Investment Matters

What Matters this week

We began the week with a bit of a false start.  Optimism on Monday from an extension to the deadline for US-China trade negotiations was replaced by skepticism and pessimism as to whether a deal will be hammered out.  Best not to invest on the basis of the vicissitudes of geopolitics.

As expected, the Reserve Bank left interest rates on hold, however, it did acknowledge what we already knew- the supply of credit is tightening, as well as lower investor and owner-occupier demand for home loans.  Furthermore, GDP figures released for the September quarter were less than impressive, with growth of 0.3% for the quarter and growth of 2.8% (year-on-year) versus analyst consensus estimates of 3.3%.  Of course a single data point doesn’t make a trend.  However, we will be watching to see the December quarter data point, due in March.

In other news, it looks like that shopping spree you “Afterpayed” could come back to bite you. There were reports this week of a first home buyer being denied a home loan due to an outstanding Afterpay balance.  This comes as the banks are beginning to conduct a forensic, line by line analysis of borrower’s expenses, looking for anything that resembles a recurring expense.  This signals two things.

Firstly, the banks are seriously tightening their lending standards in the wake of Hayne (which might explain part of the contraction in credit highlighted by the RBA).

Secondly, we might see a further contraction of credit, particularly after the implementation of comprehensive credit reporting reveals that borrowers have more outstanding obligations (credit cards, car loans etc) than previously thought.  It’s good to see prudent measures are being to put in place to ensure responsible lending to consumers.  But perhaps they were better implemented before the boom in house prices, not at the beginning of their decline.

The Reject Shop lived up to its name this week, with its board talking down last week’s bid by Allensford (backed by Raphael Germinder).  The board (according to the AFR) is advising shareholders not to accept the takeover vehicle’s on market buyback offer of $2.70 per share (vs its share price of $2.77 as of Thursday).  After a disappointing first quarter, the board is confident of an improvement in future performance as sales rebound over the Christmas period.  However, with some of the short termism we have seen as of late in markets, who knows what shareholders will decide….

Shareholders of Graincorp woke up to an early Christmas present with a debt-fueled takeover offer of $10.42 per share - a significant (43%) premium to its closing price of $7.30 last Friday.  The would-be buyer, Long Term Asset Partners, is an asset manager for a trust whose beneficiaries are Australian investors (nothing to see here Foreign Investment Review Board...).  The manager is hoping to smooth the traditionally volatile cash flows of the agriculture business and turn it into an “infrastructure play”.  How? Through some good old financial engineering via a long-term swap with Allianz (that will function like an insurance policy against poor grain harvests), which it hopes will allow it to raise debt for the takeover at a much lower cost.  Given the leverage being employed and the novelty of the deal it will be interesting to see how this one plays out.  (Side note – given it is employing a high amount of leverage and doing all sorts of clever things with swaps, perhaps they should have chosen a name that sounds a little less like Long Term Capital Management? [1]).

Lastly, after a brief recovery, shares in rare earth minerals producer Lynas were smashed this week (-20%).  A Malaysian government review of the firm's processing plant has stipulated that, in order to have its license renewed, the company will need to export its radioactive water leach purification rather than treat and dispose of it in Malaysia.  It’s unlikely that many countries will welcome 400,000 tons of hazardous waste with open arms (particularly Australia, where analysts expect it to end up) and the transport of hazardous waste is heavily regulated (and therefore likely to be expensive), hence the market’s reaction.

[1]  Long-Term Capital Management (LTCM) was a large hedge fund led by Nobel Prize-winning economists and renowned Wall Street traders that nearly collapsed the global financial system in 1998. This was due to LTCM's high-risk arbitrage trading strategies.


- Paul Grace