Archived Monthly Report

PERFORMANCE

For the month of June the Aspiring Fund returned -4.5% after fees and tax while the NZX 50 Gross index fell -11.9% and the Australian market -4.8% in New Zealand dollar terms over the same period.


For the June quarter the Aspiring Fund was up 3% after fees and tax which compares favourably with the NZX 50 Gross index which was down -7.9% for the quarter.


For New Zealand June was the worst month the sharemarket has had since August 1998 and moved us firmly in to official bear market status with a fall of 24.6% for the preceding year. The savage downdraft in share prices was a global phenomena (the MSCI world index was down -8.1) but, so far, New Zealand has been hit harder than most due to illiquidity, currency risk and the sharply contracting economy.


Portfolio performance in June was again assisted by our cautious stance reflected in a consistently high level of cash, but the tide went out and it took most of our boats with it. Only four stocks in the NZX50 posted positive returns for the month- fortunately we owned the best of them, NZ Oil and Gas, through a holding of options which we converted to ordinary shares at the end of the month.


While the June month numbers were not wonderful, we were pleased to achieve a positive 3% for the June quarter against a backdrop of the 7.9% decline in the local market. Our decision to shift cash offshore in anticipation of a fall in the New Zealand dollar was a useful contributor to this result, as was our focus on holding well managed companies with an international business orientation. While we have not been very successful in getting the “obvious” resources calls like BHP and RIO right this has been more than compensated by avoiding the landmines which a lot of portfolios hold as core stocks like the Australian banks, Telecom and Fletcher Building.


Any company with a perceived exposure to the cyclical downturn now engulfing us was marked down savagely in June. For example, our Michael Hill, Mainfreight, and Methven holdings lost ground as they were caught in the broad hammering of all shares with any perceived cyclical bent. We were particularly bemused by the selling in Michael Hill immediately after the Briscoes and Warehouse downgrades as over 70% of its business is offshore and their exposure to the resource rich areas of Queensland, Western Australia and Canada is unlikely to be affected by the New Zealand economy.


Interestingly, none of these companies have reported the downgrades seen from other economically sensitive shares and all have seemed relatively upbeat in their most recent market communications.


In Australia, small caps took another beating in June, caused in part by tax loss selling, and this affected the performance of some of our holdings. Generally, the Australian sharemarket is being assisted by the performance of their large energy and resource companies, and their industrial stocks are in many sectors performing worse than their New Zealand peers. The Australian industrial sector is now down 38% from its highs.

COMMENTARY

Sharemarkets were weak in June on the back of ever increasing oil and food prices and a further heightening of concerns within the global banking sector.


Oil rose 10% during the month to $US140 a barrel and corn (where US crops were hit by floods) rose 20%.


As well as squeezing the consumer, such movements have increased worries over global inflation, and the oil price, in particular, will hit company costs and squeeze margins in a number of sectors.


Heightened concerns over the ability of global banks to weather losses from sub prime problems and from likely housing foreclosures within the limits of their existing capital bases also put pressure on financial markets during June.


In the UK two large banks, HBOS and Barclays announced capital raisings and have subsequently had their share prices smashed below their respective placement prices. This will limit investor appetite for the future rounds of capital raising which seem inevitable for most global banks.


The Australasian banking sector appears sound but the problems of their international peers still have a significant influence on our local economies and markets in terms of availability/pricing of credit and general global confidence.


Locally, it is evident that the consumer is continuing to hunker down in the face of rising food and oil prices. We are being harder hit than other Western countries simply because we are less wealthy than most and less able to stand shocks to our personal income/expenditure/balance sheet positions.


The most up-to-date evidence is seen in the comments by retailers Briscoes and the Warehouse which both downgraded profit forecasts in June.


The Warehouse said there had been a "marked downturn since the latter part of May". This has been confirmed by other retailers with whom we have been in touch during June.


Commonsense suggests that many consumers will have less and less to spend on anything other than food, fuel and mortgages until there is some relief through tax cuts, interest-rate cuts, wage growth or oil price declines.


Falling house prices are also not helping consumer confidence, leading to an end to debt-driven consumption and a move towards precautionary savings.


New Zealand investor confidence was again dented by finance company problems. Dominion, St Laurence and Dorchester all suspended redemptions in June. Whilst we don't think this will necessarily result in huge wealth destruction as has been the case with other finance company receiverships, it effectively signals further liquidations in the sector as reinvestment rates for all but the best finance companies continue at very low levels.


We believe that the Reserve Bank has erred in maintaining monetary policy settings at their current level and that the evidence of a rapidly deteriorating economy is now so conclusive that they are likely to ease rates before September, rising inflation notwithstanding. Unemployment is already tracking up and any inflationary pressures left in the economy will not be affected by interest rates but by aggregate demand which is collapsing. If the Reserve Bank does delay cutting rates until September, as many suggest, we suspect the subsequent easing will need to be sharp and decisive.


The good news in this is that we expect the easing cycle to lead to a gradual decline in the New Zealand dollar- good news for the beleaguered manufacturers and farmers and for our portfolio with its focus on companies with significant offshore earnings.


GDP officially contracted 0.3% in the March quarter and will probably be worse in June.


All this seems very depressing, and it is! And we also have the problem that sharemarkets are being overrun by fear and negative sentiment!


Although economic news during June was overwhelmingly negative there was also, at times, an element of panic selling as sellers rushed to get out in a market where buyers became increasingly rare. An example of this in our portfolio was Hellaby Holdings whose share price fell 19% during the quarter despite no change to their guidance. On the evening of June 30 they announced the sale of the BBQ Factory, reduced guidance for the June 2008 year and provided a trading update. The next day they recovered all the previous quarter’s fall. In focusing on the positives the market (in this company anyway) is showing some signs of a predisposition towards recovery.


The silver lining is that both the Australian and New Zealand sharemarkets are now pricing in very negative scenarios for economic growth and, even then, implicitly have earnings rated at below long-term average multiples. A lot of companies are now trading on 2009 PEs of seven or less and we could also point to a number of companies in Australia trading at less than their cash/security asset backing.


For those with a buying bent there is a veritable lolly shop of opportunities to consider. However there is also a dangerous minefield to navigate over the next few months as companies report earnings and provide trading updates to an extremely risk-averse market. Currently any negative result or comment prompts an immediate sell-off. Only when earnings downgrades and negative outlook comments are met with indifference or net buying will we know that we have got to the other side.


Our cash weighting remains at about 40% of the portfolio reflecting the bleak outlook for both the domestic and world economy and markets. Oil continues to inch up on a daily basis, having gained another $US4 a barrel since month-end and whilst this trend continues we suspect equity markets will struggle.


So why do we not hold more cash? Quite simply, we view everything we own as cheap on a medium-term view and it is extremely difficult to time recoveries exactly. One thing we are sure of- the sharemarket will begin to move up well before the economic statistics or the company results point to a recovery.