admin

Economic Update July 2017

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
Strong signs of continued world economic growth
– Europe has shaken off its recent rocky economic road to recovery
– Signs of life in Australian employment data
– Bank tax might limit growth in the ASX 200 during FY2018
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture 

At the start of a new financial year, it is natural to reflect on our performance over the last one.
In just one year, Europe has gone from being ‘the problem child’ of world economies to a shining light, growing at above trend with past political squabbles having largely subsided.
The US has moved from a grid-locked Obama government to an economy of great hope. True, Trump is struggling to make his mark on a number of fronts but much of the economic data have been solid. If Trump can get his tax cuts, infrastructure spend and healthcare reform through, the USA economy will also run at well above trend.
China has again shown the bear market proponents to have been premature in calling the end to its strong growth path. China has announced a truly massive multi-country infrastructure project, ‘One belt, one road’ that will link the eastern part of Asia with the rest of the continent, Europe and Africa. With the new government taking over later in 2017, there is a reasonable expectation that they will be even better able to continue strong growth.
Not all is well. The UK was doing quite well until May called an election – which backfired on her. She has a two-year deal with a conservative Northern Ireland party (DUP) to form government and see ‘Brexit’ through. How she goes in negotiating Brexit is the key to the success of the UK economy.
Australia too is not yet out of the woods. Recent employment data have shown strong signs of life but not yet for long enough to call it a strong recovery. With our latest economic growth at a low +1.7% over the year, the government needs to get some runs on the board in terms of policy and it would help if the Reserve Bank came to the party with a rate cut.
Some worry about house prices – particularly in Sydney. Students of the property market would know that it is entirely normal for average house prices to be stagnant for up to a decade and then go through a period of very rapid growth as we have just seen. We had similar price growth in Sydney up until 2003 only to be followed by a shallow but elongated dip into 2013. If we now start another ‘property price plateau’, it is just business as usual. That is our position.
So the next financial year is looking to be a source of more growth in stock market indexes around the world – but that gains in Australia may again be a bit more muted than others.
The ‘bank’ tax is likely to weigh on the share prices of the whole financials’ sector. As that sector is about 40% of the ASX 200, the other sectors will have to do most of the work over FY2018. Nevertheless, the ASX 200 should continue to pay solid dividends with franking credits.
The main economic events to monitor over the coming financial year are the Brexit negotiations in Europe and how the US Federal Reserve (“the Fed”) handles its so-called ‘budget repair’. From around September, the Fed plans to stop buying all of the new bonds necessary to completely offset those existing Treasuries that mature.
Given that they plan to reduce the 4.5 trillion dollars of debt to about 2.5 trillion over several years, skill will be needed but we think the Fed has learnt so much from its ‘tapering’ program of a few years ago.

Asset Classes 

Australian Equities

The ASX 200 closed the financial year up +14.1%, including dividends, over 12 months. We are predicting a return to more average growth over FY18 with the ASX 200 finishing at about 6,150 next June. Of course, there will be bumps along the way especially round September-October as the Fed starts to move and Trump faces renewed uncertainty after the August recess for Congress ends.
Our market would have looked even stronger if the Telco sector hadn’t tanked -21.7% (including dividends) over the last 12 months. The Materials sector, including the likes of BHP and RIO, notched up a 12-month return of +25.8% including dividends.

Foreign Equities 

The so-called ‘FANGs’, being Facebook, Amazon, Netflix, and Google (Alphabet), suffered some significant stock price volatility in the US in late June. Since these companies comprise 55% of the NASDAQ index and 37% of the S&P 500, their fortunes a have much wider impact on Wall Street – just as our big four banks do in the ASX 200.
While some question whether this could be the start of a market correction, others just point to the strong earnings growth. Of course, the massive fine the EU placed on Google for favouring its own advertising clients was a real negative but it only knocked its stock price down by about -2% on the day.
That the Fed gave a ‘pass’ to all of the banks in the second round of stress testing gave all markets a big kick up. These US banks can now start returning money to shareholders in dividends and share buy backs.
Capital gains were strong around a number of major markets during FY17: S&P 500 (+16.2%), London FTSE (+12.4%), German DAX (+31.5%) and the Japan Nikkei (+28.6%).

