Kreston market update week ending Friday 2nd July 2010

Kreston ANZ

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News

Kreston Dormers

Kreston Dormers Financial Services Pty Ltd

The ASX 200 fell 3.7% amid China growth concerns and as a consequence Materials had their biggest loss in over 6 weeks falling 4.3%. Energy had it's biggest fall since mid May down 3.9%. Financials were down 3.8%, Property lost 2.5% and Utilities shed 1.8% for the week.

For those technically minded, the US S&P broke a major support level of 1,440 on Wednesday night with the projected next support level 10% to 15% lower. Australian markets also breached 4,300 on Wednesday whereas the last 2 times this had occurred over the past 2 months the markets 'bounced'.

There is no doubt economic trends have turned down (in some countries) or less positive (in others) as stimulus programs are being pulled back. The sentiment on the market means that any positive news is being swamped by negative news, no matter how important, or unimportant.

	Index	Change	%
All Ordinaries	4,291	-165	-3.7
S&P / ASX 200	4,267	-190	-4.3
Property Index	851	-22	-2.5
Utilities Index	4,070	-74	-1.8
Financials Index	4,128	-163	-3.8
Materials Index	11,392	-509	-4.3
Energy Index	13,921	-537	-3.9

With regard to Bank Term Deposit rates last week's upward movement was reversed this week.

Term	Rate %	Change in rate
3 months	5.60	0.10
6 months	6.00	0.00
12 months	6.11	-0.20
3 Years	6.80	-0.20
5 years	6.95	-0.05

The volatility amongst overseas markets continued, with the FTSE and the Nikkei losing 5.7% and 5.8% respectively. Interesting the Hang Seng only shed 2.9% consistent with their recent trend of out performing foreign markets over the last month.

In Australia, we review credit growth and the big news out this morning regarding the revised Resource Tax as announced by the new Prime Minister, Julia Gillard, this morning. Concerns around US and Chinese growth rates are the main issues in overseas news.

This week's Feature Section reviews the performance of the Australian share market over the past year.

Australian News

Private Sector credit growth was 0.5% in May and was 2.7% above May 2009 levels. Prima facie that is not an inspiring number in a 'bouyant' economy. Nevertheless a positive was that business lending increased by 0.4% following a 0.2% decline in April. Investment by businesses is critical to sustaining growth as the stimulus program fades and if you were looking for good growth in credit numbers it is business credit you would wish for.

Housing related lending increased by 0.7% with much of this by investors. In a sign that consumers are moderating spending, the 'personal other' credit declined 0.5% for May.

The proposed Resources Super Profit Tax has been replaced with a Mineral Resource Rent Tax (MRRT) on mined iron ore and coal. This change has been viewed positively by the mining industry with Marius Kloppers, CEO of BHP Billiton, describing the new Tax as a "material improvement" to the original Tax proposal.

The proposed MRRT major points include:

•	Tax Rate reduced from 40% to 30%
•	Hurdle rate – Long Term Bond Rate + 7% (i.e. 12.1% today)
•	No longer retrospective and now applies only to new projects
•	Starting depreciable capital base (at the election of the taxpayer) either Book Value or, Market Value as at 1 May 2010
•	Accelerated depreciation over first 5 years stays for Book Value method, life-of-mine method for Market Value
•	Undepreciated assets and carry forward losses ARE transferrable if project is sold
•	Is now ONLY applicable to Iron Ore, Coal, Oil & Gas (inc CSG)
•	Taxing point at the first saleable form (i.e. mine gate) less an extraction allowance of 25% (i.e. such as to only tax the resource profit)
•	Exploration rebate and Government underwriting of losses are now dropped

Overseas News

Overall the mood overseas remains negative on European debt concerns, the strength of the US recovery and even the impact of slowing growth in the Chinese economy.

The G20 meeting (a gathering of the world's top 20 economies) was held last weekend with an 'agreement' to cut government deficits by half by 2013. The agreement was pretty loose and demonstrates the different views from Europeans and the US around the pace of cutting deficits. It failed to provide any comfort to markets as the CDS spread (the cost of insuring against a default on a country's debt) has continued rising for indebted European countries.

The US contend that it is too early to cut deficits and doing so will put the recovery at risk. The concern is that economies are still reliant on stimulus programs and growth will dissipate if removed too quickly.

The European contention is that debt is so high that not cutting deficits will impact on government borrowing ability.

Both are correct and illustrate the big financial quandary for each country. We need growth to repay debt. If stimulus programs which involve increasing debt are withdrawn too quickly, then growth will decline and impact the ability to repay debt.

Each country is in a different position so to expect a one size fits all is unrealistic. Globally it is hoped that those countries such as China, India, Germany and even the US will generate sufficient growth to allow an orderly withdrawal of their stimulus programs. At the same time those countries such as Spain, UK, Ireland etc. reducing their deficits are able to benefit from growth 'spillover' from growing countries. It is a difficult balancing act which is the reason markets are so negative at present.

Wednesday night's falls in the US were driven by the US Conference Board revising down its estimate of April's leading economic indicators for China. The previous reading was at odds with other indices that were showing China's growth rate was 'moderating'. Interestingly the revision was due to a calculation error for the construction sector which was previously too high. The government has targeted this sector to dampen growth.

