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Now is the time to make money off drugs. The good news is that you no longer have to be a cartel of Pablo Escobar proportions to earn it. 

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Gone are the days of smuggling cocaine across state lines, today there is clean money to be found in the green stuff: marijuana.

Marijuana has a long history as a medicine. The Chinese used it as an anaesthetic, the Indians used it for anxiety and it has even been found on Viking ships, possibly for use as a painkiller.

Cannabis was brought to Australia on the First Fleet and for 150 years the growth of hemp seeds was widespread and used as a medicine and enjoyed by recreational users too.

That was until 1920 when Australia signed the Geneva Convention on Opium and Other Drugs, which saw Cannabis grouped with heavier drugs like morphine, cocaine and heroin, and its use restricted to medicinal and scientific purposes. In 1938, cannabis was outlawed completely and slapped with the labels by Australian newspaper Smith’s Weekly as an “evil sex drug that causes its victims to behave like raving sex maniacs” and a “gateway drug”.

Like any illicit substance, people kept trying to access it, with the most famous case being a festival in 1973 in Nimbin attended by 6,000 people openly smoking marijuana. The riot that followed sparked conversations to decriminalise the drug in NSW and a plan was drafted to remove jail sentences, which did not come to pass.

Once again, the conversation has changed with medical marijuana becoming legal in Australia in 2016. Marijuana for recreational uses though is still illegal in Australia, despite being legal across Canada, in several US states and even New Zealand planning to legalise the happy herb.

It is medicinal marijuana that is the gateway into the drug for investors at the moment, but there are growing voices that it is not the “green money” it has been made out to be.

Cannabis legislation is still incredibly complicated despite legislation passing in 2016. The 2016 amendments to the Narcotic Drugs Act allowed cannabis to be legally grown for medical and scientific purposes in Australia.

“This is an important day for Australia and the many advocates who have fought long and hard to challenge the stigma around medicinal cannabis products so genuine patients are no longer treated as criminals,” then minister for health Sussan Ley said when the law was passed.

The uptake of medicinal cannabis, however, has been slow, with access to the drug being incredibly difficult due to long waiting periods, high costs and uninformed doctors. That is starting to change, with new data from the Therapeutic Goods Administration showing a 42 per cent increase in approvals for medicinal marijuana and a doubling of cannabis patients.

Canada case study

Canada legalised cannabis on 17 October 2018 nationwide but medicinal marijuana has been available in the country since 2001. In 2015 alone, Canadians are estimated to have spent roughly CAD$6.2 billion on marijuana. It wasn’t just consumers spending on marijuana, investment firm Canaccord Genuity estimated that $700 million has been invested in Canadian marijuana companies since 2015.

In late 2017, Deloitte predicted that the Canadian recreational cannabis market would be worth close to $23 billion, however legalisation also brought business risks with it, according to an Ernst & Young report. The report by EY found that many cannabis companies would merge together, leaving only a few large players in the industry post-legalisation.

During 2016 and 2017, the stock prices of many producers increased significantly as retail investors became bullish on the sector, with some values increasing by 54 per cent. Investors in Canada warned that speculation and frenzy were fuelling the gains, with some notable investors like Barry Schwartz of Baskin Wealth Management saying he would never invest in marijuana.

Marijuana stocks soared in the days leading up to legalisation only to plunge post-legalisation. In fact, many pot stocks went down by a double-digit percentage. The drop has been attributed to a variety of factors, including the old adage of investors buying the rumour and selling the news, unjustified valuations, supply issues and even the ongoing black market for illegal cannabis.

Paul Rosen, chief executive of Tidal Royalty, a company that invests in cannabis firms, told CNN business that cannabis companies are just like any others and people had to look at the balance sheets before investing. Mr Rosen says that people needed to ignore the green rush and joked that not every company can become the Google of cannabis. Heading into 2019, many US investors are predicting it will be a better year for marijuana stocks, as supply-chain problems are solved, the US seems set to legalise it further and regulations for edibles and beverages are set to be finalised.

Australia’s potential market

In Australia, the industry is just getting started, but data suggests the total legal and illegal cannabis market is worth between $4.6 billion and $6.3 billion. The data from New Frontier was announced during the Cannatech conference in Sydney last year, but due to the unknown quantity of the illegal market it is hard to know how accurate those numbers are.

A larger international report by Prohibition Partners has Australia’s industry experiencing quadruple-digit year-on-year growth over the next decade. The report is collated through quantitative research involving socio-economic and consumption analysis and qualitative intelligence gathered through reports and papers.

Prohibition Partners head of insights Alexandra Curley says it was a challenging market to research due to inconsistencies and misunderstandings around definitions.

“At Prohibition Partners we dedicate considerable time ‘cleaning’ the data that we find to ensure that we are analysing like for like when we compare markets.  We have noticed errors in some of reputable datasets for example in terms of the cost per gram of cannabis, but we are able to draw on our expertise in the industry as well as our vast network of industry experts to cross-check anything that doesn’t look right to us,” she says.

The Oceania Cannabis Report by Prohibition Partners found that the industry would be worth in excess of $10.6 billion to the economy by 2028. To put this figure into context, the liquor industry is currently worth just over that at $15.5 billion and the tobacco industry less than that at $8 billion.

