Economic update: Housing and property leading the economy again

In the wake of the Federal Budget consumer confidence has dipped in the quarter to June and our resilient Australian dollar is continuing to make our domestic outlook more difficult than it needs to be. This combined with the tragedy this week in Eastern Europe and escalating challenges in the Middle East makes geopolitical risk to the world higher than it has been of late.

The domestic cash rate remains unchanged at 2.50% and there is no sign of a rise to come in the near term. The Reserve Bank came out in early July and warned that Australians shouldn’t always expect house prices to rise and minutes in mid July indicated they will be holding rates steady until there are significant signs of improvement outside of the mining sector. On the positive, our economy has had moderate growth and there are continued signs that the transition away from mining is slowly occurring with growth in our tourism, oil and gas and property sectors.

Housing construction and new home sales have expanded significantly over the past year, although in the second quarter the pace of increase has moderated a little.

In international markets the US economy has continued to show very positive signs. The US Business output boomed over the month of June – manufacturing output and new orders rose at the fastest pace since April 2010 and job creation hit a four-month high.

A ‘mini-stimulus’ package from the Chinese Government has helped improve economic activity in the region. The Chinese economy has grown at an annual rate of 7.5% in the second quarter, up slightly from 7.4% in the first three months of the year.

The European share market was the only region posting losses in June, with slowed industrial growth.

The Australian bond market continued to perform steadily over the quarter with the UBS Australia Composite All Maturities Index increasing by 3.08%. Within the asset class Government bonds were the stronger performer gaining 3.55%, while corporate bonds increased by 2.57%.

While bonds performed well, Australian equities lost ground in the month of June, recording a loss of -1.45% as measured by the S&P/ASX 300. Over the entire quarter equities only recorded only a slight gain of 0.88%. [Read more…]

Green Shoots

The Federal Election has come and gone, leaving the result most business owners and investors were expecting but will the confidence instilled by a more stable Government bring the green shoots Australia needs?

In the week leading up to the election when our Nation’s fate looked sealed firmly in blue tape, the consumer confidence number started to climb, rising by 4.7% in September from August and sitting at 110.6, above the 100 level where optimists outnumber pessimists.

The business confidence numbers also strengthened significantly in this period, with the index rising in August to its highest point since May 2011.  The consecutive cuts in the cash rate may have helped, but seemingly more important were the anticipated political changes.

Nationally, housing is also providing a badly needed sign of life in our economy, with six consecutive weeks of 80%+ auction clearances in Sydney at the time of writing, and Melbourne achieving their highest rate since 2010, at 76% .

Equities, which were struggling under the weight of the Syrian crisis and the end to quantitative easing in the US in August, seem to have lifted their tone with the news that Russia and America plan to do everything they can to avoid full blown conflict.

Could these be the green shoots of Spring in our economy that so many are looking for to invest?

Over the coming three months we are looking for three shifts in the market:

We expect the USA will continue down the forewarned path of reducing its quantitative easing, bringing to fruition something the market already expects.  This could cause some market instability around announcements.

We see the continued weakness in commodity prices and Asian markets driving a gradual and painful weakness across the mining economy in Australia and a continued flow through to other sectors.

And the handbrake coming off Australian business confidence, as the Liberal Government starts to make their policy changes.

One big hope we all have is that the recent reduction in the $A dollar will act as a natural stimulus improving investment and export growth that stimulates our business economy.

Economic Update – September 2012

Following consecutive cuts in April and May, the Reserve Bank of Australia (RBA) left the overnight cash rate unchanged at 3.50% in July and in August.   Many economists are speculating that rate cuts will now be seen in the race towards Christmas. 

The Reserve Bank Board was of the view that global GDP will grow at average pace for the remainder of 2012 but believes there are clear potential downside risks that need to be monitored. The key concerns cited were contracting growth in Europe and weaker economic indicators in China.

Locally, it has been commodities that have caused the greatest short term pain for our economy and financial markets, with iron ore spot prices falling to below $US90 and coal prices having slumped by up to 30% in some categories during the month of August and in early September.

Bond markets were volatile during August but most markets reversed intra-month trends to end close to their starting values. The Australian 10-year government bond yield was a strong case in point, increasing sharply in the first half of August hitting a high of 3.44%, before falling back to its starting value of 3.01% by the end of the month.

Equity markets generally continued to rise through August on rising hopes for another round of Quantitative Easing from the Federal Reserve and bond buying from the ECB. The Materials sector underperformed its global counterparts and was one of the worst performing sectors domestically due to the sharply falling iron ore price.

The best performing Australian large-cap stocks during the month included Bluescope Steel (+26.4%), Primary Health Care (+23.5%) and Resmed (+20.8%). The worst performers came from commodity and resource services sectors, Boart Longyear (-38.4%), Atlas Iron (-21.7%) and Lynas Corporation (-20.5%).

U.S. and European stock markets posted strong returns in August, with investors gaining confidence that the ECB will intervene in government bond markets to stabilise the region.

