Hey, everyone, it’s 11:00 a.m., so let’s jump into it. Thanks, everybody, for joining. My name is Jodi Pettersen and of course, I’m joined with Stephen Bruce, the Portfolio Manager of the eInvest Income Generator Fund under the ticker code EIGA. Thanks, everyone, for joining me today. We are hosting a webinar on what’s been going on. What’s it looking like in the future? We’ve got Steve all to ourselves. So before we jump in, I want to remind everyone two important points. Firstly, there is a Q&A function. So you’ll see in the toolbar on the Zoom, you can submit questions. So please use this opportunity to do so. And then I also will start sharing my screen.
There it is.
And so that we can share this very important slide. So this one here, of course, is the disclaimer side.
So as you are all aware, we’re not financial advisers. We’re investors only. So this is not financial advice. This is just general information. Please always seek advice. And, you know, the PDS is available at einvest.com.au. So let’s jump into it.
Steve, I’m going to head over to you.
Thanks, Jodi. And ladies and gentlemen, and thanks very much for your time and your interest today, as you said, when Stuporous on the portfolio manager of the invest income generated fund. So today I was just going to give a, I guess, quick update on how we see things. And it is obviously a very interesting time in the world, and that translates into a very interesting time in the market. So I guess some of the points I will I will touch on the global backdrop, how we were seeing things pre-COVID, what it has done to markets and earnings to date and what that translates into for the outlook for earnings and importantly for dividends, how we have the portfolio positioned in the in context for the near term and then looking forward as to what we what we think will be important as we start to move hopefully through and past covid. So let’s get started. Now, the first point I’d like to make, and this is just stepping back now, investing, as we all know, is a long-term game. And we know over time, economies grow, earnings grow and stock markets rise. But one of the things that is often overlooked in these sorts of points of crisis is that there’s always a lot to worry about in the world at any given time. And fortunately, the world seems to get through most of it. And looking back over the next 18 months ago, there were a whole lot of things people were worried about. It was Trump and his behaviour that was going to cause America and China trade wars, that housing prices were looking a little bit soft, too. But if we actually look forward and to see what actually transpired over that period could just go to the next slide.
Actually, things actually turned out turned out pretty well over that period. The global economy is out of concerns and improved all through 2019. It was driven by of strong growth in the US. America and China walked back from the from the trade war. The BREXIT was going to be resolved one way or one way or another for following the election. And interest rates continued to be low around the world, which was supportive. And if we look in the Australian market, the economy was starting to rise. Getting that inflection point the RBA had been trying to engineer, we had had interest rate cuts again being accommodative. The property market was picking up. In fact, it delivered strongly. And I saw the market up twenty four per cent in 2019 in Australia. So that was against the backdrop of people worrying about a lot of things as we started through the year. And a little chart we’ve got here, it’s basically a chart of the OECD leading indicators and it just shows through 2019. Things were improving through the back end of 2019 and we’re on an upward trend as we went into 2020. But then, of course, the next slide we know what happens is we went into 2020. We had this well, actually, maybe unprecedented isn’t that isn’t the right word because it has happened before, just not in modern memory. One in one hundred years, global pandemic. But importantly, you know, it’s been met with an unprecedented response.
And what I mean by that is when we look at the size and the speed and the coordination of the responses of governments and central banks and other regulators, that has really been unprecedented. We’ve had interest rates being taken down to super low levels. We’ve had massive fiscal stimulus in terms of cash handouts. We’ve had loan repayment holidays, we’ve had rent holidays, et cetera. And these things have been put in place to support the economy. And it seems to be having a reasonably good effect in a lot of markets. So you’ve had a very, very rare event and we’d like an unprecedented response in a scope, scale and speed. So if we move on to the next slide, thanks. So what does that mean for markets? We can see here that the market on the left was sold off aggressively now in January, not March of twenty twenty. And you can see we were down probably around thirty five per cent from peak to trough in the soul. Now the chart on the left is the ASX three hundred index in the most broad benchmark of the of the Aussie market. And on the right is the unit price of the best income generator. So you can see a eInvest EIGA unit price much tracks the fall in the market and then pretty much track the rally in the market from off its lows into the market.
Fell sharply, then began to rally over the next couple of months from March to where we are today. And as we stand today, we’re at around 50 per cent down from the pre and take.
And if we look at what’s actually happening in the in the wider economy, underlying that activity, levels have been bouncing back fairly sharply on this chart. He looks at the whole of Australia, a national Australian data, and it looks at a range of a range of indicators which set out the level of activity we’re seeing. So essentially the blue bars show you how far things went down. And if we look at the one that’s furthest down, second from the right restaurant reservations now they went down one hundred percent. And the reports show you essentially where we are today and the peak bars we were a week ago. So what we can see is a lot of these indicators you had big falls, then big recoveries as Lockdown’s based and people started coming out again, but then softening off just a little in the last week or so.