Ms Curley says that the global cannabis industry is just at the beginning of its legal journey to market.

“In the Oceania region, Australia is very definitely leading the way, but recreational cannabis still remains illegal and accessibility to the legalised medicinal cannabis is still not without its problems,” she says.

According to the report, the biggest cannabis vertical in Australia would come from the recreational market, which once legalised would be worth roughly $7.6 billion by 2028.

Ms Curley says that number could be higher or lower depending on a number of scenarios, such as production/supply, but the number was based off solid facts.

“As of 2016, the Australian Institute of Health and Welfare estimated that some 10.4 per cent of the total population used cannabis and that the tolerance for regular use had risen from 9.8 per cent to 14.5 per cent between 2013 and 2016. It is not completely unrealistic that the number of recreational users could double as a percentage of the population over the next decade, although this would be tempered by the fact that many users are likely to remain light or occasional users,” says Ms Curley.

By 2024, the report estimates the medicinal cannabis market would be worth over $1.2 billion and would quickly double to almost $3 billion by 2028.

The industrial market in the Oceania region would be worth $18.6 million by 2028 with Australia to be the largest market in the region, accounting for roughly 99 cents of every dollar of the region’s hemp industry.

Even moving beyond the private enterprise, the government could reap the benefits of a legal cannabis market.

In January last year, the government announced plans to become the fourth country in the world to legalise medicinal marijuana exports. Following the announcement, shares soared for the over 20 cannabis producers listed on the ASX. Cannabis Jobs Australia, a job board for the industry, estimates that by 2028 there will be 50,000 cannabis jobs in Australia.

Australia’s climate makes it the perfect place for growth with a potential for two crops a year in areas with high sunlight and countries are already lining up to buy.

“Australia boasts an optimum climate for growing some strains of cannabis that are expensive to produce in more established markets such as Canada. This, coupled with anticipated changes to the law, will create an environment that will enable the region to capitalise on strong growth within the industry. That’s going to make Australia a very attractive proposition to investors,” Ms Curley says.

However, currently growers are unable to use the outdoor environment according to Barry Lambert, chairman of Ecofibre, an industrial hemp company.

“On the growing side, we can only grow it indoors, so you have to arrange the grow shed where you have high manual labor costs, electricity costs, all that stuff. Compare that to where we (Ecofibre) grow in the US. In America, we grow it outdoors under the Kentucky sun,” he says.

With the 2017 changes, marijuana companies are able to export to other parts in the world like the US and Canada, both of which are growing markets.

Canada took five days to burn through its stock once it was legalised nationwide for recreational use and according to Statistics Canada, close to 5.4 million Canadians will buy cannabis over the next 12 months.

The US is also a growing market for exporters where sales grew by 30 per cent in 2016 to reach US$6.7 billion, and that is without it being legal nationwide. The US now makes up 90 per cent of the marijuana stock trade, which can only go up with federalised legislation.

However, Mr Lambert says there was no market in those countries for cannabis exporters.

“Who are they going to export it to? America, you can buy it over the counter at a fraction of the price. Canada it has been legal for some time to sell cannabis and they are trying to export it,” he says.

Top stocks

Like any stock, there are a number of differing opinions on “pot stocks”. Prohibition Partners’ Ms Curley reflected that revenue in Australia’s cannabis-related IPOs was low and was worth looking outside of the direct industry.

“Volatility and immaturity in the market play a part in this, but as the market matures, more segments will open up. It’s definitely worth looking outside of the sector for opportunities as more players and even consumer brands attempt to cash in on the dynamic growth of the cannabis industry. We don’t currently cover ancillary services in our reports, but specialised companies that will enhance and facilitate the cannabis industry e.g. in compliance testing, laboratory equipment, drug delivery products and even cannabis clinics, will become a growing area of opportunity for investors,” she says.

HLB Mann Judd (an accounting and financial firm) partner Marcus Ohm says there are a lot of uncertainties in the industry before there could be an informed view on the industry.

“Australia is at an early stage in relation to the regulatory environment relative to other jurisdictions. For example, countries vary on whether marijuana is illegal, permitted for medicinal purposes or permitted for recreational and medicinal use. Australia has eased some aspects (e.g. medicinal uses/cultivation licences etc) but compared to the US (state level) and Canada (federal), for example, Australia has narrower applications,” he says.

Mr Ohm says the industry needs regulatory certainty and the success of the current players in the market would dictate its growth.

“The medicinal marijuana companies will need to demonstrate a realistic path to profitability. This is difficult due to the fact there is a lot of uncertainty around the future regulatory environment, the demand side as well as efficacy. Companies are doing trials for applications such as insomnia and the results of these trials will influence whether or not there is future growth for shareholders and whether there are new entrants to the market,” he says.  

Mr Lambert says there are currently too many companies in their infancy, and it is hard to judge where they are.

“I personally haven't invested in any other company. And I look at all their reports and stock exchange and I see no reason why I would invest in them. Like I say, I don’t follow them enough. Most of that is companies if I do look at them are down 50-75 per cent in the last 12 months,” he says.

Mr Lambert says most of the companies on the stock exchange are just not making money yet but spending it.