Bonds and Interest Rates 

The RBA did not change rates in June and it has not signalled any inclination to do so – at least in the near future.
On the other hand, the US Fed hiked rates by 0.25% as was widely anticipated. The Fed further clarified its plan to ‘repair its balance sheet’ which markets took in their strides. It is expected that this program will be started in September but at such a gradual rate that markets should not be perturbed.
The Bank of England was also on hold and its governor stated that he did not expect to hike rates this year – but he would if business investment took off.

Other Assets

Both iron ore and oil prices continued their slides into June but, iron ore prices jumped by about +10% and finishing up +11.3% on the month.

Regional Analysis

Australia 

There is now a reasonable prospect that the Australian labour market data may have started to recover without the need for extra policy changes. With now three successive months of good employment data, and a blip down in the unemployment rate, a new trend may have emerged.
The Governor of the RBA, Philip Lowe, has talked up the employment data by saying it is accommodating those people who prefer not to work full time. We believe that the almost non-existent wage inflation does not support this view.
To be on the safe side, we think a rate cut would help support the economy while the government tries to get its new budget through parliament. We see no risk to house-price inflation from a cut as we believe recent Sydney price behaviour has been following the usual pattern of house prices across all states for many decades.
June closed with Dr John Edwards, a former board member of the RBA, calling that there would be eight rate increases in the next two years. This is known in the trade as an attention seeking forecast. He can dine off it no matter what happens for six months. If he gets close he looks like a hero. If he is way off the market as we and seemingly everyone else thinks his forecast will be forgotten and so will he. Nothing to lose on John’s part!

China

China’s Industrial Profits jumped +15.7% (annualised) at the end of June to spark the reversal in the price of iron ore. Other data were also very strong such as the Purchasing Managers Index (PMI) for manufacturing up to 51.7 from 51.2 when 51.0 was expected. The services PMI was again stronger at 54.9 from 54.5.
We have no reason to expect China will miss its growth targets. Indeed, a former member of the People’s Bank of China was recently reported by CNBC as having said that he believes the new government – due to be appointed in October – is likely to be more aggressive in attaining economic growth targets. This reasoning is apparently based on the recent work having been done to stamp out corruption in some sections of government. The new government starts with a clean slate.
U.S.A. The US labour market lost some strength over the past few months – but not enough to worry. The last jobs number came in at +138,000 new jobs when +185,000 were expected – and the previous month’s data was revised down from +211,000 to +174,000.
There has been some noticeable price growth in the housing sector but not nearly enough to cause concern. The hike of 0.25% in the Fed Funds rate in June was the second for the year. Since this was widely anticipated and welcomed. It should not have any negative consequences for the economy. The big question is whether the budget repair program from September will effectively raise rates and hamper economic growth.
Given Trump’s problems with his second attempt at reformulating the healthcare policy, it does not look good for a swift move to infrastructure and tax cuts. However, we expressed such a view of a delay at the beginning of 2017. Perhaps the market just got a bit ahead of itself! But the Fed’s stress testing positive results for the banks have big implications for economic and market growth.

Europe

President Macron had a major victory in the wider French elections. This bodes well for economic stability in the region. The Purchasing Managers’ Index (PMI) for manufacturing hit a six-year high in June.
The President of the ECB, Mario Draghi, has announced no more rate cuts to follow. However, he is thought to have a gentle touch for when he eventually starts a tightening policy.
The UK is showing early signs of softening growth. There have been some differences of opinion from the Bank of England Governor, Mark Carney, and his Chief Economist. Carney was adamant that there will be no rate hikes this year. Then he said he would if business investment warranted it.

Rest of the World 

North Korea continues to be a thorn in the side of the rest of the world with its missile testing program.
Qatar, too, has attracted negative attention. It is claimed that their actions have helped contribute to the strength of the terrorists in the Middle East. Sanctions are being discussed but Qatar happens to be the location of the largest US air base in the region!

*Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research

Network 10 and Voluntary Administration – What does it all mean?

Voluntary administration.  It’s a term that seems to be popping up more and more in the media. We’re told that businesses who enter voluntary administration are finished and it’s the end of the road for them, when in fact, it can actually be a way to try to keep the business operating and viable.

A recent high-profile case is that of Network Ten – Australia’s third largest television broadcaster. With a string of hit shows and the backing of billionaires Lachlan Murdoch, James Packer and Gina Rinehart, it’s hard to believe that the broadcaster would need to enter administration.  In Ten’s case, reduced advertising revenue and high budgets on its primetime shows mean it’s likely it will be unable to repay the outstanding balance on a $200 million overdraft due to the Commonwealth Bank in December.  With Ten’s high-profile backers refusing to guarantee a new loan past this date (for reasons known only to them but to become clear soon I suspect), the company entered voluntary administration in a bid to restructure and look at the best way to remain viable in 2018.

