30 May 2015 - Hedge Clippings

Boombustology

The title of today's Hedge Clippings comes from a book of the same name by Vikram Mansharamani. As the name (the book's, not the author's) suggests, it explores the almost inevitable cycle between history's booms and their ensuing busts. 

Last week's Clippings explored two different opinions on the Chinese economy, with the bearish view referring to debt levels identified in an article in the Chinese language version of the People's Bank of China's (PBoC) first-quarter Monetary Policy Report. We also noted the risk created by the levels of margin lending at both street and corporate level.

Thursday's fall of over 6% on Chinese equity markets, reportedly on the back of a tightening of margin lending levels, possibly came a little faster than we had expected, but still reinforced the concept of boom-bust-ology. History has shown that for every irrational boom there is an inevitability that there will be an ensuing bust. It might be too early to call -6% a bust, but the speed and suddenness of the move would have to signify the potential for one.

Closer to home it would be a stretch to describe Australia's economy in the bust phase following the mining boom, but it is certainly struggling with the transition. Hence Philip Lowe, the Deputy Govenor of the Reserve Bank of Australia, in a speech entitled Managing Two Transitions, last week described the difficulty the economy is facing.

The problem is that Australia's manufacturing sector is not taking up the slack from the mining boom. As strong as the housing and property markets are, they are insufficient to prop up non-mining business investment. This is inspite of historically low interest rates, with Lowe making the point that Australian businesses have not reduced the hurdle rate of return required for making new investment decisions in line with lower rates.

Obviously investment decisions are driven by far more factors than interest rates, however when interest rates are high the hurdle does rise. The paradox for the economy is that the same is not true when they fall. As a result capital expenditure is falling, and is likely to continue to do so in spite of the RBA's requests.

To what extent the government (and opposition) are responsible for the lack of business confidence remain to be seen, and difficult to pinpoint, but it has been some years since either side of the political fence in Canberra provided any cause for optimism.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

KIS Asia Long Short Fund rose 4.04% during April, bring the Fund's annual return since inception to 15.48% p.a.

The Laminar Credit Opportunities Fund returned 0.54% over the month of April, bringing its annual performance since inception to 19.13%.

Morphic Global Opportunities Fund rose 0.02% in April as its benchmark (MSCI AC World Total Return in Australian Dollars) fell 0.33%, resulting in outperformance of 0.35%.

The Avenir Value Fund returned -3.57% in the month of April compared to the  ASX 200 Accumulation Index -1.70%.

Aurora Fortitude Absolute Return Fund  rose 0.34% as the market experienced higher volatility over the month of April.

The Paragon Fund returned 1.10% versus the ASX 200 Accumulation's -1.70%, for the month of April 2015. The Fund's annual return since inception has been 21.24% p.a. versus the Index's 10.60% p.a.

Totus Alpha Fund was down 4.5% in April compared to the ASX200 Accumulation Index's -1.70%. However the Fund's annual performance of 24.74% (ASX200 Accumulation Index 14.70% p.a.) has been strong.

Chris

CEO

AUSTRALIAN FUND MONITORS

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