and companies as varied as Time Warner, UPS, Dow Chemical, Kellogg and fashion retailer Gap all saw their shares boosted as their revenues exceeded expectations
Over in Asia, Nippon Steel and Sumitomo Metal, two of Japan’s largest steelmakers, unveiled a $24.5bn merger aimed at cutting costs and matching the competitiveness of fast-growing emerging market rivals – while Baidu, China’s largest internetsearch, beat forecasts with a doubling of Q4 net revenue.

Sweden’s government is to sell its 6.3% in Nordea, the Nordic region’s largest bank, in a deal that would raise around $3bn – while LVMH, the world’s largest luxury goods company, reported 2010 sales up 19% to €20.3bn, boosted by rapid growth in Asian markets, and China in particular.

Global bonds

Ben Bernanke on Thursday restated the Federal Reserve’s commitment to a second round of asset purchases, or quantitative easing, which generally supports bond prices. Nonetheless, prices of US government bonds, or Treasuries, slid sharply as the Fed Chairman also voiced concern about the scale of the US budget deficit – which is forecast to hit a mammoth $1,480bn this year, or 10% of GDP. As a result, ten-year yields advanced a chunky 32 basis points to 3.65%.

UK ten-year yields marched up 17 basis points to 3.82% as investors continue to fret about the medium-term outlook for inflation, which could rise to four per cent during 2011. German ten-year yields also increased, although by a less marked 11 basis points to 3.26%, as the European Central Bank considers its response to Eurozone inflation now running at an annualised 2.4% – well above its target of ‘below but close’ to two per cent.

In a relatively quiet week for peripheral bonds, Spain issued €3.5bn of three- and five-year securities in a poorly subscribed auction, raising less than its €4bn target. Nonetheless, benchmark Spanish ten-year yields dropped from 5.51% to 5.16% as Madrid continues to insist the country is not in the same category as other highly indebted Eurozone nations such as Ireland and Portugal.

The above information is of a general nature and has been prepared without taking account of your individual investment objectives, financial situation or particular investment needs. It is not intended as financial advice to retail clients. Before making an investment decision, you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. We recommend you consult with your financial adviser, who can help you determine how best to achieve your financial goals and whether investing in a fund is appropriate for you. Aviva Investors Australia Limited ABN 85 066 081 114. AFS Licence No. 234483. Level 28 Freshwater Place, 2 Southbank Boulevard, Southbank 3006 GPO Box 2007, Melbourne VIC 3001 Telephone: (03) 9220 0300 Facsimile: (03) 9220 0333 Email: investorservices.au@avivainvestors.com Website: www.avivainvestors.com.au Part of the international Aviva plc group.

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