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Apart from Chinese stocks, shares rallied as investors began to embrace the likelihood of a soft economic landing for the US economy. The Dow Jones Index rallied 10.5% and the Australian dollar was firmer. Commodities were mostly stronger, especially iron ore and coking coal. 10-year bond yields finished broadly unchanged despite considerable volatility.

 

The US economy is showing encouraging signs of cooling which bodes well for a more favourable interest rate environment in the short term. Chinese economic growth is at an acceptable level. Investors are disappointed that the government has not provided greater economic stimulation. The Chinese government is trying to balance economic growth and rising debt levels. Like the US, the UK and Europe are seeing signs that point to the possibility of lower rates in the future. Growth in this part of the world is stagnant.

 

The Australian economy continues to generate economic growth. The rate of growth has weakened considerably as the cost of living, tax and interest rates crimp spending power. The Reserve Bank increased rates by 0.25% to 4.35% to curtail price pressures.

 

The Beanstalk Balanced Portfolio rose over the six months, gaining 1.7%.  Australian shares and Listed Property accounted for the bulk of this gain.

 

Australian shares contributing to performance included Adbri Limited (+1.1%), Mayne Pharma (+0.9%) and Southern Cross Media (+0.6%). Australian shares detracting from performance were The Star Entertainment (-1.3%), AMP (-0.6%) and Alumina (-0.6%).

 

The August reporting season demonstrated an investor focus on strong balance sheets, robust cash flow and falling debt levels. This was evident when comparing the results and investor reactions to reports released by Iress and GWA. The Iress share price declined 30% in response to more challenging debt and cash flow numbers while GWA rallied 10% as investors cheered improving metrics.

 

The next six months will reward companies with healthy balance sheets that show an ability to generate strong cash flow or otherwise meaningful reductions in elevated debt positions.

 

Lower bond yields, good economic growth in the US and the prospect of reduced rates suggests a favourable environment for growth assets like shares in the short term.

 

Portfolio returns for the Beanstalk Balanced Portfolio have been curtailed this period by some weakness in the larger holdings of AMP and Woodside. The investment case for these businesses remains intact. These holdings have masked the strong returns that have begun to flow from some of the other positions within the Australian equities portfolio. For example, Mayne Pharma rose 89% over the December quarter. ADBRI and Southern Cross Media were both trading at such low levels that takeover offers have been launched creating rallies of 48% and 28% respectively. More recently, Alumina has risen 27% into the new year and 64% since its lows in late November on mine approval and refinery closure news. These strong performing stocks are reflective of the deeply undervalued characteristics represented right throughout the portfolio. They also demonstrate that when a catalyst arrives to unlock value, returns can be very large.

 

The Beanstalk Balanced Portfolio has a 37% exposure to cash and fixed interest related securities combined. The portfolio is invested 47% into Australian equities and has a 4% weighting to listed property. Fixed interest related securities sit at 8% of the portfolio. Exposure to international equities is at 12% and the portfolio retains a zero weighting to gold. Cash holdings are 29% of the portfolio.