And that’s no doubt the Melbourne, the Melbourne or the Victoria effect. And if we look at. From around the world, you’re seeing a very, very similar similar pattern in China, for example. That was where this infection seems to have originated from. The affected first lock down first came out first, and Chinese activity levels have recovered very, very strongly, which has been very good for Australia. So activity has been has been bouncing back nicely and remains to be seen what the Victorian issues will.
So if we just and they are looking at that again, you will see millions of charts like this. We can see the initial waves across Australia subsided substantially. And then in the last month or so, obviously, we’ve had this second wave in Victoria. But despite that aside, the rest of the country seems to be tracking along pretty well, although the impact you would imagine will be significant, because we can see from the chart on the right, the Victorian economy is a bit over a quarter of the total economy of Australia.
So let’s hope they get that under control sooner rather than later. So how has this affected the market now? Obviously, it’s put a very high level of uncertainty around around earnings in the near term. And as a result of that, most of the companies in the market which had earnings guidance out, which is where they basically give you an estimate of the earnings they going to make in the upcoming financial year. They’ve taken the probably the prudent step and withdrawn that guidance, saying if things are just too uncertain, we don’t know with we don’t really have enough certainty about what’s going to happen in the near term to give you a meaningful and meaningful estimation. But what we think and the market’s overall view is that earnings are going to be down more than more than 20 per cent. And we’ll start to see that in the reporting season, which is going to be kicking off in the next week or so, where companies will report their 2020 financial year earnings.
Now, the early indications, I guess, earnings are going to be down a lot, but many analysts will get the feeling that a lot of companies, it’s going to be a little bit less bad than perhaps people thought initially.
And one of the reasons for this and it gets back to that massive support that governments have been getting when we look around, actually, incomes have been supported very, very well and in fact, of people’s incomes have actually gone up as a result of the job keep or the increase in job seeker and then as well, the flexibility that’s come from the loan repayment holidays, which I’ll talk about a little bit more further along and as well as the rent, the rent, the rent deferral periods. Now, the other factors that are at play have been low interest rates, which you can’t underestimate the benefit that has in terms of flexibility, of refinancing. And also and this has obviously been a contentious one, the option of early, early withdrawal. So things are going to be down a lot, but potentially not quite as bad as people thought.
And what does that mean for dividends now? Obviously, this is this is of great interest to investors in despondent and myself. Now, what we see here, this is a chart which shows going back over time periods when dividends have been reduced in the market. Now, you could see what people are expecting from the current cut in dividends of a bit over 30 per cent is actually the biggest reduction in dividends that we’ve seen in any period in the past. Now, if you look at the reduction in dividends in the GFC, which was the second column from the left, what we can see, it’s about five percent greater than that. But interestingly, in the GFC, when the GFC dividends immediately started growing again in the following period, but the GFC was obviously caused by significant structural imbalances in the economy. And what makes us a little bit optimistic about the current downturn is, yes, it is Ciampa initially. But the underlying cause is not an imbalance in the economy that has to be worked through. It’s not a massive build up of subprime debt. It’s an exogenous event. It’s a virus that’s come that hopefully will pass in time. So in our view, the potential for earnings and dividends to bounce back quite quickly this time shouldn’t be underestimated.
Now, of course, this is an aggregated number and the effects in different parts of the market will be very, very different. So if we just move to the next slide.
Just to the next, sorry to intrude on the slides, I’ll stop drawing on the slides.
It’s causing problems. There we go. That should change it.
Can we go right now? Sorry, guys.
Now, convent’s not equally bad for for all parts of the market and all stocks in the market. And in fact, there are some stocks and parts of the market that have actually done quite well because of it or in spite of it. And if we just look through some of those, for example, supermarkets now, obviously with restaurant bookings down 100 percent at one point and now down 40 or 50 or whatever we saw on that previous chart, a lot more people are eating at home. And this has been very good for food retailers like Coles, Woolworths to admit cash would be another one. Retailers, which have a strong online presence, have also been doing very well. And that applies to many of the listed retailers. I’m taking stock like a JB Hi-Fi, for example, is doing well in this environment. And similarly, the retailers who specialize in what you might call home waves are doing very well because we’re all spending more time at home or sitting at home offices and doing that sort of thing. So that’s an area of the market that investors can focus on, which is doing quite well. And in our portfolio, for example, we do have significant holdings in Coles and Woolworths to benefit from that pick up in consumer staples.
Spending telcos is another area of the market that you’d expect to be doing well in this environment. Far more working from home, far more schooling from home. And suddenly the importance of your broadband connection and speed and capacity becomes critical. That’s been going to be benefiting Telstra and also benefiting TPG, both holdings in the fund.