Other recent high-profile brands and businesses entering administration include Topshop, Careers Australia and SumoSalad.  However, in the 2015-16 financial year, nearly 14,000 companies were declared insolvent, of which only 703 were liquidated – that’s only 5%, proving that administration isn’t the death knell the media makes it out to be.

Let’s look at the stages of insolvency and what it means for businesses, their staff and customers.

Insolvency

At its most basic level, insolvency is what a business can’t pay its debts as and when they fall due.  A company may be ‘cash-flow’ insolvent, meaning they don’t have the cash on hand to pay wages and debts, but have assets which could be liquidated to free up cash.  A company may also ‘balance sheet’ insolvent, meaning there is no cash or assets available to pay debtors.  In either case, a company may be required under the law to be placed into administration, receivership or liquidation.

Voluntary administration

When a company enters voluntary administration, the directors of that company appoint a third-party administrator to investigate its affairs while determining its viability moving forward.  The administrator takes on all the power of the company and its directors, providing some breathing space to determine the future of the company.

Usually businesses will trade as normal during voluntary administration.  The administrator will meet with creditors, review financial statements and provide a report back to the creditors on the best solution for all parties.

There are three outcomes to voluntary administration – the company is returned to the directors and no further action is required; a deed of company arrangement is imposed, requiring the company to pay creditors; or the company is placed into liquidation.

Receivership

Similar to administration, a company goes into receivership when a secured creditor (generally a bank of other lender) calls in a receiver to recoup what they are owed.  A receiver takes control of some or all of the company’s assets, giving priority to the secured creditor over unsecured creditors.

Liquidation

Otherwise known as ‘winding up’, liquidation involves the sale of a company’s assets in order to repay creditors.

There are a number of ways to enter liquidation.  The first is voluntarily – directors or shareholders can elect to appoint a liquidator to divide assets among creditors.  The second is by court order – where a creditor, company or board applies to the court for a compulsory liquidation.

In all of these cases, the role of the liquidator is to assess, collect and distribute assets (or proceeds of the sale of assets) and handle any claims for compensation.  Once this process has taken place, the company is dissolved.

Directors

Directors of insolvent companies may be hesitant to declare their status.

As we can see, Channel Ten entering voluntary administration early could actually protect the company and its directors from action by ASIC, and gives the company a chance to restructure and look for ways to continue past December 2017.  Hopefully this means some good news for retail and small shareholders.  I suspect it also gives the Government a nudge to change the highly contentious media ownership laws, or risk losing a major broadcaster and employer.

Will Australia see a recession in 2017?

Despite Australia’s record-breaking run of GDP growth, recently the chatter has increased about the possibility of Australia experiencing a recession.

The last time Australia was in recession, Paul Keating had just ousted Bob Hawke as Prime Minister, Daryl Braithwaite was riding “The Horses” high on the charts and we had just been introduced to a new Pippa on Home and Away.  Above average inflation, double digit interest rates and a global market collapse in the late 80’s created a perfect storm that resulted in a 1.6% fall in gross domestic product (GDP) in the September quarter of 1990.  This triggered a recession that lasted for 12 months, finally lifting in the September quarter of 1991.  The period is immortalised by then Treasurer Prime Minister Paul Keating’s phrase “the recession we had to have”.

While this recession saw businesses collapse, unemployment hit a record high of 11.25% and wage growth halt, it ultimately purged the economy of high inflation and an exorbitant cash rate.  It also led to a raft of economic reforms which has now seen Australia break the world record for the longest period of uninterrupted growth.

While many economists predicted negative growth in the latest GDP figures, Australian Bureau of Statistics data shows a slim 0.3% growth for the March quarter, reminiscent of what was seen during the global financial crisis in 2008 and 2009.  Treasurer Scott Morrison summed it up best this week, saying, “a generation of Australians have grown up without ever having known a recession.”

Many Gen X’s and Y’s are already complaining about the cost of living and housing affordability, not realising they are living through the greatest economic period around the world – ever.  With growth continuing to slide and many economists anticipating a recession in the near future, what would a recession look like for this generation?