“Australian companies will find it very hard ever to make a dollar. If you look at some of the Australian companies, none of them make any money. There’s no revenue and they’re spending millions of dollars,” he says.

One of the first ‘pot stocks’ to appear on the ASX was MMJ Phytotech, which has since become a cannabis investor named MMJ. The group now holds $66 million in assets under management in various cannabis companies across Australia, the US and Canada. In the groups’ investor prospectus on the ASX, it highlighted its allocation across the value chain of the industry, with the majority skewed towards consumer goods and extraction facilities.

Arguably one of the largest initial IPOs was Cann Group, which raised $60 million in capital in 2017 and last year applied for an export permit to allow it to access the overseas market. Its new facility near Tullamarine Airport is expected to hold 50,000 kilograms of marijuana and generate revenues of between $160 and $200 million. Cann Group chief executive Peter Crock in his AGM address last year said the group had raised $78 million that would fund the new facility to be opened by 2020. The group is also one of only three groups with a permit to grow cannabis locally.

There are a number of small cap companies on the ASX that have an element of operations in cannabis or hemp, with many following certain themes. 

One of the riskiest from an investment perspective are the biotech marijuana companies. These are the companies that are running clinical trials to eventually take to market drugs based off cannabis. According to the Biotechnology Innovation Organisation, only 9.6 per cent of drugs make it from the initial tests to market.

Some of the companies are Zelda Therapeutics, which is developing drugs for insomnia, autism and cancer nausea; Botanix Pharma, which is developing drugs for bone and joint disease; and CannPal, which is developing a drug for animals.

Adjacent to these is AusCann, which is a pharmaceutical company designed to do the next stage for biotechs, that is developing and manufacturing the products themselves. Earlier this year, AusCann acquired a facility that will allow it to research and develop hard-shell cannabinoid capsules, among other products.

THC Global is also in the growing game and recently obtained two permits that allow for the cultivation and production of the company’s proprietary high CBD strains at its Queensland facility. The group also has two separate manufacturing licence applications under review, which its chief executive, Ken Charteris, says was crucial to its growth.

“The receipt of these permits is a critical step in progressing our Australian farm-to-pharma strategy and confirms expectations that THC Global will be in a position to commence full-scale production in the near term as one of the only Australian companies to have production ready facilities with licencing and permitting at an advanced stage,” he says.

Queensland Bauxite, a traditional mining company, has diversified its offering through its subsidiary Medcan Australia into prominent Israeli cannabis company Pharmocann. The deal will see Medcan manufacturing Pharmocann’s range of products for the Australian and global market. Medcan recently secured a manufacturing and export licence and will use Pharmocann’s expertise to produce the products, as Israel does not allow for export of medical cannabis products.

Bauxite has also teamed up with Algae.Tec to develop cannabis-based products for the animal market. The agreement through the Bauxite subsidiary Medical Cannabis, of which it owns 55 per cent, will see the group provide low THC cannabis cultivars to Algae to assist in establishing a breeding program to produce stock for veterinary medications, supplements and therapeutics. When the deal was announced in 2017, Bauxite shares went up 16 per cent.

Where to now

Whilst many people are in different mindsets about investing in marijuana, one theme that links them all is the need for better legislation and for better access to medicinal marijuana.

Mr Ohm from HLB Mann Judd says the field of applications in Australia was too narrow and needed relaxing.

“There are already quite a few companies listed on ASX who are in the process of working through their plans. Further listings will likely take account of the results of the existing listed companies in the sector, and the regulatory/demand aspect before listing,” he says.

President of the Australian Industrial Hemp Alliance, James Vosper, says that there has been a lot of investment in the industry, but regulation made it difficult.

“There is a lot of investment in the industry but there have been some issues with people getting access to medicines so therefore the number of people being treated in Australia isn’t as high as it could be. The means of accessing medicinal cannabis, there's quite a lot of red tape to go through, from the patient and the doctor that prescribes it. That has caused some issues with the growth of the industry within Australia,” he says.

Mr Lambert from Ecofibre says legalising medicinal cannabis in Australia did absolutely nothing for the promotion of the industry.

“There are two reasons. One, there is no demand for the product because the rules around getting the product are unworkable. For example, no doctor understands it because they aren’t trained in it because up until 2016 it had been illegal,” he says.

“Secondly, there’s been no research in this country because it’s been illegal. So, doctors don't know about it, therefore they don’t prescribe it.”

On the business side, Mr Lambert says it would be a huge product, but Australian companies needed regulation to change.

“We will not operate in the Australian medicinal cannabis market until Australia adopts the American system,” he says.

Mr Lambert says that US system allowed for medicinal cannabis to be sold over the counter and it was a system that Australia needed to adopt for growth.

“The Americans passed legislation here before Christmas. It was federally legal since 2014, but it was in a convoluted way through various acts etc. But the Americans made it clear in the 2018 pharm bill passed and signed by President Trump just before Christmas that says, ‘Hemp grown in America is legal and everything that comes from it is legal’ i.e. medicinal cannabis,” says Mr Lambert.

Without that the industry was dead before it even began, says Mr Lambert.