I think that’s accelerated the NBN uptake of NBN.
Well, I think I think no doubt will. I mean, the NBN rolls out according to its own its own pace. But in the areas that scene, which is lodging most of them now, I think people will be will be switching over over more quickly. And that’s probably just a trend that will continue. Resources, a really interesting one, because even though there is this global downturn and I’ve got a slide specifically on this slide, a demand for resources has remained strong and commodity prices have remained very, very healthy. And that’s turning into really good dividends and cash flows coming out of stocks like BHP and Rio. Another peculiar sector which will be benefiting are the insurers, with people going at least a crashing because the was houseflies, because we’re home to put them out, etc.. So you’re actually having a bit of a claim today in the insurance sector and similarly with the health insurers, where with elective surgery delayed and postponed, the claims rates are falling as well. And then finally, gold and gold is not a sector that we are directly investing in this fund because primarily because gold stocks typically don’t have a habit of paying dividends. But in this uncertain environment, you’ve had a very strong flight to safety. And in and gold is the one thing that can generally be relied on to perform defensively if you’re worried about the future. For example, if you’re worried about inflation at one end of outcomes, gold will protect you against that. Similarly, if you’re if you’re an asset of McGinest and you’re worried about a breakdown of society and equities, baked beans and protect yourself with a gun, gold is the thing you want to have in that scenario. Now, we don’t subscribe to either of those things, but plenty of people do. And the gold price has gone through two thousand dollars. The way we have been involved in gold is a parity, which is that mining services company focused on the gold sector, which trades on a very cheap valuation and will pay a dividend.
So when we’re thinking about how we have the portfolio set just at the moment, we’re focused on these sort of stocks which will actually do okay in the current conditions. And we’ll continue to pay dividends. And in the case of, say, the miners is very, very strong dividends also. So if we just move on now to some of the trading before we move onto the things that’s going to do, the things which are not doing so well, I just thought it’s worth touching on resources.
Now, as I said, resources have been very, very solid through this whole period. In particular, the iron ore mine is now this is very important for Australia from a tax revenue point of view, from royalty point of view, from an employment point of view.
And unfortunately, if you look at it from a spin, that’s the iron ore price over the last over the last over this year to date. And you can see it one hundred and fifteen dollars. It’s just been sort of defying any downturn. And this is really a combination of a couple of factors. Firstly, demand out of China has continued to be strong, their demand from most other markets has been recently weak, but the Chinese, with the slowing economic growth, have been falling back to their old habits of investing in property, investing in infrastructure, which has been driving demand for steel. And therefore, I know that at the same time as demand has held up better than before, the supply has also has been constrained. And when we think about what that’s been causing that one of the biggest producers in the world, Farleigh in Brazil, has obviously had very significant issues stemming from the rapid effects of Kova through Brazil. Plus many other smaller iron ore producing countries have had similar effects. So we’ve had an environment of healthy demand meeting constrained supply, which has seen prices up. And what that means from the point of from the point of view of BHP and Rio on a fourth Priscu, all of which we hold in the portfolio, is that they’re receiving very high prices for their iron ore, generating strong cash flows, and that’s translating into healthy dividends. And that’s still sitting on top of a very strong balance sheet to start with. So their balance sheets, they focus on their core business, their capex requirements. Right. So as long as this keeps on, we’ll expect them to be spitting out very, very good levels of dividends. And that’s a core part of our portfolio just at the moment.
So if we move on now to look at some of the stocks which are not doing so well, and these really fall into into two categories, even in a downturn, the more economically sensitive parts of the market generally won’t do too well.
And you would expect that. And what we feel, what we sort of think of some of the stocks, which all sectors which fall into this category one would be the traditional retailers like those retailers who don’t have a strong online presence, bricks and mortar people spending less in bricks and mortar stores. Now, actually, not many of those sort of retailers are actually listed on the on the ASX, which for stock market investor means it’s not. It’s less of a significant issue. Another another sector which has been impacted, obviously, is the banks. Now in a downturn, you’re going to have an increase in bad debts. And that’s saying that the banks share prices fall quite, quite sharply and it has translated into lower dividends. Now, we all know that the banks have been a mainstay of dividends in the Australian market. But just in the near term, that’s that’s not that’s not been the case. But importantly, at the bank regulator came out last week and said we’re actually happy for banks to pay dividends after all, so long as they want to be.