Unemployment

The official unemployment rate has been on the rise since 2009, peaking at 6.2% in August 2015.  Since early 2016, the rate has hovered just below 6%.  In 2015, Canada faced a technical recession which saw the loss of 71,000 jobs in one month.  South Africa is currently in recession, with an unemployment rate of 27%.  During Brazil’s recent recession, unemployment climbed by 76%.

With Australia’s national debt already closing in on $500 billion (whatever happened to the ‘debt and deficit disaster’?!), having anywhere between 10 and 30% of the population out of work would place enormous pressure on an already overextended welfare system.  It would also entirely contradict Prime Minister Malcolm Turnbull’s election platform of ‘jobs and growth’.

Interest rates

When Australia entered recession back in 1990, interest rates were steady at 14%.  Over the next three years, the rate dropped steadily to 4.75%, before increasing again in 1994.  Since the end of the Global Financial Crisis, the Reserve Bank has again wound back interest rates, going up and down but never peaking above 4.75%.  In an effort to stimulate growth, the RBA has been consistently dropping the cash rate since 2011, with the current rate of 1.5% on hold for close to a year.  If a recession were to hit Australia, we would likely see further drops to the cash rate, which is great news for borrowers, but bad news for those trying to save and grow their wealth.

Currency/exchange rate

While there are many factors affecting the Australian Dollar against overseas currencies, economic uncertainty can make the dollar lose ground – as can a drop in interest rates.  But a weaker dollar isn’t necessarily a bad thing.  It makes manufacturing, tourism and exports far more attractive overseas, fuelling growth in employment.  The downside is to any Aussies travelling overseas, who can expect to fork out a lot more for a holiday.

We’ll be watching the economic data closely in the coming months to see if there is any deterioration in economic conditions.  If you’re concerned about what this might mean for you, please don’t hesitate to visit www.infocus.com.au and make an appointment with your local Infocus financial adviser today.