“We don’t believe that the prescription system works. And, therefore, those medical cannabis companies are going to find it very hard or impossible to be successful and that their solution is adoption of the American system, which is legalising hemp and you can then buy this product over the counter because it’s safe,” he says.

Others remain more optimistic, with Mr Voster saying the future looked bright for the industry.

“I think Australia has a great future in this industry. The whole world is moving towards an organic model and Australia has half of the world’s organic farmland. Put that with a great reputation for products, and you have a great future in the medicinal cannabis industry,” he says.

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Now is the time to make money off drugs. The good news is that you no longer have to be a cartel of Pablo Escobar proportions to earn it. 

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Robert Rich says he never works a day in his life because he genuinely loves what he does.

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Robert Rich found his way into financial advice after a bad experience with an adviser. Since then, it has become his passion.

“I’ve got to work hard but I’m just genuinely loving what I’m doing. They say if you love what you’re doing then you never work a day in your life. It’s so true,” he says.

Mr Rich is a relative newcomer to the financial advice industry, where he works with Phillip Richards for Endorphin Wealth.

Mr Rich was an accountant in a past life. It was only after an experience with a ‘swish’ adviser that he made the change.

“When we got our financial advice document, the man recommended that we get an off-the-plan apartment as part of the advice and said we had to pay them a really large $35,000 fee for the privilege of buying one. So, we had a bit of an argument,” Mr Rich says.

“He said you're not the type of clients for me and to swished us out of his boardroom.”

It was that experience that led Mr Rich to Endorphin Wealth because he wanted to genuinely help people control their finances.

“If I actually had someone who financially cared about what was best for the client, I could do this for a living,” he expresses.

Mr Rich says part of his success came from being a property investor himself, which allowed him to mentor his clients.

“I’m walking the walk and talking the talk. I’m more than happy to the pass the knowledge on to my clients to help them grow their own wealth,” he explains.

Mr Rich says he was also able to relate to his clients as they generally were not high-net-worth individuals, which he felt the industry focused too much on.

“I feel like the majority of industry really focuses on anything in the high-net-worth sector. Whereas I think young people or people without a great deal of wealth are probably being forgotten about at this stage,” he says.

It was the ability to help those individuals to develop a financial blueprint for their future that was the rewarding part of the job for Mr Rich.

“When you're sitting at a dinner table with a glass of wine in hand explaining to them that you know that they’ll be able to retire in three years’ time and just seeing that look on their faces,” he says

“It’s like ‘oh my gosh, wow, we can actually do it’. They look at each other and they hold hands and they cheer. That’s just what it’s all about really. I could just do that every day.”

In fact, client satisfaction ranked higher on Mr Rich’s list than winning Newcomer of the Year at the ifa Excellence Awards earlier this year.

“One of the biggest successes of my career was winning the ifa award. That was just outstanding,” he says.

“But I guess the biggest success is really meeting with clients with a complex situation and being able to tell them they’re fine.”

Mr Rich also expresses gratitude to the Barefoot Investor, Scott Pape, for his work in generating conversations about financial advice. He found that advisers were the last piece of the puzzle for many people.

“It’s creating a lot more conversation. A lot more people are trying to understand and ask questions. People are starting to become wiser about it, which is great,” he says.

“We don’t want a country full of sheep just kind of going about their business while the wealthy people just take advantage of the situation.”

Moving forward, Mr Rich says he wants to help build Endorphin, but also wants to focus on his own education.

“It’s good to complete my studies and have that additional knowledge for my client. I just want to continue to work with clients that energise me and inspire me to actually want to help them,” he says.

Mr Rich must be doing something right though, as his clients keep coming back to him and bringing their friends.

“I’ve got a lot of happy clients who give me great testimonials and I’m getting a lot of referrals from interested clients, which is just the best thing ever,” he concludes.

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Robert Rich says he never works a day in his life because he genuinely loves what he does.

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After a volatile 2018, the year ahead looks just as choppy for equities as geopolitical events plague share markets across the globe.

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The last 12 months saw global equities knocked around by a multitude of events, including China’s economic slowdown, the US trade war with China and Brexit.

RARE Infrastructure chief executive Nick Langley agrees that 2018 was a volatile year for investors, with substantial equity market falls in February and October making it clear we are now in a late cycle stage of the global economy.

Based on his company’s analysis of the global markets, he believes there are two factors that could determine how long the late cycle will last: the trade tensions between China and the US, and the rise of populist politics.

“We believe this may result in a greater likelihood of a downturn earlier due to a rise in government spending and less room for corporates to grow their earnings over time,” Mr Langley says, talking specifically about the rise of populism.

“This could lead to an earlier and potentially even deeper downturn.”

The challenge for financial advisers and their clients this year will be navigating the choppy waters of foreign markets while continuing to feed their clients’ insatiable appetite for equities.

Australians’ ownership of international shares bought directly through overseas exchanges returned to its pre-GFC peak in 2017, which according to the ASX Investor Study may partly reflect an improved appetite for, and better access to, overseas listed investments.

The report notes that over the same period, the proportion of funds under management allocated to global equities increased 7.7 percentage points to 39.2 per cent in 2017.

Saxo Bank chief investment officer Steen Jakobsen says Australia is very much an equity-based investor in the universe.