So we would expect the banks to remember they didn’t pay dividends in, but they half year results. But when we get to the end of the year in November, we’ll expect them to commence paying dividends again. And it’ll be very interesting to see what CBA do next week when they have the full year result, because I have a different view into the other banks and we expect them to pay a dividend, whereas the others tended to in the last period. And of course, travel and tourism exposed stocks are doing it very, very tough. Just think about Qantas. No one is flying any, obviously. And so so those stocks are basically generating revenue and have really gone into that sort of hibernation mode.
Now, this was all to be, I guess, expected in a downturn from those sort of stocks. But what’s been more interesting really is lots of parts of the market, which are perceived as being very safe and defensive, have also run into issues. And then really it’s just the extraordinary, unusual nature of what’s happened here. I mean, health care is always considered a very defensive sector of the market, but with essentially non-essential surgery being cancelled, that’s had a significant impact, for example, on the private health care operate proper hospital operators, and that feeds through into radiology and pathology. And then even at the GP level, with people being reluctant to leave the house, GP consultations are down. So a very defensive sector has actually taken some pretty big earnings, earnings hits along the way. Similarly, the infrastructure is thinking about stocks like Transurban at Sydney Airport. These have historically, historically been perceived as basically bullet proof utility like these providers and it up very heavily as a result, carrying lots of debt. Now, ordinarily, they would be safe, but in an environment of lockdowns and a banning of air travel. Well, Sydney Airport is not collecting too many landing fees and Transurban isn’t collecting too many tolls. And then finally, another area of the market perceived as safe, but potentially not as safe as some might have hoped, is really the rates where.
The owners of shopping malls and office boxes say where rents have clearly been falling as retailers have been under pressure and vacancy rates are rising. So I think this will lead to a bit of a reassessment of the value of some of these businesses and the multiples that they they should try it on and then just move to the next. And then, of course, there are parts of the market that really aren’t affected by this at all. And agriculture is one that one that springs to mind. Agricultural stocks, by and large, don’t care about pandemics. They really largely care about whether it’s raining or not. And thankfully, the drought has broken and the winter season and winter cropping season is progressing very, very well. Now, this chart on the right might mean a lot to most of us, but it’s probably an extremely beautiful sight to farmers. And it just shows for the winter season, which begins on the 1st of April today, how good the rainfall has been to the sort of cooperation that the better. So after three terrible years, we’re being set up for a very large winter crop and not on agriculture itself isn’t a big component of the economy, at least compared to what it used to be.
But it does have a good multiplier effect through all the sort of regional communities and the people who were involved in it in that way. So there are some opportunities. A GrainCorp is a stock in the portfolio, which should be a direct beneficiary of this improving seasonal outlook.
I’ve got family in that’s in the sector. And I can I can say that they’re definitely happy with the amount of grain.
So now and so we’ve talked about how we how we’re seeing the market just at the moment and how we have the portfolio positioned at the moment. But let’s take a look now about coming out the other side now.
We’re all we’re all hoping that there will be a vaccine sooner rather than later or I guess we’ll have to call and say natural attrition is not the right word, but one way or another, virus will be dealt with. Now, the way that we should look at the way where the market is trading and this is something we also agree with, we’re thinking that by if we’re twenty two, so that is starting by June next year. So in a way that, say, 10 months or 11 months, things will be basically back to normal.
So not the fun actually with that we’ve just started, but the one after that will be a normal year. And so the market is sort of looking through the current year, which is going to be a bit of a mess and pricing on a bet pretty much back to normal, two thousand and twenty two. Now, we think that’s a reasonable assumption and probably the best assumption that we can choose to operate under in that environment.
While things will be largely back to normal, we would think that there’s going to be a lingering high level of unemployment because historically unemployment has taken considerable time to recover after a downturn. And that means that there’s going to be ongoing stimulus measures put in place by governments to try and boost to boost the economy, to get that unemployment rate down. Similarly, we think interest rates are likely to remain low and the the RBA to lower rates will be low for several years. Now, that is subject to change if circumstances change, obviously. But as a base case, we think that’s reasonable.
And when you put that together, an improving economy, ongoing stimulus and interest rates remaining low, that actually adds up to a very supportive environment for markets in our view.
And so with that backdrop, if we now start to see good news for infection’s around in Victoria’s principally France or the US potentially plateauing or improving or similarly more positive headlines around vaccines and these hundred lines every day, but some more some meaningful ones, then potentially you could actually see the market rally strongly on the back of that, in our view.
So how what sort of stocks do we hold or do we like in in, I guess, the post covered environment? As I said, stimulus, we believe will continue. And one of them, I guess, the most effective forms of stimulus governments can do is around spending on infrastructure, because you’re spending money, you’re creating jobs and you get something at the end of it. It’s a bit better than cash handouts. You give someone some money, they spend it at the shop and then it’s gone. Whereas you build up a wind farm, you build a solar farm, you build a new transmission system, you’ve you’ve got an asset that lasts at the end of it. Now, what stocks are involved in that? The first one that springs to mind is, is Macquarie Bank because.