The reaction to the adjustment of the China numbers really reflects the nervousness in the markets rather than the number itself. The index in question is not a much relied upon index (and that will be even less so after the mistake) and the adjustment brought the reading into line with more 'respected' China indices. At this point the market is reacting to even 'obscure' negative news.

The reaction to the above news was exacerbated by lower than expected US consumer confidence levels in June which dropped from 62.7 in May to 52.9 in June. The decline was steeper than expected and broke a three-month stretch of rising readings.

Ratings agency Moody's placed Spain Aaa credit rating on review for possible downgrade. Whilst Spain has been implementing significant government spending cuts, the country has around 20% unemployment and anaemic growth.

Official jobs numbers will be a key focus of the markets in the US this Friday night as they will be another indicator of the strength of the recovery in the US.

Looking further forward, the majority of US companies report over the period of July 19th to August 8th .This will be a particularly important period as the impact of macro economic concerns around European debt and US growth rates will become apparent at the company level. Prior to that, US employment numbers are due out this weekend (Australian time).

Feature Section : Markets Performance over the Past Year

This week we review the Australian share market performance since the end of June 2009 and also look at each sector. The index readings and % rises are set out below.

Market/Sector	30 June 2009	30 June 2010	% rise since 30 June 2009
ASX 200	3,954	4,301	8.8
Property	749	843	12.6
Utilities	3,966	4,058	2.3
Financials	3,726	4,168	11.8
Materials	10,139	11,435	13.4
Energy	14,728	14,092	-3.6

ASX 200

The Top 200 companies on the stock exchange rose 8.8% for the year ending 30 June 2010 when the ASX 200 was at 3,954. The index reached 5,001 in mid April so the last 2 or so months have given up around 17.7% of previous gains.

Bear in mind however that the above numbers do not include dividends. The average dividend yield on the ASX200 is 4.13% so the total (referred to as the accumulated return) for 2009/10 has been 13.1%.

Bearing in mind that the ASX 200 was coming off large falls in 2008 and 2009 the pullback in the last 2 months has been disappointing. That sort of correction after a severe bear market has precedents.

Sectors

There have been some quite disparate performances across sectors.

Materials were the top performing sector despite recent falls due to lower commodity prices and the impact of the Resources Tax on the miners. Commodity prices have been weaker recently although higher iron ore contract prices have underpinned the overall rise in the sector. This is essentially the China story of higher demand to fuel their internal growth.

The Property sector has been the second best performer. It came off a very low base after being the worst performing sector during 2008 and 2009 and companies in the sector raised a lot of capital in 2008 and 2009 to repair balance sheets. Due to the much lower gearing driven by banks insisting the companies hold more shareholder equity, the sector is attracting money looking for 'predictable' cash flows. A further positive is that commercial property prices probably stabilized over the past 6 months.

Utilities (e.g. gas and electricity providers, port operators, pipeline operators) are still suffering from high debt levels. These types of companies have stable cash flows (everyone continues to cook and turn on lights) which has enabled them to maintain higher debt levels. They are being held back by unstable debt markets with a concern that the cost of debt may rise and impact profitability.

Financials have performed creditably with an 11.8% return over the year. The four major Banks have considerably less competition now that many second and third tier competitors have either been bought out or ceased business. Nevertheless since mid-April the sector has given up 23% of the gains it had achieved as overseas sovereign debt concerns flow through to this sector. While our domestic banks have limited exposure to European sovereign debt problems, tighter overseas credit markets overseas is increasing the costs of foreign borrowing.

Energy was the underachiever for the year and has given up 15% of previous gains achieved to early April 2010. This sector is heavily influenced by speculators as they bet on the strength or weakness of the global economy and the $AUD. You may recall oil at $US145 barrel in 2008 which had little relationship to underlying demand. Other factors that are impacting are the obvious concerns around a slowdown in the global economy but also possible short term oversupply of LNG. This concern is due to the number of LNG projects underway and also the rapid increase in shale gas production in the US.

Overall a much better year for investors than the 2 years prior but still plenty of room for improvement. We recommend clients continue to hold stocks featuring good, reliable underlying earnings that provide good yields (income) to investors.

Government Extends Super Pension Drawdown Relief

The government announced on Thursday that it was extending 50% reduction in the minimum pension required to be drawn from pension funds for 2010/11.

The purpose of allowing lower minimums is to extend the life of superannuation assets. The new minimums are:

Age of beneficiary	% factor	Reduced % factor for 2010/11
Under 65	4	2
65 - 74	5	2.5
75 - 79	6	3
80 - 84	7	3.5
85 - 89	9	4.5
90 - 94	11	5.5
95 and over	14	7

Using the above table, your minimum pension amounts for 2010/11 are calculated on the value of your superannuation assets in pension phase as at 1 July 2010.

While, the required minimum pension amounts have not increased since last year, you may find that your portfolio and thus your minimum pension requirements have increased for the 2010/11 financial year. You should review your pension requirements with your adviser or accountant.