Investment Matters

What Matters this week

President Donald Trump pulled the trigger this week, giving the green light to a 10% tariff on $200b of imported Chinese goods. China responded with 5-10% tariffs on $60bn worth of goods. We may not see a resolution to this one for a while: it is important politically for the communist party to save face, while it seems Trump is sticking to his guns (given that trade wars are “easy to win”) with November’s mid-term elections around the corner.  

Japara, Regis and Estia were smashed this week as the Prime Minister announced a royal commission into the aged-care sector. Shares were down a whopping 23%, 21% and 24% respectively for the week. There are clear issues in the sector: over the last year the Department of Health has closed almost one aged-care centre a month and an estimated 40% are running at a loss. The commission will be set up to look at crumbling standards, non-compliance and failures in care. Issues at the forefront will be staff-to-resident ratios, adequacy of staff training and the impact of systemic cost cutting measures (as well as funding hopefully!). The commission will be the 10th (yes, 10th) federal inquiry into aged care since 2009.

Readers of Investment Matters should note that Aveo is primarily a retirement village provider and has limited involvement in aged care (please see the note below).

Rio announced it is going to rain franking credits on shareholders to the tune of $60m. It will distribute the franking credits through an off market share buyback to return proceeds from the divestment of its coal assets. It’s a win-win for shareholders although those holding Rio in their superfund are likely to be the most happy - given labor’s proposed franking credit reforms.

Woolworths, Coles and dairy processor Lion have given into political pressure to implement a "milk levy" - helping drought stricken farmers by raising their milk prices. It’s a nice (if not somewhat forced) gesture - given their excessive bargaining power is the cause of much of dairy farmers' troubles.

The battle for Investa Office Fund continues with Blackstone declaring it is still in the running after a tap on the shoulder from ASIC.  The drawn-out takeover process has seen it fight with Canadian Oxford Properties Group for control of Investa’s $4.4 billion property portfolio.

Westfarmer's Bunnings announced on Thursday it is launching an online offering that will allow customers to purchase products online and pick them up in store (which begs the question - why?).  You won’t be shopping online for that new kitchen sink anytime soon though - the launch is planned sometime within the next two years with plans for home deliveries in the future.

More worrying tales about poor handling of claims, compliance and a lack of accountability on this week’s episode of the Royal Commission.

We heard that AMP has been charging dead customers for life insurance premiums for a least three years (I believe the term for that is over-insurance?) while Allianz had to front up for misleading online promotions.  IAG (under its brand Swann Insurance) incentivised car/motorbike dealers to sell its products by skirting around caps on commissions (leading to sales which not surprisingly were “inappropriate”).  Suncorp aired ads it knew might be misleading after balancing “commercial risk and rewards” - it was fined $43,200 for ads which raked in $426 million in premiums (guess they were right!).  Youi took the cake this week, as it left a pregnant mother living in a roofless home for a month after a severe hail storm – in an area exposed to high levels of lead.  Almost two years later the roof still has not been fixed - not quite what you would call acting in “utmost good faith”.

This week revealed that the law offers protections that are tipped heavily in insurers' favor.  There is a lack of power for ASIC to regulate insurance claims (as insurance claims handling are exempted from the Corporations act) and insurance falls outside the scope of unfair contract terms law (as contracts covered by Insurance Contracts Act are exempted).  Furthermore there are no legislated penalties for breach of the duty of "utmost good faith". I expect this will change: watch this space.

- Paul Grace