Economic Update June 2017

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
Support mounting for RBA rate cuts
– Popular Federal Budget
– United States (US) Federal Reserve maps out recovery phase
– China downgraded by Moody’s
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.
The Big Picture
While most market commentators are predicting no rate changes for Australia in the rest of 2017, three major houses recently re-affirmed their call for cuts.
JP Morgan and Credit-Suisse are predicting two more cuts this year which would take the RBA rate to 1%. Macquarie re-affirmed its call for three more cuts to less than 1% in this ‘cycle’ – that is, in 2017 or early 2018.
We maintain our call for two more cuts. We first identified and reported a growing problem in our full-time employment creation in April 2016. While total employment has been growing steadily, part-time jobs have been replacing lost full-time jobs.
The May Federal Budget gave some long-term hope for our economy with the infrastructure spending announced over the next ten years. The proposed tax cuts for small businesses will also help. But the increased Medicare levy and the bank tax will work against growth.
Both Moody’s and S&P re-affirmed the country’s AAA rating after the Budget.
There is no doubt that the bank tax will be passed on. No company can absorb substantial taxes by cutting costs over an extended period. The only question is whether shareholders or bank customers will bear the brunt. First-year economics teachings lead us to believe the burden will be shared.
Since the big four banks plus Macquarie form the basis of many super funds – directly or indirectly – the Australian public will have less to spend even if the banks do not raise rates to cover the tax.
On top of the bank tax, Moody’s just downgraded 23 smaller banks. The impact of this change in the ratings will be to increase the cost of funding for smaller banks. Therefore, we expect pressure on the banks to lift rates – or not reduce them by as much as any cuts made by the RBA.
The US Federal Reserve mapped out a well-received plan to ‘shrink its balance sheet’. That is, the $4.5 trillion debt amassed in quantitative easing since the GFC is to be reduced in gentle stages starting this year.
The balance sheet is to be repaired by not buying sufficient new bonds to replace all of those naturally maturing – as the Fed has been doing for years. This ‘tapering’ will have the effect of raising long-term rates. Therefore, we continue to expect that there is probably only one more hike in the US likely this year. The market has placed around an 80% chance of a rate hike in June.
At the start of the year, the Fed predicted three hikes this year and then seemingly upped that to four as Trump talked up his expansionary plans. With only one hike so far this year, the Fed again has been overly optimistic about the strength of the US economy.
China reported some very strong trade data – both imports and exports – but Moody’s downgraded China in May!
On a very positive note, Nobel Laureate Robert Shiller has said that the US stock markets could go up by another 50% and most other markets could go with it. This statement is particularly strong as Shiller’s own ‘PE ratio’, measuring whether a market is expensive or not, has been used for a couple of years or so by others to say that the US market was overpriced and about to correct!
In conclusion, we see Australia and our major trading partners’ economies making gradual improvements and the stock markets unlikely to suffer more than the usual levels of volatility.
Asset Classes
Australian Equities After three months of solid growth, the ASX 200 fell in a hole during May ( 3.4%). While there are many factors at work, the fact that we lagged behind the world indexes strongly suggests that the proposed bank tax was the major culprit. The financial sector is about 40% of the ASX 200 index.
While the ASX 200 reached a recent high of 5,957 during May – up from the 5,924 at the start – the index fell away into the close of the month. Stocks in Energy (+2.0%), Industrials (+4.7%) and Telcos (+3.4%) were up strongly in May. It was the  9.2% fall in Financials stocks that did the damage.
Of course the new bank tax might impair future dividends from the big banks but the damage should not be big enough to affect the super strategies in which many have invested.
In the coming weeks there may be some clarity on how the tax will be implemented and how the banks will deal with it. At that point we believe that bank stocks could rally because – in times of great uncertainty such as now – markets often ‘over sell’ the problem stocks.
Foreign Equities The VIX ‘fear’ index (which is considered by many to be a proxy for investors taking out insurance on downside risk in stock markets) reached twenty-year lows during May – only picking up to average levels when the Trump-FBI story peaked.
Wall Street hit new all-time highs in May with the S&P 500 breaking through the 2,400 barrier. Most other major indexes also performed very well in May.
People are mixed on whether the index can rise further since many have risen strong so far in this year. For example, the S&P 500 is up +7.7%; the London FTSE is up +5.3%; the German DAX is up 9.9%; and the Japanese Nikkei is up 2.8% (all figures year-to-date). The ASX 200 is only up
1.0% in the same time period.
For the moment we stand with Shiller in that we think markets can go higher from here.
Bonds and Interest Rates
The RBA did not change rates in May and it looks very unlikely to do so in June. There has been some swing towards acknowledging our weak labour forecast data by analysts and the RBA which might encourage the RBA to cut later in the year.
The US Fed released a particularly informative minutes from its recent FOMC meeting. It outlined a clear plan to start reducing the debt amassed during the quantitative easing programmes.
Such a programme would put upward pressure on longer bonds meaning that the Fed would be ill-advised to amplify that effect with hikes in the Fed funds rate. As a result, we think our view that the Fed only has one more hike in line for the economy this year is worth holding on to.
Other Assets Iron ore prices fell further in May – by  15.5% but oil, copper and gold finished fairly flat. The OPEC meeting on May 25 helped restore some stability in oil prices.
Regional Analysis
Australia The last two months have witnessed strong growth in full-time employment after more than a year languishing in negative growth territory. The key question is whether these latest data mark the start of a recovery or a statistical artefact. Unemployment remains stubbornly high at 5.8% and wages growth came in at +1.9% for the year – which is the lowest on record. Weak wages do not usually accompany strong labour markets.
Since the proposed Federal Budget infrastructure programme and company tax cuts will take some time to work their way through the economy, the RBA would do well to cut rates once or twice this year to kick start growth in 2017. GDP growth data are due out early in June and most expect a low number – and possibly even negative growth.
In contrast to the hard data, the soft data on confidence and conditions are quite reasonable. Westpac’s consumer sentiment read stands at 98 which is just below the ‘100 level’ that separates pessimism from optimism. NAB’s business confidence came in at the highest level since before the GFC and their business conditions index is the highest since 2010.
All in all, the economic scene is mixed but not bad. A lot depends on which parts of the budget the government can get through parliament. And an accommodative RBA is important.
China
China recorded impressive import and export data in May that beat consensus forecasts. The Purchasing Managers Indexes (PMI) for both manufacturing and non-manufacturing were strong. Nevertheless, there remain some commentators that persist in talking about China slowdowns.
China is talking up a big infrastructure initiative known as ‘One Belt, One Road’ which aims to link both ends of Eurasia and well as Oceania by land and sea. This programme, together with its stated desire to relocate 200 million more citizens from the country to the cities, could ensure continued strong growth for many years to come. Nevertheless Moody’s downgraded China debt for the first time in 26 years! China was not happy about that!
China’s retail sales again grew in double digits and industrial growth was solid at 6.5%, but slightly down on the previous month’s 7.1%.
U.S.A.
The USA fell into a political hole when the debate about what Trump did and didn’t do with respect to the FBI chief and Russia got going. Cries of impeachment were heard from some corners but that is highly unlikely. Importantly, the airwaves cleared quickly as Trump set off on his first overseas trip as US President.
The response to Trump’s visits was mixed. He was well received in Saudi Arabia and Israel but he ruffled feathers in Europe and the NATO meetings.
The US nonfarm payrolls data (jobs growth) in May was particularly strong at 211,000 against an expected 190,000. The unemployment rate fell to a very low 4.4%. But, like in Australia and
elsewhere, wages growth is anaemic. After allowing for the modest levels of inflation, the so-called ‘real wage growth’ is all but zero.
The first quarter GDP growth reading was revised up from 0.7% to 1.2% (annualised). The first quarter results are often buffeted by weather factors so this result is not yet considered to be a problem. However, it will limit the Fed’s enthusiasm to hike rates or speed up the shrinking of its balance sheet.
Europe
Macron won the French presidency – as expected. That brought stability to markets in that region. The UK goes to the polls on June 8th in what PM, Theresa May, hopes will be a ticket for her to lead the exit from the EU. However, the early polling is not going well for May. The only real upside for her is that her opposite number, Jeremy Corbyn, does not have much support from Labour politicians. In the UK, the non-parliamentarian members of the Labour Party have a major say in who leads the party.
The Manchester bombing was yet another reminder of the constant source of instability terrorists can wreak on communities. After initially fearing further attacks from the same group, the security level in the UK has since been downgraded by one notch.
But when we focus solely on the economy, Europe continues to strengthen. It is now running ahead of trend growth!