A lot of an increasing proportion of infrastructure is effectively privately funded and mechwarrior the global leader in infrastructure investment and with a particular focus on renewables. And we think that one of the key areas governments will peak around the world is going to be the energy transition and requiring the box to play a big part in that.
Similarly, downa which is a diversified industrial services business, they will benefit from ongoing maintenance and management of infrastructure assets. And then Seven Group Holdings, which owns Kaitaia, which is involved in infrastructure construction in a way. So we think those will be medium stocks will benefit on the medium term. Similarly, as lockdown’s lifted and people start getting out and about again and at some point tourism picks up stocks like, I think that means greater union cinemas and Reges and a bunch of other brands of hotels should start to do better from its basically very low base. Similarly, Crown, which has a world class asset, its assets, and Crown Melbourne and Barangaroo, which is nearing completion, it’s having obviously an incredibly tough time at the moment, but in the long term, it should do very well.
And Tabcorp, again, as more people come out and what it’s actually doing well now, actually with a lot of online gaming.
And then finally, we think about the banks and I’ve got a separate slide on the banks, but we know housing will be an area of the economy that’s very important and will be supported by governments one way or another as we move, as we get to the end of it and see get some clarity around the extent of the bad debts that are going to come through the system. And hopefully they’ll be smaller rather than larger, that that will be taken positively for the banks.
So now the banks are really interesting. They’re a big part of the market and they’ve been a very strong source of dividends for a long, long time. But we all know they’ve been in a bit of a tough spot in the last couple of years. And that kind of culminated with the with the royal commission, which has seen earnings decline and all the scandals, et cetera. But and you can see on the chart on the top here, this is just comparing the return of each of the banks compared to the market over the last 12 months or so, with the exception of CBA, which has been been the best performer in typical bank, has underperformed the market by about 20 per cent over the last 12 months. But the blue line show you how they’ve done in the last three months, and that’s suggesting that the most of the underperformance has probably been passed and they’re starting to perform a little bit better as people are starting to say, OK, there’s a lot of negativity now factored into these share prices. There’s a lot of bad debts built in to what we’re valuing here. And as I mentioned before, a key a key announcement was apro, saying that banks are able to pay dividends in the current financial year up to around, say, 50 per cent of their profits. And we don’t always assume that dividend would likely start in the second half of the year. So it was good to have that confirmed. And when we think about what you should value a bank on, one of the one of the I guess the record, the floors you can put on the under a bank price is what its net assets are, you know, its loans, its assets, its liabilities.
And with the exception of CBA, we can see that all the other banks are trading at a 10 per cent discount to their value. So the net assets on the underlying the earnings, and that’s very low by historical standards. And if we compare it to the second column along the one pre covid levels, that shows you the multiple net assets that the banks were trading on before covid struck. So those multiples, one point three, two point four, one point four and one point four times they were factoring in all the negativity. We knew about the royal commission and the scandals, the falling interest rates. So it’s reasonable to assume that in a post covid environment where the bad debt issues come away, that over time the banks should be right back up to that level. And when you sort of compare that to the current share prices, you’re looking at between 20 and 50 per cent upside to the share prices of the banks. So for an investor with a long term view, although the near term might be a bit bumpy with a long term view, you could you can make an argument that you’re expecting up to 50 per cent upside out of businesses, which will resume paying an attractive dividend. So we’re a bit less than the index weighting the banks just at the moment. But we can see them returning to for. An important part of the portfolio over time.
And and just finally, related to banks now, this is an interesting an interesting slide we put in. I mentioned before the loan deferrals or loan repayment holidays have been a really key plank in the in the support packages put in for the economies here and in many other countries. And this chart here just shows you the extent to which these have been taken up. So it was brought in in March. And you can see April, May, you had big step outs. Then the number of people applying for loan deferral has basically flattened out. And so it’s stabilized at around two hundred and fifty billion dollars or about 10 percent of loans outstanding. The majority of that relates to mortgages, say 80 percent of its mortgages and the remainder being small business loans. But the chart on the right is interesting because the blue bars show the number of people who knew people who’ve applied for a deferral. So you can see that sort of stepping down.
But the public, it does show the number of people who have actually said, well, actually, I can pay and I would like to start repaying my line. So now this obviously doesn’t factor in the recent developments in Victoria, but pray that the trend is starting to look more positive.
So what does this all mean for Distribution’s out of the trust, out of Ida, so Olga is the principal focusses, delivering an attractive level of dividend income. Now, it’s had it’s been going it’s been going for a bit over two years now.
