Following this week's global share-market rout, Saxo Capital Markets Australia Market Strategist Eleanor Creagh said that global markets remain vulnerable to a continued deceleration in economic growth, and that a fragile geopolitical environment could "well be the straw that breaks the camel’s back".
In such an environment, she says precious metals and gold miners look set to continue to outperform as investors seek out safe havens to protect against volatility.
Indeed, the gold miners were arguably the only shiny spot - no pun intended - on the ASX amid Thursday's sell-off.
"Heightened geopolitical risks and trade tensions set to weigh on global growth combined with an aggressive easing cycle from the US Fed, with a further rate cut set for September spurs demand from gold and dividend-paying gold miners as a store of value," Creagh says in a note.
"In an environment of cheap money against a backdrop of the return of central bank largesse where the purchasing power of currencies is persistently eroded and real rates continue their collapse, gold remains attractive."
Plato Asset Management's Senior Portfolio Manager, Dr Peter Gardner, is familiar with the virtues of an exposure to gold and gold miners in such a volatile environment, particularly some of the mid-cap names like Northern Star Resources (ASX:NST), St Barbara (ASX:SBM) and Regis Resources (ASX:RRL).
"Because we want to be fairly index-relative … we're unlikely to never own gold stocks because they are still part of the Australian market. And so, then we're deciding which gold stocks we want to own in general. And those mid-cap gold miners have over a longer period outperformed Newcrest (ASX:NCM), being the one large-cap gold miner that we've got, quite significantly," Gardner says.
"And some of them seem to be very well-run companies – Northern Star have been very good at picking up purchases from other companies that aren't managing their mines very well and they seem to have very good technology and processes themselves.
"Some of those mid-tier gold miners have done quite a good job at that and they're paying out a higher yield than Newcrest are, and so they kind of tick both our boxes from that perspective."
Also found among Plato's gold holdings is St Barbara, which Gardner points out had some recent problems. They were trying out new technology which attempted to make underground rocks into slurry and then pump the slurry up to the top of the mine, which meant they could save having to try and truck the rocks up top.
"It turned out they couldn't do what they said they were going to do … that's kind of a one-off issue in a sense, and we still think they're fairly well-managed and still pay out a decent yield," he says.
Gardner also notes that all these gold miners, including fellow Plato holdings Newcrest and Regis Resources, are starting to witness a bit more cost inflation.
"When you're going through a mining downturn your costs tend to be quite low because all the mining services companies aren't earning much of a margin, and as their margins have started to increase, that's put a bit of cost pressure on all of them," he says.
And while Regis in particular has seen its share price drop a bit as a result of this cost inflation, Gardner argues that they're "still doing a really good job".
He is also quick to point out that while Plato likes these gold names, their weighting within their portfolios is not significant.
"If you really liked it you would be overweight by 50 basis points on one of those kind of names – so we're not taking massive bets and part of our strategy is that we want to be very diversified," he says.
"We don't want any individual stock to overly cost the portfolio significantly."
Cash & fixed income won't cut your mustard
Following the two recent rate cuts by the RBA, a 50 basis-point cut by the Kiwi central bank, as well as well as rate cuts in places like India and Indonesia, it's clear that sentiment has definitely turned and investors are searching for dividend yield as a replacement for their cash and fixed income investments, according to Dr Don Hamson, Managing Director of Plato Asset Management.
Hamson describes a world in which some investors are expected to buy bonds that have negative yields as "very strange".
"I think that turnaround and that mindset change in interest rates year to date is why equity markets are at all-time highs, because people are getting used to 'lower for longer' … 1% doesn’t cut the mustard," Hamson says. "It doesn't make ends meet, does it?"
"Inflation is more than that, so you're getting a negative real rate of return on cash and bonds. If you get a great term deposit, maybe you've got a 0% real rate of return … so we think we can continue to get 8-9% off our underlying equity portfolio."
Hamson says Australia has been in a pretty good period for dividends lately, thanks in part to the resources sector.