Rest of the World

North Korea launched a missile that reached an altitude of 120 km! The US, and the rest of the world, is increasingly concerned about the proliferation of tests in that part of the world.

*Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research

Media Release | Infocus iCON16 Begins Tomorrow

The Infocus Group’s annual Adviser conference, iCON16, kicks off tomorrow.  This year the group are heading to the exotic location of Sentosa Island, Singapore.  iCON16 provides an excellent opportunity for Advisers to network with their peers and hear from a range of industry and external experts in a beautiful part of the world.

The three day event will see over 120 Financial Advisers, Alliance Partners and Staff from around Australia inspired by keynote speakers and educational sessions based on practical advice strategies to build better businesses and engage for success.

The agenda for iCON16 is packed with amazing key-note sessions and panel discussions with leading industry professionals.  Michael Pascoe, one of Australia’s most respected and experienced finance and economics commentators, will act as the official MC and provide an economic update for attendees.

Steve Baxter, one of Australia’s most successful businessmen and famously a ‘shark’ on the TV series Shark Tank Australia, will also be at iCON16.  Steve will deliver an inspiring keynote at the Business Owners section of the conference sharing his success stories and providing Advisers with some exclusive insights on change, disruption and what’s required to run successful businesses.

Infocus Group Managing Director Rod Bristow said “In an environment where change is a constant and quality advice a non-negotiable, I am really proud of the professional development opportunities available for Advisers at this year’s conference.”

“iCON16 is the second conference where Advisers from both our AFSLs come together to share knowledge, ideas and experience.  This experiential learning offers a rare and valuable opportunity for conference attendees to get out of their comfort zone.  Our Annual Conference is traditionally the opportunity for all attendees to ‘dig a little deeper’ and explore the issues of real importance to them within their own advice businesses.  Our agenda lives up to these expectations with a range of insightful and challenging content”, he said.

For more information, contact Infocus on 1300 463 628, follow all things iCON16 on social media by searching for the hashtag #iCON16, or visit www.infocus.com.au

Economic Update – October 2016

Economic Update

By Ron Brewley*. Brought to you by Infocus

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Federal Reserve dictates market moves:

– US Fed unlikely to rock the boat
– Australian economic growth shows positive signs
– China bears submit

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture 

In December 2015, the United States (US) Federal Reserve (Fed) hiked rates for the first time in nearly a decade. At that time they predicted four more hikes during 2016, so far there have been none!

Some held out hope for a hike in September, but this group have been disappointed at each meeting. December this year is their last chance for 2016 they might just do it to save face but there is no legitimate reason.

