Economic Update: Zigzagging markets looking for some summer confidence

World markets took a hit last quarter with a myriad of negative or concerning news, ranging from Scotland’s independence referendum, Hong Kong’s pro-democracy protests and the US and several other nations’ air forces entering in to Syria to fight against ISIS. These events lead to a shift in sentiment towards uncertainty that saw share market and consumer confidence fall initially before rocketing back to record highs in some markets in recent weeks.

The big stories are however, the deflation of the Yen that is underway to stimulate the Japanese economy and the on-off speculation that the US Fed may start raising interest rates sometime next year as it moves toward the end of quantitative easing. Risk assets were served up at severe discounts in the months of September and October, but have regained ground of late.

Domestically, interest rates have remained on hold this month, steady at 2.50% for the 13th consecutive monthly period. Whilst the RBA has warned previously that it may look to employ a strategy to rein in bank lending to keep house prices under control, this month, Governor Glenn Stevens barely acknowledged that concern, saying “Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets. Dwelling prices have continued to rise over recent months”.

Australian equity markets fell in September then bounced back in October, with the S&P/ASX 300 Index rising by 7.2%. September saw the ASX experience its worst month since May 2012, with around $90 billion sold off in the period, and Australian shares losing almost all the gains since the start of the year in a single month.

The pressure on commodity prices has been relentless, with Iron Ore prices continuing to fall and disappointing Chinese data weighing on sentiment.  We have seen a decline in the Australian Manufacturing PMI Index by 0.8 points to 46.5. Australian exports also deteriorated in September, however the fall of the Australian Dollar should see this sector improve in the months to come. Australian Manufacturing PMI measured exports sub-index declined by 11.0 points to 42.2 points, bringing Australia’s international competitiveness down by 4.17%.

Looking to international markets, concerns are rearing their head that Europe remains at risk of moving into a recession. ECB chief Mario Draghi weighed in on concerns saying “without reform [in the eurozone], there can be no recovery”… “I cannot see any way out of the crisis unless we create more confidence in the future potential of our economies”. In China the MSCI Local Currency Index underperformed, posting a loss of -6.20% in September before recovering confidence to achieve a 17.7% increase in retail sales and a 13.8% upturn in industrial production in October. The Hong Kong pro-democracy protests impacted on investor sentiment, resulting in the Hang Seng Index dropping by -7.31% over the month of September. Manufacturing activity in Mainland China has slowed as retail sales continue to decrease.

Gold and Oil pricing continued to fall in October. The downturn in Gold coming on the back of an appreciating US Dollar and rising expectations of the US tightening monetary policy.

Over the coming months we will be carefully watching the following:

  • The rising prices of property markets in Melbourne and Sydney and the concern of investors entering the markets chasing short term gains.
  • Geopolitical unrest and the threat of global terrorism destabilising the international economy, causing a decline in consumer confidence.
  • An increase in Australian employment market impacting local consumer confidence, impacting on small businesses.
  • Outcomes from the G20 meeting in Brisbane.

 

Economic update : the state of the economy and the markets leading up to the Federal Budget

The budget is coming.  With just two weeks to go it looks like, the Government will deliver a budget with a strong long term outlook and an amount of short-term pain including the introduction of a debt levy. Not surprising really given the state of the domestic economy and the sheer number of baby boomers that will leave the workforce in coming years.  

Over the last three months, our economy has behaved with relative stability.

The last quarter, and in particular, the last month has seen the Australian dollar rise adding more pressure to rebalance the domestic economy. On the flip side, housing prices have continued to rise over the quarter combined with an increasing level of building approvals showing confidence is certainly in place.

Interest rates have remained unchanged throughout the quarter at 2.50% and RBA Governor, Glenn Stevens has commented that further rate cuts are unlikely in the short term. The board appear more comfortable with the global outlook and are predicting a reasonable pick-up this year. In Australia, the housing market has rallied in recent months and household spending has continued to increase, encouraged by our historically low interest rates.

