[This is a transcript of a video report.]

The share market has been in a very bullish phase over the past couple of months. The reasons for this are pretty simple. Obviously the American market has been going up and American shares have been rising because investors were heartened by the fact that Barack Obama was able to deliver on his promise to conquer the so-called US fiscal cliff.

Now what that really means is that he has agreed with Congress that the overall amount of money that can be borrowed by the American government will be lifted. That, interestingly, has occurred around 60 times since the end of World War II so it seems there’s no end to this pattern of borrowing more than the country can really afford and then spending it on things, again, that it probably can’t afford. But the market doesn’t want this to end anytime soon and that’s the main reason the share market has been going up.

Some positive signs

I guess the good news from the perspective of the real economy in America is that it’s showing definite signs of revival. The US has got quite a few things going for it, leaving aside the issue of government spending for the moment. It’s pulling back from Afghanistan, which although that could actually decrease US GDP in the short-term, obviously it’s a good thing for the overall welfare of the country. Secondly, interest rates in America remain resolutely low. Indeed, the US Federal Reserve is committed to keeping them this way for another couple of years. Thirdly, the US is in the middle of an energy revolution. Shale oil and gas, a bit like our coal seem gas here, not quite the same but similar, is making domestic gas in America very, very cheap. America at the moment is not allowed to export this gas, which is good for our local LNG producers, but it can use it for its own industry, and American industry is responding by both increasing production and hiring more workers.

So the US economy is going better and there are a few positive signs emerging from France and Germany. But the point is that the market has already decided that Europe is a basket case, so any bits of good news that will emerge will be good for our share market. The Australian share market for the last 18 months has been stuck in a trading range of around 3950 to 4450 — it’s now well and truly broken out of that range.

Companies to watch

Interest rates were kept on hold during February. I still reckon there is probably another 50 basis points of cuts and indeed if you look at fixed rate home loans, they’re pricing in more than that around 70 to 75 basis points of further cuts. At some stage pretty soon though, I do think we’ll probably reach the bottom of the interest rate easing cycle. But at the moment, debt, relatively speaking, is cheap. It is cheap by our own standards historically. Of course Australian interest rates do remain high, much higher than the rest of the world and that is the reason the Australian dollar does not want to go down.

Even though the Reserve Bank is suggesting rates might fall further, our dollar is still just under 104 US cents. One of the things that low interest rates have done for our market is really improve the allure of yield stocks. I mean Telstra (TLS) is at a four year high, trading at over $4.60 a share. Just over 18 months ago it was down around $2.56. Telstra shares have had a massive recovery.

Of course the banks have been very strong. Even National Australia Bank (NAB), which has been a laggard because of its problems in the United Kingdom, its share price has appreciated. Commonwealth Bank (CBA) has hit record highs of all time, higher than it was pre the global financial crisis. And also infrastructure stocks — Sydney Airport (SYD), Transurban (TCL) for example — they’re doing very well. And property stocks like Investa Office Fund (IOF), which we hold. Again, quality companies or property trusts that can pay a solid rate of dividend in an environment of low interest rates will still be sort out by the market. Yields have gone down, the market has gone up, but the yields available on the share market, particularly when you include franking credits, are still a lot better than what you’d get from term deposits at the moment

But I really think all eyes have got to be on the banks because bank share prices have gone up quite dramatically. I’m not so convinced that banks profitability justifies the price increases. Yes, the banks pay good dividends. Will they be able to fund those dividends in the future? Only time will tell but at the moment anecdotal evidence suggests credit growth at the banks is virtually non-existent. Now they are still making good margins on loans but again, if interest rates bottom out soon, it’s going to be harder for banks to do that. In an environment where credit isn’t growing, it’s hard to see how coffers can grow very much. So that’s what I’ll be looking for in the upcoming reporting season.

With our income portfolio, which again as the name would suggest focuses heavily on income stocks, banks of course have been a major driver, along with Telstra. That portfolio is in considerable appreciation and we look at least for those dividends to be maintained, if not increased

Interestingly, Transurban, which we hold in both the income and takeover portfolios, announced that even though its earnings had fallen slightly, it’s increasing its dividends. Transurban knows how to spot a trend, knows what’s attracting investors. Investors ignored the earning cut and focussed on the dividend increase at Transurban.

With regard to other takeover stocks, I think GrainCorp (GNC) is still worth looking at. It has a bid on the table, things have gone rather quiet. The stock is trading only a little bit above the bid from Archer Daniels Midland. I think GrainCorp and Archer Daniels Midland will soon resume their talks and I do think if Archer Daniels Midland, especially now the overall stock market has gone up during the period of this bid, will pay more than $13 for GrainCorp.

And also Echo Entertainment Group (EGP),a stock that we hold as a takeover stock, hasn’t performed very well, but I do think once James Packer’s Crown Group (CWN) gets permission to increase its stake beyond 10%they will do so, hopefully on market.

Finally, I guess I wanted to look at other investment related stocks in our main portfolio in the Beulah model portfolio. We’ve done very well from holding IOOF (IFL), which is of course a fund manager, and the ASX (ASX) itself, both of those stocks benefited enormously from a rising share market.

That’s it for now. Look forward to your company same time again next month.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.