“That has been shown to be a good strategy for the last credit cycle,” he says.

“Now you are shown to be swimming naked, because you have two assets: equity and real estate. Both of them are very highly leveraged to global growth and the economic environment.”

Geopolitical events have had a seismic impact on financial markets and equities are arguably becoming increasingly sensitive to external events. Put simply, the market tends to overreact to news.

Hexavest co-CIO Vincent Delisle anticipates that 2019 will see a different picture emerge, with macro visibility bottoming in the first half of the year.

“Investor optimism regarding future growth has dimmed considerably in the latter part of 2018, and sentiment entering 2019 is much more cautious,” Mr Delisle says.

“Hence, from a risk-reward standpoint, the opportunity to increase risk assets and cyclical sectors could present itself this year and thus provide investors with an opportunity to eventually redeploy cash and reduce exposure to defensive sectors.”

Despite the obvious risks, many fund managers remain optimistic and are actively identifying opportunities.

Market anxiety about the risks of a recession is also likely to add further to volatility and there is certainly the potential here for investors with a shorter time horizon to be spooked, says Kim Catechis, head of global emerging markets at Martin Currie Investment Management.

“However, we believe these risks create opportunities for long-term investors such as ourselves. Specifically, to initiate holdings in companies that we see as being exposed to long-term secular growth drivers, at attractive valuations,” he says.

Will Hamilton, CEO of Hamilton Wealth Management, quoted a Capital Economics paper that reported 2018 was the first time in 25 years that all 10 major asset classes delivered negative returns. As a result, he believes there is value to be had in global equities over the next 12 months.

“As we enter 2019, we are biasing towards equities, especially after the recent sell off. This was and still is the least overvalued asset class – and remains cheap relative to mainstream fixed income,” he says.

The Trump effect

Fund managers have voiced their concerns over the US economy since President Donald Trump took office in January 2017. Two years on and the American economy is firing on all cylinders, with unemployment down and the share market way up – perhaps too high for some.

RARE’s Mr Langley sees a slight divergence between the S&P 500 and the real economy, while Chris Wheldon, portfolio manager of the Magellan High Conviction Fund, thinks there is potential for greater uncertainty regarding Mr Trump’s presidency in his behaviour and actions in the year ahead.

“The Democrats now control Congress and the Republicans still hold power in the Senate, but that changing dynamic may mean the Trump administration is subject to more scrutiny and pursuit of wrongdoing,” Mr Wheldon says.

“That may cause increasingly irate behaviour and increasing uncertainty and that may impact market sentiment.”

The Federal Reserve raised interest rates throughout 2018, lowering projections for interest rates (from three rate hikes to two) and economic growth in 2019. The market reacted badly. A day after the Fed raised rates in December, the S&P 500 plummeted to a 15-month low.

Mr Catechis of Martin Currie Investment says tightening labour markets, rising wages and reasonably strong economic activity will continue to lead the Fed to increase rates.

“Higher rates will not be good news for some expensive equities, especially stocks of companies which have gorged on cheap liquidity for the last decade, as among other things they mean higher borrowing costs,” he says.

RARE is optimistic in its predictions. Mr Langley says profits may increase in the US, although not at the same rates as they have in the past.

The trade war

The stand-off between China and the US is one of the major global themes keeping portfolio managers up at night.

Mr Wheldon of the Magellan High Conviction Fund says much of the impact will depend on what happens next, with various rounds of negotiations and announcements affecting markets and sentiment over the course of 2018.

“It seems there will be another round of discussions between Chinese and US officials scheduled for early 2019, so we will see if there are any ground is being made in areas where there is currently disagreement,” he says.

“I think our longer-term concern is that China is unlikely to back down on much ground in areas related to technology development and technology supremacy. If that is the case, it’s hard for us to see the US backing down on a number of its claims as well.”

The abundance of media coverage on the trade war between the US and China undermines the global business climate, according to Montreal-based global equities specialist Hexavest.

The group has alluded to trade between the two countries representing less than 1 per cent of global GDP, as shown by International Monetary Fund data.

“The decision by the Trump administration to postpone the application of a 25 per cent tariff for three months affects only a tiny piece of the global economic puzzle,” says Hexavest chief economist and portfolio manager Jean-Pierre Couture.

“The end of the business cycle, which is far more important for corporate earnings and financial markets, has been shaping the global macroeconomic backdrop in recent months.”  

Mr Couture says investors must look beyond the media and the sigh of relief that came at the end of the G20 summit, as postponing the US tariffs will not be enough to remedy the situation.

“For the time being, we maintain a defensive positioning because we think many investors will be surprised when the slowdown is borne out by economic data and earnings announcements at the start of 2019,” he says.

Hexavest noted in the third quarter, the stagnation of the eurozone economy, abrupt slowing of investment in the US, weak credit growth in China and much dimmer prospects for some technology companies confirmed this strong trend.

The US-China trade war has also had a contagion effect, impacting small economies that have provided decent returns for Australian investors.

Amit Lodha, a portfolio manager at the Fidelity Global Equities Fund, notes the trade tensions and rhetoric around US-China relations have disproportionately impacted emerging markets. However, he thinks the trade the war could have potential upside.