Now, in our first year, we ended up having a very significant distribution. And this is because we participated in a lot of market buybacks and received a lot of special dividends. And if you recall, that was because a lot of companies were rushing to get franking credits out to investors when there was the threat of the government of a shorten government banning franking credit refunds. Now, that didn’t happen, but that was why we ended up with a big a big distribution in the two thousand nineteen year. And obviously part of that meant that the unit price ended up a bit lower as a consequence. So you get big dividends, come in and then get paid out. So the price declines if we go into the year that just followed. Now, dividend paying habits of companies reverted back to the normal kind of levels. And as a result of that, the distribution paid out of the trust was up seven point three percent, which was very close to that seven percent level that we we typically target. And that is virtually entirely comprised of dividends. I think it was a very, very tiny sliver of capital contributing to that. So when we think about the current the yield that we’ve just started in, as we sort of talked about before, we expect overall market dividends to be down significantly for this year. How we’re responding by reorienting the portfolio more towards those those companies where we expect that we’ll have more secure dividends. And we talk about those sort of stocks, consumer staples, supermarkets, telcos, resources and some of the financials when we’re expecting dividends to resume in the second half of the year. And with the upside that we see potentially in the bank share prices, we’ll probably expect to see more banks in the portfolio as we go through.
Now, what will that results in is for the current year, we’re expecting to pay a distribution yield again of seven percent when you include franking credits. But in terms of cents per unit, that will be down around a quarter on what we paid last year.
So based on the unit price of three point ninety seven percent, distribution yield equates to 15 and a half cents per unit cash plus franking credits. Now, this is, of course, an estimate and it’s subject to change depending on how things pan out, pan out through the year. But that’s a best estimate at this stage. And what we know about dividends is that they they do get they do go down some times, but over the long run that if they do, they do grow. And just a final point on dividends.
If you move to the next slide, I think investors in funds like this realize it. But what’s lost on a lot of investors is that dividends don’t pay.
Dividends are an under appreciated component to total returns to the market. I mean, everyone in equities thinks about capital growth. A lot on capital growth is is good. But if you look over the last decade and this goes up to the end of 2019, the Australian market return nine point three per cent per annum, including franking over that 10 year period. And of that, three point two per cent was capital growth. For that, four point six percent came from dividend and one and a half per cent came from franking. So you can see dividends and franking account for at least two thirds of the total returns over over that period.
And in a way, one way of thinking about dividends is that they they pay you while you wait for capital, for capital growth.
So in conclusion, to the next slide, the way we’re seeing the world is we went into this crisis with basically a broadly improving economic backdrop. We’ve had an event unexpected by everyone, which is, quote, very significant near-term uncertainty and disruption.
The effects of this, however, are quite varied across different parts of the market. And so within that within that environment, there are still good investment opportunities and companies that will continue to pay attractive dividends for investors, particularly compared to the yields available on other sources in the market. With interest rates where they are, we expect that the stimulus will continue to be provided here and elsewhere to support the economies and that over time earnings and dividends will recover. So that’s the end of my presentation. Thank you very much for your time. I just mentioned this for 15 minutes, but I’ve got.
A lot longer than that, and I’d like to take any questions that we have, so definitely opening up all to questions on the Q&A.
So submit them using the toolbar and particularly I’ll go back to that, particularly that question around the distribution’s expectations for the next financial year and the sense of changes. You have actually written a and a kind of blog post on our website that breaks that down even further. So if you go to the report section and look at Eiger, you’ll find that then I definitely encourage you to read it. If you have something you want to say that break down further. But save I’ve got another question I’m getting a lot is when will the tax statements be true for? I got for the last financial year and I’m being told it’s mid August, so should be sometime very soon. I haven’t got an exact date, but I know that they it’s being worked on right now. So expectations of mid August and you will receive that by email and the like when it comes through. Steve, I know we come out of your view on interest rates going forward. I expect them to kind of come any time soon. What about inflation? There has been talk about deflation for the first time in a long time. Is that a view that you share?
Well, trying to get positive inflation or up to the bottom end of Central Bank’s inflation target ranges has been a problem for for many years now. And something like that initially, which suppresses demand, makes it even worse. And I think Australia had its lowest inflation rating system ever just last week. Now, obviously, disinflation, deflation is a bad thing. Similarly, as runaway inflation is a bad thing, I think the risk in the near term is more to the downside around inflation just with this suppressed demand. But there’s a really interesting thing happening in the moment. And if you look over the last number of years, there’s been a lot of money printing by central banks around the world. And this is one of the reasons the gold prices are so high now. It has not translated into inflation, softer demand environment. But interestingly, if you look at the amount of money printing has just gone off the charts now, but the velocity of money in the economy is slow. So there’s a lot of money around, but people aren’t doing much with it. So what happens if we get to a point where there’s still a lot of money around and then people stop doing stuff with it? Do you then start to get some inflation now? Nobody knows these things are unforecast, but it’s something that obviously everyone is wondering about. Yes. And looking for signs. Signs. Now, what do you think? What is the inflation due to markets? A little bit of inflation is good because it generally means the economy is improving. It gives companies more pricing power for the things that they are selling, which helps them cover the generally increasing costs. Because one of the things a lot of companies find is the price they get for their services isn’t going up nearly as much as the costs for reasons of regulation, etc.. Higher energy prices. There’s a whole whole bunch of factors. A little bit of inflation coming back in is good, is generally good for corporate earnings as particularly for value resource stocks, which are typically way, way more focused in this in this portfolio. And so that would be good.