In international markets, the US and Euro Regions have shown improvements in recent months. The US Federal Reserve made the announcement in March to reduce asset purchases by a further $10 billion a month to $55 billion. Following on from this announcement, US 3-year and 10-year Government Bond Yields rose by 0.07% and 0.32% respectively.

Overall International Bonds outperformed global equities in March, with the Barclays Global Aggregate (Hedged) $A Index increasing by 0.31%. Treasury stocks and corporate bonds gained by 0.35% and 0.36% respectively for the month.

Australian equities posted modest gains in March, with the ASX 300 rising 0.21% for the month. Commodity prices declined by 2.0% for the month in terms of Australian dollar terms, largely coming from the fall of iron ore, coking coal and steaming coal. On a market capitalisation basis, large company stocks performed better than smaller companies. The S&P / ASX 50 Leaders Index increased by 0.33% in March, while the S&P/ASX Small Ordinaries Index posted a loss of 1.16%.

On a sector basis, Financials (ex-Property) was the best performing and gained 2.92% in March. All the big four banks also recorded another round of strong gains in March. Materials and Healthcare were the weakest sectors declining by -2.89% and -2.07% respectively.

While residential dwelling investments continue to expand, commercial properties (office buildings and large shopping centre investments) declined over the month. The Australian Listed Property Market posted a loss of -1.58%.

In international equities, the Fed’s further decision to taper and indication that quantitative easing could end earlier (possibly within the next 6 months) has resulted in a more optimistic growth outlook. The MSCI North America (Local Currency) Index posted a small return of 0.68% in March.

The best performing region was India with 4.75% over the month due to political optimism. Japan was one of the worst performers losing -7.51% in the first quarter of 2014 due to the sudden 3% sales tax threatening to endanger their recovery.

China lost -1.74% and Europe reversed its previous months strong position and lost -0.65% in March.

Global resources performed poorly in the month with the FTSE Gold Mines Index and HSBC Global Mining Index declining by -11.14% and -5.42% respectively.

Over the coming three months we expect, if there are no sudden changes to the global environment….

1. A Federal Budget that takes some positive steps to reduce the deficit, cutting welfare payments to those not working and incentivising mothers into the workforce; and

2. A stable interest rate environment that is supportive of business and consumer confidence.

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.

Doom and gloom or the roaring bull?

While interest rates may need to fall a bit further, green shoots of recovery suggest we are at or near the low and more importantly, point to an improvement in economic and profit growth over a 12 month horizon, according to Dr Shane Oliver, Chief Economist from AMP.

“All I hear is doom and gloom… All is darkness in my room”

Dr Shane Oliver opened his Economic Update for our Sydney office last week with a riff from the new Rolling Stones song “Doom and Gloom” released this year.

His pragmatism was clear, despite the recent rise in equity markets that has occurred since December 2012, he wants investors to retain cautious optimism and look forward to more growth.

Many of the worst-case scenarios that economists predicted for 2012 didn’t happen:

  • Italian and Spanish bond yields fell when many expected them to rise,
  • The US didn’t have a double dip or fall off the fiscal cliff,
  • The Australian dollar traded within a narrow range all year; and
  • The world didn’t end on December 21, the end of the Mayan calendar.

Many of the issues that people were concerned about last year can now be seen receding and Shane Oliver himself says he is feeling more sanguine with the world’s economic prospects.

In 2012, listed REITs were the star performers, enjoying a return of 30% in Australia and 27% globally.  Cash on the other hand achieved only a 4% return.

In 2013, he expects the world to grow steadily.  He predicted that China will grow 7.5-8% and that the tail risks in Europe will continue to recede.  “Europe is still in recession right now, but the economy is showing signs of growth,” he said.  “All is starting to look OK in the US, with retail sales motoring along, the fiscal cliff now resolved, and housing starts are picking up.  We are also impressed to see that US debt to GDP ratios has fallen from 11% at the height of the GFC to 6% today.”

According to Dr Oliver, Japan finally seems to be getting it right too with the election of new Prime Minister Abe who has won the election on inflation friendly policies that make it look like it will go down the same recovery track as the USA.