“Trade uncertainty lasting for longer could become a drag for investment, and would be very negative for investors,” Mr Lodha says. “But I also believe that this would force Chinese authorities to push even more aggressively towards a stimulus scenario to counter the effects of a slowdown in its economy.”

The Organisation for Economic Co-operation and Development’s (OECD) composite leading indicator, which provides early signals of global economic activity, suggests that the Chinese economic slowdown will continue from 2018.

As policy makers began to roll out measures aimed at injecting stimulus into China’s economy late last year, the People’s Bank of China said it would supply lower-cost liquidity for up to three years to banks willing to lend more to smaller companies.

Saxo Bank’s Mr Jakobsen says China is significantly below the growth number it has been reporting and what the world has been expecting.

“There was a massive political questioning in China about whether they would continue with opening up and reforms. That has now been confirmed,” he says.

“That left 2018 as a year of holes, of waiting and seeing and it will take all the way to Q2, Q3, to have a real impact on Australia.”

Europe

With some fund managers now considering US stocks to be too pricey, Europe has provided an ample opportunity to pick up some fair value equities. But, like all corners of the globe in 2019, the European Union has its own woes.

“Within Europe, the market has punished Italian equities and government bonds for the country’s debt laden budget, and we could expect more volatility as negotiations with the European Commission continue,” says Fidelity’s Mr Lodha.

Mr Catechis of Martin Currie says uncertainty around the final ‘divorce’ deal in Brexit and Italian sovereign risk will be a preoccupation for markets. Mr Langley of RARE adds that political uncertainty and growth concerns in the region mean that utilities and other infrastructure names across the continent have been oversold and look attractively valued.

“We expect European growth to be firmer this year, coming in at trend rates or above, which will provide a boost to infrastructure valuations,” he says.

“While in the UK, a significant sell-off of the utilities sector on fears of a Labour government and a nationalisation program have dissipated. Some of this has already been reflected in resurgent share prices of UK names, but there is more to come here, and we remain overweight for now.”

Like Japan, Europe is slowly planning its exit from negative rates, but the pace of normalisation is expected to remain slow in these two regions.

Other geopolitical factors to look out for include rising crude oil prices, which are primarily driven by supply distortions in Iran and Venezuela and are also weighing on oil-importing economies, which calls for additional caution, according to Mr Lodha.

“All of these issues are interdependent, as the path of the oil price in some cases drives the path for bond yields and emerging market currencies,” he says.

“What is making things more complex is that price signals are increasingly spurious, as they are driven by algorithms and ETF trading.”

The long game

Fund managers generally agree that short-term market uncertainty this year will be a great opportunity for long-term investors, allowing multiple entry points to gain exposure to companies that are tapping into powerful long-term trends.

“From our standpoint as international equity specialists, we continue to see a huge amount of opportunity for investors looking beyond their domestic markets,” Martin Currie’s Mr Catechis says.

“For instance, optically, emerging market equities are around their long-term price-to-earnings average. However, we believe the asset class still represents good value in terms of an international equity allocation.”

Return on equity is fairly synchronised with developed markets, as represented by the MSCI World Index, although price-to-book and price-to-equity values remain low relative to history and developed markets.

For Fidelity’s Mr Lodha, the US and Japan continue to provide interesting bottom-up investment opportunities.

“The US growth outlook remains strong, due to robust macroeconomic data, tax cuts and fiscal spending stimulus, while overseas cash repatriation is encouraging buyback activity,” he says.

Meanwhile, Fidelity’s Alex Duffy considers the financial sector as being one of the most interesting areas of the market, given the balance sheet of dominant, retail-facing banking models. The portfolio manager believes these businesses are well-positioned to serve the pent-up demand for finance and consumption across emerging markets.

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After a volatile 2018, the year ahead looks just as choppy for equities as geopolitical events plague share markets across the globe.

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The Hayne royal commission hearings are done and dusted. Regardless of what is revealed in the final report, the fight continues for Dover Financial director Terry McMaster.

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On 24 October 2018, Terry McMaster sent a response to the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, submitted to the Governor-General almost a month earlier on 28 September.

Usually in such a response to something as serious and formal as a royal commission, the first sentence usually goes something along the lines of “We thank you for your efforts...” or “We welcome the opportunity…” and the like.

Not Mr McMaster. No such pleasantries from him. He put up his dukes.

“Unlike others, Dover cannot thank you for your diligence and thoroughness in preparing your report. There is no evidence of either quality insofar as Dover is concerned,” says the first sentence in Dover’s response.

“Your report needs to be corrected for obvious, numerous and serious factual ‘errors’ and the consequential incorrect conclusions you draw from them.

“I place ‘errors’ in inverted commas. I am being polite. To be less polite but more accurate, I put the phrase ‘deliberate misstatements’.

“It could be you, your staff, and/or ASIC. It does not matter. Your report is full of deliberate misstatements.”

To Mr McMaster, the royal commission, headed by commissioner Kenneth Hayne, only had one intention – to help the corporate regulator ASIC build a false narrative on Dover.

As of 8 January, most of the responses to the interim report are now up on the royal commission website.