Chinese stocks were weaker market performers in August, falling 3.10%, as the government continued to deploy mechanisms designed to slow the economy. Asia ex-Japan also declined as a result of the slowing trade links, to end the month 0.41% higher, underperforming the global benchmark by 4.91%.

The Australian dollar fell against most major currencies, largely due to the falling price of iron ore, of one of our major commodities. In particular, the AUD declined by 3.93% against the Euro as investors garnered some confidence due to the increasing possibility of ECB stabilisation mechanisms.

The S&P/ASX 200 Property Accumulation Index was down 0.14% in August underperforming the broader Australian sharemarket.

At a stock specific level Goodman Group (6.12%) was the strongest performer on the back of the corporate restructuring by adding Goodman Logistics (HPK), the Lend Lease Group (4.81%) also performing strongly. The Aspen Group (-23.29%) was the poorest performing security, with the resignation in August of their managing director being a contributing factor to this loss. The Stockland Trust (-5.07%) also fell due to poorly received 2011/12 Financial Year results.

Gold (+4.81%) and Oil (+9.55%) were up strongly in August, while the more broad CRB Spot Commodity Index was up 2.05%.

Volatility fell in August by 1.46% as measured by the VIX Index.

 

Looking Ahead

Our Advisers are looking for the following activity in coming months:

– Financial Markets have rallied on (fulfilled) expectations that major central banks would take action to stimulate their economies, further progress will require a confirmation of recovery. It could take several months for economic data to do this.

– The European Central Banks proposal to buy the bonds of troubled countries reduces the risk of disaster in the Eurozone. This financial support has however only come in return for increased austerity.

– Commodity prices did surge on the long awaited QE3 announcement however the long term resources prices will be determined more by China QE3.
Article by John Manuel, Director, Prosperity Wealth Advisers Pty Ltd. John and our other Advisers provide Financial Planning and Family Office services to our clients from offices in Brisbane, Sydney and Newcastle.  

Economic Update: March 2012

Quarter 1 of 2012 brought mixed messages in Australia, with two months of strength, followed by a weaker March. 

Australian Equities, as measured by the ASX All Ordinaries Index, gained 0.72% in March. The top 200 companies, measured by S&P/ASX 200 market capitalisation Index, gained 0.85% to outperform the market.

Leading these gains was the S&P/ASX 300 Information Technologies industry sector which ended the month 13.5% higher and the Healthcare Sector which ended the month up 7.51% and the quarter up 11.76%.

The Materials sector was the worst performing industry during March, declining by 3.96% due to falling commodities prices. Poorer than expected manufacturing data from China, as well as an announcement by the government to slow down economic growth, triggered a decline in the price of production metals; aluminium, nickel and zinc, in anticipation of reduced demand from the nation.  This flowed through to many Australian resources stocks.

The Reserve Bank of Australia (RBA) kept the overnight cash rate steady during March, defying some analysts’ predictions of a further interest rate drop.

This is said to have had some impact on Australian property where confidence remains fragile.  The sector experienced a minor correction during March, declining by 0.59%, after posting two solid months of gains, to end the quarter 7.14% higher. Also contributing to the March decline was a decrease in the number of new home loans and housing construction commencements, which are leading property indicators, directing investors to exercise caution in the sector.

On the back of the lack of interest rate cut, and other global liquidity movements the Australian Dollar recorded a decline against the Euro, depreciating by 4.08% last month. The AUD also fell against the British Pound (GBP), finishing the March quarter 4.61% lower.   It also fared badly against the US Dollar (USD) and the Japanese Yen (JPY), depreciating by 4.16% in the quarter and 1.83% during March.

The first quarter of 2012  saw optimism returning worldwide to equity markets from the nearing conclusion of the European sovereign debt crisis. While the disaster is not yet entirely averted, as seen in recent days, an important stabilising block was implemented during March, with the EU and IMF providing Greece with a second bailout package. Investors in Europe responded positively to this announcement and drove the MSCI Europe index 3.68% higher, to end a strong quarter during which it appreciated 9.51%.

Asian equity markets did not perform with as much consistency, seeing varied results with the TOPIX (Japan) gaining 2.15%, while the Hang Seng Index (Hong Kong) declined by 5.47%.

Looking Ahead

Looking ahead we are watching for the following activity this quarter:

  • Volatility at lower levels, but continuing as Europe continues to traverse fiscal austerity in many nations.
  • Continued improvements in international confidence as the US economy strengthens towards the pre-election period.
  • Continued potential for an interest rate cut in Australia in coming months.

 

Source: Data and statistics drawn from Zenith Monthly Market Report, March 2012

Disclaimer: This article has been written by Prosperity Wealth Advisers Pty Ltd, Corporate Authorised Representative (No 345322) of Primeplan Securities Pty Ltd AFS Licence No 229537 (ABN 59 070 507 274). Suite 16, Level 3, 299 Toorak Road, South Yarra VIC 3141. Tel 03 9826 2800

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