Australia, he says is showing signs of green shoots, despite our determination as a Country to be pessimistic.   Retail sales were up in January, job ads were up in January, and new home sales and auction clearances are looking up too.

“Mining is moving into a cyclical decline, which will force our economy to be more dependent on the non-mining sectors over coming years for stability.  Whilst this presents concerns, the reserve bank is supporting growth and consumer confidence is rising, with it up over 15% in the last year.  Political risks remain and are likely to hang around until we have removed the hung parliament and returned certainty to our Government in September.

He believes that the seven cuts in interest rates we have seen over the last eighteen-month period are starting to be felt right across the Australian economy and that we may now be nearing interest rate lows.

“I believe interest rates are near the bottom of the cycle.  With Banks offering 4.99% on fixed term loans, it simply cannot get much better.”

Dr Oliver was optimistic that the equity market has entered another cyclical bull market.  Our equity market in Australia has been rising since November 2011, about 18 months.  But research by AMP shows that most cyclical bull markets last approximately 47 months, leading him to suggest that there should be more good times ahead.

Equity markets are up 22% in the year to February, primarily due to some growth in company profits.  This has driven up price earning multiples making some of the equities in our market look a little expensive, or indicating potentially that profits might be about to rise as often happens at this point in a cyclical bull market.

What makes him think it can go higher?

“When cash rates get below about 6% people usually start moving out of cash and seeking out risk.  There is about 14% of our Superannuation system currently sitting in cash at the moment in Australia, giving us a strong pool of money that may be tempted to enter the market given a continued improvement in confidence.”

To finish off the evening, Dr Oliver highlighted the risks, which looked a lot less threatening than recent years:

  • Instability in Europe, with many watching Italy for any distress after their recent elections;
  • Any slippage in Chinese growth;
  • Any further ratings downgrades for the US; and
  • Continued softness in Australia’s non-mining economy which we will become more and more dependent on.

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.

Enter the Dragon


The economic Gods have favoured Australia with some fortune that has sheltered us from the depths of the GFC.  The westernisation of Asia, our proximity to the region and the resultant minerals boom have been well recognised, as have the opportunities for Asian Investment. At last month’s meeting of the Managing Partners of our Asia Pacific Accounting Alliance, held in Kuala Lumpur, the opportunities for investment to and from Australian businesses were driven home.

Our Asian colleagues reaffirmed their strong interest in the west and Australia in particular, and were keen to showcase their well-educated and low cost workforces ready to support businesses expanding to and from the Asian region.

Bruce Lee’s epic last film, Enter the Dragon portrays the quietly confident and disciplined Lee introducing his concept of ‘fighting without fighting, using the strength of his opponents to his benefit’. In much the same way and fittingly in 2012 the Chinese year of the dragon, we can capitalise on the great strength of our Asian neighbours.

Have you thought about how the seismic shift of power in Asia will affect your business and considered what you should do to capitalise on the opportunities presented in this changing economy?

Inward Investment from Asian Markets
Strong Asian investment interest continues in resources, property and agriculture. If you are holding these assets its important you are positioning yourself with the right organisations to ensure you are on the potential shopping list. These asset classes are the first wave with asian investment in operating businesses gathering pace. There is also activity in the smaller end of the market with one recent Asian entrepreneur we met with pledging to invest $10 million per year in various Australian businesses.

Business Restructure/Outsourcing
A sensitive topic I know but my Asian visit confirmed we have to rethink our business models. Smart, well-educated, eager and cost effective labour from Asia will continue to have an impact on all our businesses. The challenge for each of us is to use the opportunity to focus our people on becoming customer facing knowledge workers while evaluating opportunities to outsource more rudimentary tasks.

Australia as an ‘Asian Investment Entry Point’
Over the last year, we have noticed a strong increase in enquiry and referrals from our International Alliance partners from around the globe. With limited growth opportunities in Europe and North America, western businesses with an eye on the emerging Asian Century are seeing expansion into or acquisition in Australia as a good first step Asia Pacific option for two reasons. Firstly, they are more comfortable with the regulatory and cultural fit that Australia provides; secondly, our solid growth prospects from our proximity and increasing connectivity to Asia gives their start up or acquisition a greater chance of success.