Curiously, the Dover response is still yet to be seen. Until now. What follows is only a portion of Mr McMaster’s 49-page defence of the licensee that used to have more than 400 advisers under its wing.

Deliberate misstatements

The interim report made significant errors that then led to a significantly incorrect conclusion, according to Mr McMaster.

Mr McMaster disputes page 255 of the interim report, which briefly discussed the closure of Dover’s AFSL. It read: “In June 2018, ASIC and Dover announced that Dover would give up its AFSL and cease providing advice.” He says this is completely wrong – that Dover’s closure was not voluntary, and that ASIC forced Dover to close down.

“Further, this sentence falsely implies Dover made an announcement in conjunction with ASIC,” Mr McMaster says. “The royal commission has another critical fact wrong: there was no such announcement. In fact, at first ASIC denied it played a hand in Dover’s closure.”

But perhaps his biggest objection – of which there are numerous – surrounds the false impression it made of Dover’s adviser recruitment processes, namely, its Client Protection Policy.

Dover not only followed ASIC’s processes for recruiting advisers, but exceeded them, he says. But counsel assisting Mark Costello left them out in his questioning of Mr McMaster, despite adviser recruitment being emphasised in both the Dover rubric and his own witness statement. If Mr Costello had asked these questions, he argues that a truthful picture would have emerged.

“Dover would have explained it systematically undertook further investigations before authorising each new adviser. The royal commission would have learned these further investigations significantly exceeded ASIC’s requirements for recruiting new advisers,” says Mr McMaster.

“But why would Mr Costello want to ask these questions? It would not help the narrative the royal commission and ASIC were trying to build against Dover. The royal commission and ASIC wanted to build the narrative that Dover had poor adviser recruitment processes. The royal commission did not want to publicly confirm what numerous consultant law firms had found – that Dover had good adviser recruitment processes.”

In particular, Mr McMaster points to the recruitment processes for former Dover advisers Julie Hamilton and Koresh Houghton. The interim report notes the relevant event that led to each adviser being banned occurred before the adviser joined Dover, thereby proving Dover’s pre-appointment enquiries were inadequate.

In the case of Ms Hamilton, it was Colonial First State – her former licensee before joining Dover – denying access to her clients’ data on its platform. For Mr Houghton, it was faking five client signatures after his former CBA-aligned licensee Financial Wisdom refused to sign a client transfer form.

“This is wrong,” Mr McMaster notes. “Each relevant event occurred after each adviser joined Dover, not before.

“The relevant events were the result of unpredictable belligerent behaviour by CBA group companies that could not be detected by pre-appointment enquiries.”

The royal commission’s finding on Ms Hamilton in the interim report went as follows:

“Ms Hamilton was advised by Mr McMaster that she could be an authorised representative within two hours of her advising Mr McMaster that her current licensee, Financial Wisdom, intended to report her to ASIC for a ‘significant’ breach. Mr McMaster’s response was ‘I am not unduly troubled by this’. He said that ‘it could not have happened at Dover because we read over every SoA [statement of advice] twice, and we would have picked up any compliance concerns early in the piece’. He offered for Dover to take Ms Hamilton on as an authorised representative ‘with immediate effect’.”

Mr McMaster calls this finding incorrect. He says Ms Hamilton had been advised by Dover she could become a representative of Dover well before these events occurred. She was a part of a ‘group application’ from a bunch of Financial Wisdom advisers who had alerted Dover to the probability of Financial Wisdom discovering compliance concerns once they left.

But once Ms Hamilton gave notice to Dover that Financial Wisdom raised hitherto unmentioned compliance concerns, Mr McMaster says these concerns were never substantiated.

In the case of Mr Houghton, the royal commission’s findings are even shorter, comprising one paragraph:

“Mr Houghton had advised Dover that Financial Wisdom had concerns about advice he had provided while an authorised representative. Dover appointed Mr Houghton as a representative on 22 January 2015. Dover first contacted Financial Wisdom by letter on 10 February 2015.”

According to Mr McMaster, Mr Houghton had been advised by Dover that he could join the licensee some time before he advised Financial Wisdom he was leaving and, like Ms Hamilton, was a part of a ‘group application’ from a bunch of Financial Wisdom advisers who had alerted Dover to the probability of Financial Wisdom discovering compliance concerns once they left.

Financial Wisdom did not raise any concerns about Mr Houghton. However, Colonial First State did so about six months later.

Again, Mr McMaster says the events surrounding Mr Houghton’s banning order occurred after he joined Dover, not before as stated in the interim findings.

“More particularly, it occurred when Financial Wisdom refused to sign a single compendious client transfer and forced Mr Houghton to visit each individual client to obtain individual signatures on about 150 separate documents,” he says.

“Mr Houghton, faced with a looming day deadline, took a short cut and faked the last five signatures.”

Suppression of contrary ASIC statements

Another significant part of Mr McMaster’s objection to how the Hayne commission was conducted is in how it gave no right of response to the former Dover advisers cited throughout the hearings. He points to ASIC documents relating to Andrew Smith and Adam Palmer. One document says senior ASIC executives were happy with the advice and services provided by Mr Palmer.

