ALPHA Structured Investments
Alpha POWER Shares (Aegis) Portfolio - October 2008

Alpha POWER Shares (Aegis) Portfolio - October 2008

Monthly Stock Returns (including dividends)

Aegis Market Commentary

The domestic share market fell again in October, with the S&P/ASX 100 Accumulation Index declining by 11.6%. Property (-25.3%) was the worst-performing sector, with deteriorating operating conditions and market aversion to highly leveraged stocks forcing a number of players to raise capital at a significant discount to prevailing prices. Energy (-19.6%) was the next worst-performing sector, with stocks falling on the back of the continued decline in the oil price. Materials (-17.5%) also experienced a significant decline on the back of falling metals prices and concerns that a global slowdown would lead to reduced demand for metals. Healthcare (-2.1%) and Telecommunications (-2.5%) were the best-performing sectors, with the market viewing these sectors as having defensive qualities in the current environment. During October, the global financial crisis deepened, forcing governments in many major developed economies to take equity stakes in key banking and financial institutions. We also saw a number of governments, including the Australian government, move to guarantee bank deposits in a move designed to engender more confidence in the stability of the financial system. Globally, economic conditions have continued to deteriorate, with a number of developed economies, including the UK, USA and the Euro zone reporting negative growth in the September 2008 quarter. While Australian economic growth is expected to remain positive, declining consumer sentiment and business confidence, along with falling energy and metals prices, point to a significant slowing in the economy. China is also showing signs of a slowdown and, although it is still growing at a strong pace, lower demand for commodities is expected to adversely impact metal and energy prices in the short term. Chinese authorities have undertaken a number of interest-rate cuts and announced an $870B stimulus package to help maintain growth. In early October, the US Federal Reserve, in coordination with banks around the world, announced a 0.5% cut in its Fed funds rate. This was followed by another 0.5% cut in late October, taking the Fed funds rate to 1%. In Australia, the Reserve Bank cut its official interest rate by 1% in October and followed this up with a further 0.75% in November, taking the rate to 5.25%. We continue to hold a cautious view of the market and expect volatility to remain high. In such an environment, we have a preference for large-cap stocks with good businesses and strong balance sheets. In our view, smaller-cap stocks and those with stretched financial positions are expected to remain out of favour. 

Aegis’ Comments on Portfolio Stock Performance

Main outperformers

  • Woolworths – WOW (+2.2%). WOW continues to demonstrate the defensive nature of its assets, its high-quality management and market-leading position in supermarkets. In October, the company reported first-quarter sales growth of 9.6%, with comparable store sales growth of 6% in the key Australian Food & Liquor business. WOW has not seen any noticeable evidence of adverse changes in consumer behaviour, although this may be yet to emerge. Given the strong first-quarter sales growth, we believe WOW is well placed to deliver its FY09 guidance of 9%-12% growth in net profit.
  • Telstra – TLS (-1.4%). TLS’ defensive characteristics have served the share price well in the current environment. The company also continues to benefit from the transformation strategy that has been in place since 2005. At a recent investor day, the company reconfirmed it is on track to deliver on its FY09 guidance, which includes EBIT growth of 6%-8%. First quarter 2009 has seen a continuation of strong growth in mobile and wireless broadband. TLS indicated it is also on track to deliver on its FY10 long-term objectives, delivering free cash flow of $6B-$7B by FY10, which will underpin future growth in dividends.
  • Westfield Group – WDC (-1.4%). WDC securities have held up well in the current environment, reflecting the group’s relatively resilient rental income streams, strong financial position and high-quality property portfolio. In 3Q08, WDC reported operational earnings growth of around 5.5% on a constant currency basis and reaffirmed its FY08 distribution of 106.5 cents per share. Occupancy levels were maintained across the portfolio at 97.3% leased, with retailers continuing to demand space. Australia and NZ rentals grew 5.2% on pcp, while the US and UK grew 2.5% and 2.7%, respectively.
  • QBE Insurance Group – QBE (-3.8%). QBE delivered strong gains in August and September and has held on to most of these gains in a sharply lower market. There was no new information of any substance from QBE in October, and we repeat our comments from last month. We expect QBE to continue to do well in the current environment, benefiting from its acquisition program and sound approach to risk management. We believe the current environment is likely to throw up a number of potential new acquisition opportunities for QBE at attractive prices.

Main underperformers

  • Leighton Holdings – LEI (-34%). LEI shares have fallen on concerns of a slowing in work due to the declines in mining and construction volumes. However, we think this fall has been overdone, as the company has a strong pipeline of work and significant growth prospects underpinning its expansion strategy into India and the Middle East. At its recent AGM, LEI confirmed its full-year guidance of revenue and earnings growth of 15%. At the end of the first quarter, LEI had work on hand of $35.3B and has since grown this by a further $2.4B, demonstrating its ability to continue finding work in the current environment. We remain comfortable with the outlook for LEI.
  • WorleyParsons – WOR (-50.6%). WOR shares continue to be sold down in line with the decline in the oil price. We maintain our view that the selling has been significantly overdone given that, as a service provider to the oil and gas industry, as well as other sectors, the company’s earnings are not directly tied to oil prices. The company recently held an investor update and indicated it has had a solid start to FY09 and is expecting good growth for the year. Workflow remains strong within the key Hydrocarbons division (around 75% of revenue), although there is some uncertainty in the smaller Minerals & Metals division. We are forecasting earnings and dividend growth of around 10% in FY09.

     

IMPORTANT NOTE:
Aegis Investment Partners Pty Ltd (ABN 98 096 109 125, AFSL 226 957) (“Aegis”) is the stock selector for the Alpha Model Portfolio – Aegis. The information contained in this document is prepared by Aegis for use solely by professional investment advisers and is not intended to be provided to retail clients. In preparing this information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether information contained in this document is appropriate to their investment objectives, financial situation or particular needs before acting on that information. Prior to deciding whether to acquire, hold, or sell the Alpha Model Portfolio - Aegis, you should obtain and consider the Alpha Customised Portfolio Service Product Disclosure Statement dated 19 December 2006 (now closed for new investments but still actively being managed for existing investors) and the Alpha Customised Portfolio Service Product Disclosure Statement dated 3 March 2008 (to be read in conjunction with individual financial advice), available on request from Alpha Structured Investments (1300 769 694 or www.alpha-invest.com.au). While all information is provided by Aegis in good faith, Aegis makes no warranties as to its accuracy, reliability, completeness or whether it is free from error or omission. Subject to statutory limitations, Aegis, together with its directors, officers, employees and related body corporates, do not accept any responsibility or liability arising from decisions made relying upon information contained within this document. This document is only to be distributed to Australian residents. All intellectual property relating to this document vests with Aegis unless otherwise expressly agreed.