The Big Picture
July was a bumper month for news that affected stock markets. The Greece debt crisis dominated the first half of the month. Greece started July by going into arrears on a $1.7bn loan to the IMF. But having the Finance Minister resign and immediately hop onto his motorbike wearing a leather jacket and a matt black helmet with a pretty blonde sans helmet on the pillion seemed to be the tops – but then the replacement Finance Minister (also a Marxist and former academic) was so relaxed he didn’t bother to take written comments to the big Brussels meeting as he was requested to do – the dog apparently ate his homework and he asked for an extension. He got more than what he bargained for.
As a result, Greece finished up with a far worse deal than they voted against in June. But for the rest of us the Greece issue has probably gone away for quite some time. As we always thought, there would be no long-run fall-out on us – and, as it turned out – there wasn’t that much short-term volatility either.
In an unrelated crisis, the mainland China stock exchange seemingly went into meltdown. Unlike our market that is dominated by big fund managers making big calls, the so-called Shanghai Composite Index is dominated by “mum and dad” investors that border on having a gambling mentality – people that the China government was encouraging to borrow to get into the market. When the index fell by around one third in a couple of weeks in June-July it seemed bad until one realised that the index had gone up by about 150% in the previous 12-months.
The China Government stepped in and rapidly brought back order into the market. The index gained over 10% in a few days – another problem solved, but some volatility remains in that market!
Because iron ore was apparently being used for collateral on the China market, its price also took a nose-dive from just under $60 / tonne to a 10-year low of $44.59 before finishing the month at over $55.
Iran has almost struck a deal with six major powers to maintain its nuclear power programme without the weapons part. If, or is that when, the US Congress ratifies the deal, trade sanctions should be lifted and more oil will flow into an already over-crowded market. Oil prices are unlikely to rise anytime soon.
But there was also lots of good news. The UK got its best result since 2001 on household disposable income growth – after taking inflation into account.
US employment data and economic growth data were good without being great and our employment data points to last October (2014) as having been the peak for our unemployment. Every month since has marked a slight decrease. And the Governor of the Reserve Bank recently joined the chorus that unemployment may have peaked.
Nevertheless, our official interest rate looks set to fall at least once more this year. The cost – measured in terms of risk – is so small for another cut compared to a no-change or rate-hike decision, it’s almost a win-win for us (unless you are on a pension in cash).
And our Reserve Bank Governor has come out and said perhaps we should accept that trend economic growth going forward will be lower than what we were once used to.
Whatever the pundits might be saying, we still see new record highs on Wall Street in the remainder of the year and the ASX 200 breaching 6,000 sometime soon. In the meantime, there is a more likely chance of some sideways movement until all of the jangled nerves have settled down and our August reporting season to the ASX has been digested.
Asset Classes
Australian Equities
Our market, despite the Greece-fuelled noise in early July, posted a very strong gain of +4.4% in the month – and that was despite a very weak result for resources stocks.
We have the market priced at just below fair value so there is room for some further gains should the August reporting season prove to be a success.
In the run-up to reporting, we noted a slight downgrade in broker earnings forecasts – but then a bounce-back on the last day of the month. Our capital gains forecast for the next 12 month is about +8% plus a dividend of 4.5% plus franking credits. If these forecasts come to fruition it will be a very good financial year for investors.
Foreign Equities
Except for Emerging Markets that had a negative July, the major indexes – such as the S&P 500, German DAX and London FTSE – all performed very well – but not quite as well as us.
Our forecasts for the S&P 500 are for Wall Street to have a stronger 2015/16 than us – up about +13% plus dividends at just over 2% but no franking credits! There are no signs yet that the bull-run is coming to an end in the US or here.
Bonds
Bond markets largely took the Greece crisis in its stride. The Ratings Agency, Fitch, has its estimated probability for default on bonds falling to a low after a slight uptick during the Greece debt negotiations.
As the US Fed has been managing expectations well for so long now, there is no real reason to think that the first hike will cause major ripples – whenever it happens. Much of that is because subsequent hikes have been flagged as few and far between.
Interest Rates
The big question during July was, “When will the Fed raise rates in the US?” As we suspected, the date for the first hike keeps getting pushed back because jobs growth, while strong, is not being accompanied by wages growth. People are taking lower and lower paid jobs.
But the Fed Chair, Dr Janet Yellen opened the door by saying that they may consider smaller hikes than the customary 0.25% moves – say just 0.15% or even 0.10%. Given that the Fed has a range (0.00% – 0.25%) – rather than an explicit number like us, no one could notice a 0.10% increase in a 0.00% to 0.25% range. She can sneak one in showing confidence in the economy without actually doing anything. Brilliant, Janet!