"Now, we don't expect as much this year, but we've already seen a special dividend from Rio (ASX:RIO), because they've made a fair bit of money in iron ore even though iron ore prices have ticked back this financial year to date. But we still think they'll do pretty well. Iron ore prices are still well above what people thought they would be at the start of this year," he says.
"They probably went too far in June - they kicked up to over US$120 a ton. They've come back sharply, but there still at a much higher level than they were at the start of the year. So, that's probably a more sustainable level and still a pretty good profit if you can pull it out of the ground for $15 a ton and sell it for $80 or $90."
Despite the ongoing stoush between the Trump administration and China, Hamson remains sanguine on the big miners given that China is still spending a lot of money on infrastructure. "That's pretty good for BHP (ASX:BHP) and Rio, and iron ore. And we've just had a record trade surplus over the last quarter."
Hamson also believes there is a disconnect when it comes to interest rates and the Australian economy, arguing that while the local environment is not great, is not "that bad".
"I have been through a recession and it's not like 1991/92 – it's nothing like that – and it doesn't feel like the GFC either. So, I think the RBA has been preemptive … they could go to negative (rates), but I think as Europe and Japan are finding, it doesn't necessarily solve problems," he says.
"My personal view is that I wouldn't be cutting interest rates any more. They (the RBA) have jawboned the government to spend money and do other things, but it's got to be spent wisely.
"I don't disagree that it's not a soft environment, but it's not recessionary or sort of 'the world's coming to an end' – that's just my view. So, I don't think it's panic stations … to me the market is reacting as if we're going into a full-blown recession, and to me it's sort of a late-cycle slowdown.
"So, I'm more of an optimist, but look it's not great – and that's why interest rates are where they are, as it's a slowdown. But does it require negative interest rates? I don't think we're there yet.
"The world is changing and there are more retirees, an ageing population, and I think monetary policy and lower interest rates is as much a drag for some people as it is a benefit for others."
Time to reconsider your income sources?
To help meet the increased demand for income, the Plato Income Maximiser (ASX:PL8) listed investment company this month announced a $200 million entitlement offer. PL8 is the only LIC to pay regular, monthly fully franked dividends, according to Plato Asset Management.
The offer consists of 1 new share for every 1.6 ordinary shares held by existing eligible shareholders on the record date of 13 August 2019. There will also be an over-subscription facility for existing shareholders to apply for shares in excess of their entitlement.
Shares not taken up by existing shareholders will be offered to new retail and institutional investors at $1.10 each in the broker firm shortfall offer. The closing date for both the entitlement offer and the broker firm shortfall offer is 30 August 2019.
New shares issued will trade in the week commencing 9 September and will be entitled to the already announced dividend of $0.005 payable on 30 September.
"Benefits from the offer include a larger market capitalization, which is expected to attract greater research coverage and provide more liquidity, a more diverse shareholder base and a lower management expense ratio," Hamson says.
Plato says it aims to continue paying monthly dividends. PL8 paid 12 monthly 0.5-cent fully franked dividends for the year to June 2019, equating to a dividend yield of 5.5% or 7.8% including franking credits on the offer price of $1.10.
Including its special dividend of 3 cents a share, the dividend yield was 8.2% and 11.7% with franking credits.
Hamson said it is timely for retirees to reconsider their income-generating asset mix. "It is becoming increasingly difficult for retirees to live off the income from cash and fixed income given current RBA cash rates at a record low 1% and 10-year Commonwealth Government Bonds trading at a yield below 1%."
"Retirees are struggling to make ends meet and should reconsider their income sources to look at active dividend investing," he says.
"Given the recent election result, retirees can continue to bank on receiving franking credits from Australian share investments and should consider taking advantage of the higher income on offer from them."
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Plato Investment Management is an Australian owned boutique equities fund manager specialising in maximising retirement income for pension phase investors and SMSFs. For further information click "contact" below.