Mr Palmer “did it by the ASIC book”, says Mr McMaster, including full disclosure in his AMP Financial Services Guide and full disclosure in his AMP statements of advice. He called Mr Palmer “an excellent financial planner”.

“Senior executives, such as John Weaver, Christopher Newby, Lisa Saunders, Vaughn Claxton and Andrew Davison, agree with me. These guys were happy with Adam’s work at AMP,” Mr McMaster says.

The other ASIC document concerned Mr Smith, dated 20 November 2017. It outlined a review from three ASIC executives, lawyers Christopher Newby and Lisa Saunders, and analyst Denise Dawson, of 15 of Mr Smith’s client files after he left Westpac.

“Since joining Dover in April 2015, Mr Smith has not received any client complaints, and Dover has not identified or reported any adverse matters,” the document said.

Mr McMaster says each client file was in their best interests and appropriate to the client’s circumstances.

He concedes there were a few minor glitches and a few unticked ASIC boxes, but nothing significant and definitely nothing worthy of the treatment Mr Smith ended up receiving.

“The three ASIC executives concluded Andrew Smith’s work during his two-and-a-half years at Dover was excellent. This is not surprising because Andrew Smith is an excellent financial planner,” says Mr McMaster.

"The three ASIC executives recommended Andrew Smith and Dover be advised of this, and that no further action would be taken. The file would be closed.”

Ambushed by ASIC and the commission

Through all of his objections to both ASIC and the Hayne commission, what Mr McMaster found to be “extremely disturbing” was what he believes is evidence that ASIC had provided significant information about Dover’s Client Protection Policy (CPP) to the commission well before 22 March 2018.

In other words, ASIC advised the commission of its concerns with the CPP before it advised Dover. Mr McMaster says this is evidence that ASIC “set up” Dover’s downfall at the royal commission hearings.

“Dover co-operated fully with ASIC. This contrasted sharply with the lack of co-operation of other large AFSLs,” Mr McMaster says.

Despite what Mr McMaster refers to as Mr Costello’s “indignantly loud insinuations and accusations that the CPP was Orwellian and deceptive” during the hearing, the interim report suggests otherwise. Significantly, he points out that the commission does not find that Dover engaged in deceptive conduct in the interim report, qualifying its conclusions by introducing the word ‘may’ multiple times throughout.

The myth that Dover’s CPP is deceptive is further thwarted following a review of the CPP by its advisers, its clients and its legal/compliance staff, according to Mr McMaster.

“No adviser has expressed a concern about the CPP or reported a client had expressed a concern about it,” he argues.

“This must be stressed – despite ASIC searching long, far and wide for a complainant there is no evidence of a client being prejudiced by the CPP. There has not been one complaint since the CPP was introduced in 2015.

“No Dover staff member expressed any concerns about the CPP. This includes the staff on Dover’s compliance committee, and Dover’s other two responsible managers, Florence Tee and Yin Low.”

As for the commission’s questioning, Mr McMaster says almost two-thirds of the questions put to him by Mr Costello were not in the Dover rubric. According to him, he had been told by a Hayne commission solicitor that his questions would be based on the Dover rubric.

However, when he was put on the stand, Mr McMaster was not prepared for most of the questions asked by Mr Costello. He thinks he’s the only witness misled this way and was subsequently ambushed.

For example, Mr McMaster says Mr Costello criticised Dover for an incomplete response to a request for detailed information on 23 April 2018 without disclosing that Dover had only three working hours’ notice. He says commissioner Hayne must have known about this since he was the one who signed the request.

“Mr Hayne must have known Mr Costello’s apparent indignation was inappropriate and feigned. This is particularly since Mr Costello also failed to disclose that Dover followed up on 24 April 2018 asking if the information was satisfactory. The royal commission’s legal team said it was,” explains Mr McMaster.

Mr McMaster also accuses Mr Hayne of allowing Mr Costello to create the false impression that Dover didn’t co-operate with the royal commission.

“Dover obviously did co-operate, particularly once Dover established Mr Hayne’s confusing initial invitation did not ask Dover to report on other AFSLs, but asked Dover to self-report,” he continues.

“If the royal commission put this question in the Dover rubric it would have answered it in [my] witness statement. [I] would have been able to explain and expand further on the day. But the royal commission chose to not do this, preferring its ambush strategy.”

Beyond the final report

The final report is due to be submitted to the Governor-General by 1 February. Findings will be aired out. Recommendations will be made. Decisions will be made on whether to follow those recommendations and, if so, how those recommendations will be implemented.

In concluding his letter in response to the interim report, Mr McMaster writes:

“If this was deliberate you should be ashamed. If it was not deliberate you should be embarrassed. In either case a public apology is appropriate. I am compelled to remember a mentor who advised me if you ever make a mistake the best thing to do is to admit it and correct it as soon as you can. I pass her advice on to you.”

Based on that, it seems unlikely that Mr McMaster will be receiving an apology anytime soon or at all from either ASIC or the commission, public or private. Regardless of your opinion around his sentiments, what is undeniable is that it’s clearly not the tone of someone looking to back down.

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The Hayne royal commission hearings are done and dusted. Regardless of what is revealed in the final report, the fight continues for Dover Financial director Terry McMaster.

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