In the recent statement from the Fed, the door has been left open for a rate hike in September. It expressed confidence in the US economy. Just after her comments, GDP growth for quarter 1 was revised up from ???0.2% to +0.7% (both annualised) and quarter 2 came in at +2.3% which was just short of market expectations.
At home, a cut in the next couple of months has been priced in at a 60% chance. And there is a reasonable chance of a further cut so investors should be aware of the possible impact of rate cuts on their income streams.
The Royal Bank of Canada and the Reserve Bank of NZ both cut rates in July. All commodity-based economies, like ours, need to be mindful of monetary policy management and its effect on our own financial planning.
Other Assets
Iron ore prices sank from nearly $60 / tonne to a 10-year low of under $45 / tonne in July but they then bounced back by over 25% – to comfortably above $55 / tonne at the end of July. We continue to make record shipments of iron ore in tonnage from Port Hedland, WA – it’s just that the price is lower because of a supply glut.
Gold and Copper had a disastrous month in July. We have never been in favour of banking on gold. Prices go up and down for a myriad of reasons. And – by the way – if one could assemble all of the gold ever produced in the world since the beginning of time it would only amass a cube with sides of 21 metres! Just a handful of Olympic swimming-pools-full of gold.
Regional Analysis
Australia
Australian jobs improved by a modest +7,300 jobs in total but, importantly, there was a big increase of +24,500 full-time jobs that were offset by losses in part-time jobs. Unemployment came in at 6.0% but, importantly, the official trend measure peaked last October and it has improved every month since – so the Treasury forecast during the May budget of a 6.5% peak already looks off the mark.
Consumer price inflation was moderate at 1.5% for the year – up from 1.3% the quarter before. The Reserve Bank target range is 2% to 3% so the latest read is a fraction low. It gives the Bank plenty of room to cut if it wants.
The ratings agency, Standard & Poor’s, confirmed our AAA ratings but pointed out that we have to start our budget repair soon to avoid a downgrade. After the May 2014 budget we strongly stated that our ratings would be put in jeopardy if we didn’t act – and that the ratings agencies usually make such changes with appropriate notice for major economies such as ours. Well, now we are on notice.
China
While the China “bears” keep looking for an opportunity to put down the China economy, it replied with five big “beats” on market expectations: in economic (GDP) growth, imports, exports, industrial output and retail sales. What more would you want?
The government was also swift and effective in managing its stock market. There seems little doubt that China is prepared to do whatever it takes to meet its target and the evidence to date has been quite remarkable.
Westpac’s China Consumer Confidence index – measured during the July market turmoil – was actually up +1.9% on the month. The Shanghai stock market is not that important in the scheme of things – apparently even to the mainland Chinese!
U.S.A.
The US July reporting period for companies didn’t turn out as well as many had hoped. There were some spectacular successes (e.g. Amazon went up 18% in after the bell trading when it reported) but Apple fell sharply on its result. Caterpillar – the maker of those big yellow trucks and diggers little kids so admire – missed expectations and lost nearly 4% in its share price on the day.
There is a growing awareness that the future might be fine but not great. The world economy, on which the US feeds, is not as strong as they would want. Our forecasts are for Wall Street to grow by over 13% in the next 12 months plus a modest 2% – 3% dividend. That’s not too bad but year-to-date in 2015 has so far been more modest at only +2.2%.
Europe
The Europe debt crisis has come and gone. It’s time to move on, there are bigger fish to fry.
The UK has been producing some great economic data, but inflation is at 0%! There is serious talk about raising rates while inflation is zero.
Europe seems to be coming back to growth with Greece (less than 2% of the economy) now in check. The European Central Bank is still providing stimulus and confidence might return with the Greek solution.
Rest of the World
After many delays, the Iran nuclear agreement has been reached and ratified by the UN and the European Union. Only the US Congress to go and trade sanctions will be lifted!
India is starting to come onto the radar – big time. Back in 2008 we all talked of an extended boom in China to be followed by one in India as the China economy approached maturity and slowed. Credible forecasts are now being made for India growth to be comfortably above China’s starting in the financial year 2016/17.
On top of that, India has built its first ‘submarine killer’ as part of a $61bn fleet to protect its interests in the Indian Ocean should China send submarines into their neighbourhood for whatever reason.
The Brazil and Russia economies and markets are really struggling. With India and China, these four economies make up the so-called BRIC countries. There is an apparent split in the performance of the ‘BR’ from the ‘IC’s. But the Rio Olympics are drawing closer and that might help Brazil. With a ???45% fall in its stock market in the last 12 months, Brazil needs all of the help it can get.
*Ron Bewley(PhD,FASSA)– Director, Woodhall Investment Research
Important information
This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Wealth Management.