But then, of course, once inflation gets to a certain level, then the central banks stop talking about keeping interest rates low and they start saying we need to we need to raise rates, bring demand back and get inflation back in the back in the bottle.
Yeah, that makes complete sense. And what about health care? So I know that you know, in one of these slides we had earlier stood out to me that we got this slide here, that normally health care is considered quite defensive, that in this environment it hasn’t been a lot of that is think this kind of a pent up demand within health care, you know, like all day surgery cancellations. Will they be rescheduled? And do you expect then that they will be definitely in time?
If you have if you need a replacement, you need a hip replacement. And every day you put it off, it gets off.
Offered by replacements not made in the family is complaining about sore hips.
So so we know that. We know that’s the case.
But the point I was trying to make there is that a lot of these stocks that fall into this defensive bucket, people have sort of said. I have defensive earning, therefore it doesn’t matter how much I pay for them, rather than paying 20, 30, 40, 50 times earnings because I sort of still have growth no matter what. And so I don’t care how much I’m paying, I’m not really applying a lot of fundamental valuation to it. And that works fine. And to actually find out, I don’t actually have these things. And if we think about Ramsay Health Care as an example, I mean, it’s a great company, the biggest private hospital operator in Australia and one of the largest in the world. But it had a lot of debt. And that’s run into this war will be surgeries have stopped for three, six, 12 months. We don’t know how long it’ll be and then go have to go and do a very big capital raising and that when you have to raise capital, that dilutes the existing investor the shareholding. So, I mean, some people make money off capital raisings. As an existing shareholder, you would prefer that that didn’t happen. And similarly with the infrastructure, you sort of look at the assets and go to the airport. It’s monopoly assets supersized. What could go wrong? Well, the answer is all flights stopped for three, six, 12 months and you have billions of dollars of debt that you can’t. Sir, I think the point is these things that they do not without risk. And so I said, no, basically no company is entirely without risk. And valuation kind of does matter.
Exactly. And I’ve had a question here come from Gary. He says, Does that fund ever use capital to pay dividends? And then he says, if not, is the value of the unit a direct reflection of the underlying market value of the equities?
Yeah, so the last bit I feel like this is to say that so the value of the unit is at every second of the day is going to be the exact value of the all the assets of all the shares held within the trust, plus any cash that’s sitting in there and cash every time you receive a dividend. Typically what happens if a company pays a 10 cent dividend?
Usually the share price of that company goes down generally 10 per cent or 10 cents on the day and you get ten cents come into your bank account and then you get that three and a half cents in franking credits going into your franking account to be distributed at tax time.
So, yes. So yes, the unit price is always an exact reflection. And you can sort of see in the way in that chart, we showed how the unit price has moved pretty much in line with the market over that period. And it is part of the question is, does it ever try at a premium or discount to the value?
It never does. So this is an ETF. It’s not always the investment company.
So we don’t have that issue around some time, the share price of being any different to the value of the underlying assets, because there’s a market maker being Macquarie, we’re always sitting there buying or selling units for people at the at the net, at the exact net asset value.
So if you want to that when and when Steve says every second he’s referring to the net or the indicative net asset value, which is an indication of that, the valuation of that populated states talking about and that iiNet is updated every second. So it’s very timely information to be looking at. And you can find that on our website as well as usually we have a brokerage online broker or something.
So the point is, a fund like this, you can always get in or out any day in whatever size at the fair price.
And so now the first part of the question around paying capital out as a distributor now. So we never we never plan to do that. What we do at the start of the year is we make an assessment of looking at the companies we’re holding and what we expect the dividends to be over the coming year. And we look at that and we say so based on the unit price at the start of the year and what we think the dividends we’re going to earn are likely to be, we make an estimate and typically that’s around seven per cent and we will then say that’s 12 cents is what our estimate is.
We pay it out equally. And so one cent per month. Over the course of the year. Now, what that means is as the as the actual dividends is never going to be exactly what you thought we might be a little bit more. We might be a little bit closer.