Get Asia on the radar and make the effort
Whatever your business, it is unlikely you will be untouched by this continuing phenomenon. I recommend that you make the effort and get connected. There are a number of Asian focused business groups as well as printed and online publications that will assist you to understand the opportunities. Some time back our firm established an Asia Desk following our analysis of the opportunity.

We appointed a Director, seconded two Mandarin speaking staff and increased our contact with our Asian Alliance partners and local Asia business groups.We translated our material, including business cards and have now held several business meetings solely in Mandarin. Through building this expertise we have advised private and State Owned Asian enterprises on an increasing number of transactions and plan to continue the growth of this area in our business.
Expanding into Asian Markets
You may also consider expanding your business into Asia. The increasingly wealthy population provides attractive opportunities. However it is important to tread carefully. A thorough knowledge of the market, culture and regulatory environment for the products and services you work with is critical. A smarter way can be to consider joint ventures and ensure you have advisers with on the ground local knowledge.
Investment in Asian Markets
Investment in Asia via equity markets may also seem attractive; however individual stock picking is fraught with risk as the markets are still to mature. Diversified funds with more widespread Asian and international exposure may give you upside benefit while spreading the downside risk.

Allan McKeown is Chief Executive of Prosperity Advisers Group

Rebalancing for a new financial year… Which asset class will prevail in 2012-13?

30 June 2012 closed a difficult year for share investors. Australian shares returned -6.7% and International shares (in Australian dollar terms) – 2.1%. By contrast the Australian and International fixed income segments returned 12.4% and 11.6% respectively. That was the year that was but where to from here…

Firstly, for those investors relying on income from their investments, it is worth remembering two things about last year’s results

1.       Negative share returns do not equate to no income from shares (particularly in the case of domestic equities). The price of a share may fall but that does not necessarily translate to a fall in payout (for example, the share price of BHP fell nearly 30% but the dividend per share increased); and

2.       Positive fixed income returns do not equate to higher income from fixed interest. The pure income return from fixed interest does not change over the life of that fixed interest investment. But, similar to a share, fixed interest investments are traded and it is this market quality that results in price volatility. In general terms, as interest rates fall, the (traded) value of a fixed interest investment rises.

The headline constraints for International shares still remain – Eurozone weakness, a fragile US economy and slowdown in emerging economic growth.  However, resolution of the Greek political landscape appears to have prevented a breakdown of the economic union, there are signs of subtle recovery in the US and with inflationary pressure reducing, emerging countries such as China and India have scope to ease policy and stimulate growth. In Australia, the three big drags on shares – relatively high interest rates, a high Australian dollar and concerns about a hard landing in China – appear to be diminishing.

By contrast, with interest rate policy generally eased or easing around the World (and as noted above fixed interest prices move inversely with interest rates), there are headwinds for the fixed interest sector in the next year.

Successfully predicting the asset class that will outperform the others for the next 12 months, let alone the return itself, is fraught with danger. If you wish to speculate on that, and back that with your money, I wish you the best of luck. A less volatile approach is to diversify a portfolio of assets across a range of asset classes.  In general terms, the lower the return required from your portfolio, the lower the allocation to equities that is required. However, given that equities are yet to recover to their 2007 highs (and may well take longer than the 40 month average since 1900 to do so following the GFC), and the relative tailwinds/headwinds facing equities and fixed interest, I would be disinclined to significantly reduce existing equities exposure in re-balancing a portfolio.

Gavin Fernando is a Director and Financial Adviser with Prosperity Advisers

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

The information contained in this article (including any attachments) has no regard to the investment objectives, financial situation or needs of any specific recipient.  It is soley for information purposes and is not to be taken as personal financial advice.  The content is based on information from sources believed to be reliable as at the time of compilation. Past performance is not indicative, or guarantee, of future performance.  Please contact Prosperity if you require specific information or advice.