Through the looking glass: Five noteworthy trends in 2017

2017 – a year that will evoke the memory of Donald Trump and his twitter mania (and of course the twitter temp who pulled the plug on his account), nuclear threat from North Korea and a messy divorce between Britain and the European Union. Closer to home, it will be remembered for saying YES, for Gerry Harvey taking a breather from berating short-sellers to focus on his new nemesis, Jeff Bezos from Amazon (Gerry – lower prices and better service might help, just sayin’) and Commbank’s failure to follow basic AML/CTF guidelines…not once, not twice, but more than 53,000 times!

Despite all this excitement, financial markets have continued to function. US markets have breached previously set records – the Dow Jones had reached 24,754.75 at close of play on 19 December 2017, having closed the first trading day of the year (3 January) at 19,881.76. It is of course, all Donald Trump’s doing (or so he’d have you believe). The S&P500 closed at 2,257.83 on the first day of trading, and at 2681.47 on 19 December, bridesmaid to the Dow’s bride.

There were predictions of the ASX200 breaking the 6,000 mark this year. It spent much of the year dancing around the high 5,000s, but finally broke through the 6,000 barrier on 6 November, for the first time since the GFC. It was a year of modest returns for many stocks, unless of course you were invested in one of the super performers. A friend of mine dropped $40k into A2 Milk and watched it turn into $200k…oh for a crystal ball!

Trend #1 – small IPOs returned to market…across two exchanges

The reinvigorated NSX  came charging forth with new company listings this year; admittedly, just 13 listings compared to 87 listings on the ASX (at 13 December). It’s likely however, that as the NSX brand builds, it will provide a competitive force in the market.

The top performer of 2017’s IPOs thus far is Bubs Australia, delivering a whopping 760% return [1]; it listed at 10 cents and is now trading at 86. Bubs create organic baby food ‘crammed with ancient grains & nutrient rich superfoods’ – it’s capitalising on Australia’s perception as a clean and green provider of food and cashed up, health conscious parents wanting the best for their offspring.

Where there are winners, there are losers – and this year it is Servtech Global Holdings, which has lost 90% of its listing value. It describes itself as a ‘holistic transaction management service using cutting edge, cloud based technology, unlimited by industry or geography.’ Hopefully for Servtech, and its investors, the market for such a service becomes more lucrative.

Pot stocks

Pot, weed, Mary-Jane – whatever you like to call it, it was responsible for several of 2017’s IPOs. While Australia has yet to follow Colorado’s lead and legalise it for general consumption, medicinal cannabis products were legalised in Australia on 30 October 2016. This opened the door to enormous opportunities for new businesses – and new listings – focused on the cultivation, production and manufacture of medicinal cannabis products.

A couple of ‘smoking hot’ companies that have listed this year include:

  • The Hydroponics Company (THC) – since listing on 4 May this year, it’s returned 255% to investors
  • Cann Group – listed the same day as THC and has experienced a stellar 736.67% rise in its share price – that’s quite a high!

It’s an interesting thematic and one that’s likely to grow as the use of medicinal cannabis becomes more mainstream.

Trend #2 – first a trickle, then a flood…now a tsunami of $ into exchange traded products

A recent blog about ETFs talked about the sector reaching an all time high. Well, it did it again in November 2017, hitting a new record of $35.5 billion, up from $25 billion at end 2016.

Chart one: ETP market growth at 30 November 2017

 chart one.pngSource: ASX Investment Products Monthly Update, November 2017

Not only have funds under management grown, but also the number of products…nine new, mainly niche, products hit the market between end August and end November 2017.

  • Vanguard rolled out four multi-asset exchange-traded funds, each representing a share class of an existing Vanguard Diversified Index Fund; this gives investors access to Vanguard’s established range of non-listed multi-asset funds
  • BetaShares launched its Australian Sustainability Leaders ETF, which picks up on the SRI thematic garnering increasing attention worldwide. The fund focuses on stocks that pass eligibility screens designed to exclude companies with material exposure to fossil fuel, gambling, tobacco, armaments, uranium/nuclear energy, destruction of valuable environments, animal cruelty, chemicals of concern, mandatory detention of asylum seekers, alcohol, junk foods, pornography, recent significant fines/convictions, human rights & supply chain concerns, and lack of gender diversity at board level
  • BetaShares also launched the BetaShares Active Australian Hybrids Fund, which provides access to an actively managed, diversified portfolio of hybrid securities; the aim is to reduce the volatility and downside risk that may otherwise be experienced by direct holders of hybrids.