That’ll be the situation where we might pay out a teeny bit of capital if we get to the end of the year where we thought we were going to generate 12 cents in dividends, but we actually only generated eleven and a half, half a cent in capital just to keep that sort of smooth thing. Similarly, if we end up with more dividends, we have to pay a bigger final dividend because with the underlying structure, the trust and the tax losses of trust have to pay out of their income.
We can’t carry it over to next year. So the short answer is we never actually plan to distribute capital. It’s really just about distributing the dividend income that we can generate.
But if you have to do it to smooth out some of the distribution a little bit to mitigate the risk, I’m interested to talk about bad debts in the banks. You know, after the GFC, which, as you pointed out earlier in the presentation, it was very much the GFC was caused by some mismanagement within the banks as a bad debt, expected bad debts was the area that was given a lot of focus, not just in Australia but all over the world. This time it’s different. Has do you think what what happened during the GFC and afterwards prepared the banks for dealing with bad, bad, bad debts? And like we are we better off this time?
I think we definitely are. If you look at how strong the bank is and you measured on the amount of capital I have, the amount of liquid assets they have, the amount of provisions they have and the structure of their loan book and the type of funding they have, how reliable the funding is, how much of it is things like deposits which are sticky compared to, say, wholesale money, which can be withdrawn by the hundreds of millions on one day’s notice. The banks and all banks around the world have done this. The lessons learned from the GFC and they have been the regulators have imposed much more stringent requirements on them. So if you look at a bank in twenty twenty compared to a bank in two thousand seven, it’s just chalk and cheese in terms of their overall strength. The other factor that’s different this time this cycle is if you think about banks, they make three types of loans. They they in general, they provide loans to buy houses with. They provide loans to small business and they provide loans to big business. Now, in the case of the GFC, in Australia, small business was okay, mortgages were okay, but there were losses on loans to big business.
And this is where banks were doing silly things like lending money to Babcock and Brown and Allco and various local the financially Okogie sort of entities.
They don’t really do that anymore. If you look at a bank’s loan book now, it’s much more mortgages and small business as opposed to these risky big business loans where one line goes broken, you’ve lost a billion dollars. You have to have more houses to to get repaid, to lose a billion dollars. And when we think about does the government really care if some big financial corporation goes broke? No, but the government really does care if people can’t pay back their mortgages. So I think you’ll find that the probability of there being a big downturn in the housing market is probably very, very low because the government, the banks, the regulators, you and I, nobody wants that to happen. And absolutely everything will be done away with every lever available to avoid that happening.
So that’s the biggest chunk of the books. As I said, big corporate loans are much less significant part of the loan books now and then that leaves small business.
Now, we know small business is under a lot of pressure, and that’s and that’s probably where the risk area is at the moment.
But again, I think there will be everything possible to avoid things becoming too dire.
Yeah, yeah. And I’m just putting it out there. Any more questions, please, in the Q&A? One last question for you, Steve.
You talked about how coronavirus and disruptions in Brazil has affected the supply of iron ore, which has been a benefit to Australians. Looking at current news, what’s gone on in Beirut in the last week? Do you see that any any impact on the Australian market at all now?
Very fortunately, it was not Orica involved in that Orica. His supplier of morning explosives in the world did not try and we’re very quick to point out all of them, but now we know it’s just just a garden variety tragedy.
Looks like mismanagement story, I mean, the saying it was in agricultural grade, ammonium nitrate, agricultural grade ammonium nitrate banned in most countries because it’s very easy to make it into an explosive. Oklahoma City bombing, for example.
So it’s just a disaster and I want it, but it has no impact on this portfolio. At least it’s just something awful. All right.
Well, that was I feel bad ending on such a note to ask you one more question.
But overall, this presentation has been, I think, fairly optimistic. Right, in the sense that, yes, there is bumps ahead in the short term, but medium to long term overall. I think you’re generally optimistic.
Is what this the sense that I get what would have to change for you to change your optimism?
I guess the things that would really cause.
Causes to become more negative if everywhere you were starting to see significant increases in young people getting infected and no progress, no hope of progress on any vaccine or treatment on the near term horizon, that would that would make it more difficult.
And then I guess you’re in an environment of countries having to make the unpalatable choice of the economy vs. lives on a large scale that we haven’t.
We’re not. We’re not. That’s positive. Well, look, if there are questions that have popped up that you haven’t been able to ask during this session, please feel free to email me at Hello Reinvests dot com. So you and I’m always happy to pass them by state or attempt to myself. Thank you again for joining us today. This session has been recorded, so I will share recording with you all so you can go back and listen as you’d like. And again, thanks to State for your time in providing this update.
Thanks is my pleasure. And thank you everybody for your interest. Thanks again.
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