Archived Monthly Report

In the month of July the Aspiring Fund returned 1.45% after fees and tax.  The NZX 50 Gross index returned 4.4% for the month and the Australian market was down 5.3% in its local currency and 3.4% in New Zealand dollar terms.

Our July performance was below the return of the New Zealand market, due to our high cash weighting and the fact the rally was leader driven following the steep selloff in June.

We took profits on our overseas cash positions after the currency dropped following the Reserve Bank's reduction in interest rates. We retain a US dollar cash position but, given the substantial decline in the Australian dollar cross rate, we believe that most if not all the fall has occurred against this currency.

Although the Aspiring Fund would have produced better returns with more money in the market during July, the corollary is we would have lost considerably more money in June with such an approach.  We continue to be cautious in our outlook and this, on average, will mean we do better than the market when it falls and worse when it rallies. The key for the fund going forward is to negotiate with minimal damage the current bear market so as to be well positioned to prosper from the many opportunities that it will create. It is difficult to be definitive as to the timing of this, but what we are already witnessing are some of the pre conditions for a market bottom. Extreme pessimism, fear, and the flight to cash are examples of these.

The cumulative performance of the Aspiring Fund since the introduction of the PIE regime at the beginning of October now stands at -6.8% compared with the -21.8% decline in the NZX 50 Gross Index over the same time period and a fall of 16% in the New Zealand dollar- based Australian All Ords.

The major economic event of the month was the Reserve Bank reducing interest rates by 0.25% to 8%.  More importantly, the Bank, in its statement and in a further speech by Alan Bollard, has given the clear impression that this was just the start of the process and that interest rates will now be reduced steadily over the next 18 months. While there are significant inflationary pressures in the system at the moment we are not sure how much demand destruction high commodity prices will cause. A significant retracement in those commodity prices could enable the Reserve Bank to ease the OCR below 6% over the 18 months although we would only be confident of a 7% target right now.

The Reserve Bank has thankfully admitted that it can do little to stop the first-round inflationary effects of higher global energy and food prices, and has taken note of the deteriorating New Zealand economy.  Whether it has moved fast enough or with enough urgency is a moot point.

The Bank's move came after a quarterly survey of business opinion which showed that activity is still slowing fast, suggesting that the current quarter to the end of September and probably also the December quarter will exhibit negative GDP growth (making four quarters in a row of such numbers if the economists are right with their negative forecasts for the June quarter).

The good news is that the Reserve Bank is starting its stimulatory easing from a tightening bias and thus has considerable room to move.  The bad news is there is much economic pain for the economy to go through before the bank's action will have any effect.

With the increasing cost of wholesale funding to banks as a result of the global financial crisis most of the first 50-100 points of Reserve Bank easing will simply go to maintaining bank margins. Mortgage holders have seen some slight relief with a first round of cuts to new mortgage rates but, after the initial easing, we would not expect any material benefit to mortgage holders till after Christmas.

The more immediate effect of the move to an easing bias has been the slide in the New Zealand dollar.  This has had some positive effect on the pricing of listed exporters (Fisher and Paykel Healthcare was a big performer during the month) although our Holdings with overseas dollar exposure -- Michael Hill, Cavotec, Mainfreight, Ebos, and NZ Oil and Gas -- had more muted responses during the month.

Some stocks with domestic exposure also rallied during the month, but we think this is premature.  The Reserve Bank will have to move with more vigour to stem the current contraction being experienced.

Another possible implication of the falling interest rate trajectory we are now upon is that the high gross yields offered by many New Zealand companies with solid earnings will become increasingly appealing to investors.  Yield plays should benefit as the rate cutting momentum grows.

Importantly, July saw a $US15 reduction in the oil price.  Previously, we believe that markets and media had almost reached a point of hysteria in terms of predicting ever increasing prices of oil.  Given the run-up in prices since the start of the year we have expected that supply and demand responses would eventually cause a retracement.  July's move will hopefully bring some relief to consumers around the world and some sense to future economic predictions.

Global markets on average fell 2.5% during the month.  Whilst New Zealand outperformed this average, Australia had a poor month for a variety of reasons.  Firstly, there is growing evidence of a slowing economy in that country, although nowhere near the extent seen in New Zealand.  Secondly, growth projections for Asia, which has been the driving force behind the commodities boom, were lowered, bringing pressure on to a number of resource prices.  And finally, two major Australian banks came out with significant bad debt provisions which caused a severe downward movement of financial companies on the sharemarket.

We continue to see value in individual stocks, but against a background of soft global and New Zealand macro economic outlooks and continued dislocation within credit markets.  Whilst it is true is that the bottom in the sharemarket is likely to come while there is still a raft of overhanging bad news, we believe that most of the cheap prices currently available will remain on offer for some time. However we acknowledge the difficulty in timing and we will be looking to take advantage of quality companies should the pricing become extreme.

New Zealand and Australia are now approaching the major profit reporting season and we suspect there will be a number of disappointments, particularly with regard to future guidance.  It will be interesting to see the market reaction to bad news in any form.  We suspect disappointments will still be treated harshly.

History tells us that it is not until bad news is met with indifference or even buying that markets are ready for a sustained rally.