BetaShares predicts the ETP industry will grow to $40-45 billion by end 2018 – on current growth trajectory, this is entirely feasible.

Trend #3 – Listed Investment Companies – the fund manager’s new friend

An LIC is a listed, collective investment vehicle that provides investors with a diversified exposure to one or more asset classes; investors buy and sell shares in a LIC in the same way they would in any listed company or ETP.

The earliest LICs, Australian Foundation Investment Company (AFIC) (market cap of $7115.53M) and Argo (market cap of $5588.99M), were launched in 1928 and 1946 respectively and still dominate the market.

Chart two: LIC market growth at 30 November 2017

chart 2.png

Source: ASX Investment Products Monthly Update, November 2017

There have been 53 capital raisings by LICs in the past five years, of which 38 were by fund managers replicating the investment strategy of a managed fund. The growth of SMSFs and managed accounts, for which listed assets hold greater appeal, has been a key driver. Cynics may say that the ‘captured’ nature of funds is also appealing to fund managers – once the capital has been raised for the investment, the investor can sell on market, but only where there is a buyer. Funds under management do not diminish, and neither does the fee income. This differs from an ETP where a market maker is always ready to facilitate a sale.

LICs leapt into the headlines this year when Magellan completed a $1.55 billion capital raising for the Magellan Global Trust at the beginning of October 2017 – although it must be noted, this is a Listed Investment Trust, which issues units rather than shares. Hamish Douglass, Magellan’s co-founder, CEO, CIO and lead portfolio manager, reportedly tipped $20M of his own money into it. At end November 2017, its market cap had just tipped $1.7 billion, and $24,822,006 worth of units had been transacted over the month.

Trend #4 Amazon and retail sector

Is Amazon the death knell for retail in Australia? Old hands like Gerry Harvey and Dick Smith certainly think so, but perhaps it’s the model that needs to change. Amazon could be the shakeup that Australian retail needs. It’s many years since ‘customer first’ gave way to ‘profits first’ – in such an environment, why wouldn’t people go online?

I think the real clue to the future of retail is the $32 billion sale of Westfield by the savvy Lowy family; their getting out of bricks and mortar retail tells quite a story. As illustrated by chart three, Westfield is a heavily traded A-REIT; it’s removal from the A-REIT index, which it has long dominated, will significantly change its composition.

Chart three: Top 5 A-REITs by value traded at 30 November 2017

chart 3.png

Source: ASX Investment Products Monthly Update, November 2017

As a recent headline from Livewire Markets said – “Follow the Lowys – the smart money always has”!! The article following this headline shared this snippet: $1,000 invested in Westfield in 1960 would be worth $440 million when the take-over concludes in mid-2018.

Trend #5 Bitcoin…and the technology that drives it

Doing his finance report on the ABC news earlier this week, Alan Kohler compared the astounding rise of bitcoin to the tulip mania in the 1600s…several headlines have made similar observations, with one claiming bitcoin has now surpassed tulip mania as the biggest bubble ever.

Since mid-year, you haven’t been able to turn on the TV, look at the internet or open a paper without bitcoin dominating the headlines. A recent call from my mother asking if she needed to “do something about this bitcoin thing” following the receipt of several emails led me to suspect it’s heading into bubble territory.   

Whether or not bitcoin is a bubble, a passing fad that disappears like a one hit wonder of the 80s, it will leave a legacy – blockchain. Since the last blog I wrote on the subject, the ASX has confirmed that it will use blockchain technology to replace its CHESS system. Most of Australia’s banks and many other financial institutions have indicated they are looking at, or implementing, blockchain systems. It’s undeniably the way forward and will be a major trend in 2018 and beyond. It is however, a huge consumer of electricity – given the prospect of summer outages, that’s an issue that needs to be resolved.

 [1] https://ipowatch.com.au/2017-ipo-performance/

 

I’d like to take this opportunity to thank those who read these blogs and wish you a very merry Christmas, and a happy, healthy and successful year ahead in 2018. I’ll be back sharing my thoughts on a range of finance and trading related matters in the new year.    

 


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