After two years of solid job growth, 2016 has been a fizzer so far. New jobs are positive, but about 25% down on 2015 data. The new Fed economic growth forecasts are 2% for each of the next two years – and then 1.8% for 2019.

Central Banks raise rates to slow growth and curb inflation. US growth is at best moderate, inflation is anaemic and wage growth is on life support. We think that there will be at most three rate hikes before 2019. There is just no case for chancing the impact of more hikes than that.

If the Fed does as we think, stock markets will have another couple of good years. But what about Australia? World markets have done well while we have limped along.

Our economy posted strong growth for the second quarter of 2016. Over the year our economy grew at 3.3% and that’s better than moderate! On top of that we note a turnaround in what households have to spend after inflation and after allowing for population changes. After four bad years of growth in that indicator, the latest number was strong.

But the labour force data is still not out of the woods. The basic issue is that part-time jobs have been growing quite nicely but the full-time jobs are down on the year to date. As a result, the unemployment rate appears to be better than it is.

The Reserve Bank of Australia (RBA) kept rates on hold in September at 1.5%. With six central banks having negative rates, and the Fed rate only a bit above zero, our 1.5% is quite large by international standards.

Dr Philip Lowe took over the governor’s position at the RBA in September. There is no urgent need for a cut at home and so the new governor might not want to start his career with a cut. But we think we will get at least one more over the next few months.

September got a boost near the end of the month after what looks like OPEC might strike a deal on cutting the supply of oil which may impact oil prices. But Deutsche Bank dominated the close of the month.

There is talk that Germany might have to support its huge international bank to pay a fine to the US for GFC events. A few hedge funds have withdrawn some of their business so that caused a little volatility.

But will it turn into a big problem? That doesn’t look likely at this stage. Angela Merkel goes to the polls next year and her party suffered some big losses this year over the refugee immigration policy. She has to support the bank if need be. And a rumour has surfaced that Deutsche has cut a good deal with the US.

With the US recently publishing its best consumer confidence read in nine years, its citizens either think they know who will win the presidential election in November or they don’t care who wins.

The world economy continues to improve – albeit slowly. The doomsayers have gone into hibernation for the northern winter – the China bears are asleep.

Asset Classes

Australian Equities

The ASX 200 did end a long losing run in September but it is still up +3.9% for the current financial year to date (FY16). A lot of that gain is due to the Materials sector gaining +11%, Consumer Staples +11% and Financials +4%.

However, for the calendar year to date, the so-called ‘yield sectors’ (Financials, Property, Telcos and Utilities) have lost ground wiping out the dividends received. The other sectors have been going gangbusters.

We see plenty of opportunity for good fund managers to end FY16 on a high note however the broader index might struggle to get through 6,000.

Foreign Equities

Wall Street is off its all-time August highs, but not by much, it is largely trading sideways. The London FTSE shows no sign of struggling after the July Brexit referendum. The Shanghai Composite market is also largely trading sideways.

The world seems to be waiting for a signal for the next leg up in markets but volatility measures suggest there is no imminent downturn from known sources – and, by definition, no one can predict the unknown!

Bonds and Interest Rates 

Central bank activity, or lack thereof, held the markets’ attention again during September. It looks like low rates will continue for longer than most thought at the beginning of 2016.

There is an obvious split in the Fed decision makers. One or two say that they are already behind the curve, there is some support for no rate hikes before 2018!

The Bank of Japan (BoJ) kept rates on hold in September but pledged to do some more on stimulating its economy using less transparent means. Markets responded well to this.

None of these rate forecasts make it any easier for retirees who choose to rely on term deposits and government bonds.

Other Assets 

Oil prices jumped up after OPEC made a preliminary statement about cutting supply. The decision will be put before a formal OPEC meeting in November. Oil prices are currently sitting arround 75% above the low of 2016.

Iron ore prices seem to have stabilised at just under $60 / tonne which is about 40% up from their lows of 2016.

The VIX ‘fear’ index that measures expected volatility on Wall Street is down about 50% from the 2016 high.

In other words – as we tried to explain earlier in the year – commodity and stock markets were going through a temporary but painful wobble. The longer term looked fine then, which is consistent with the outlook now.

Regional Analysis

Australia

Our headline unemployment rate fell to 5.6% however this figure is misleading because of the continuing switch from full time to part time work.

Economic growth reported last month was strong and if that continues we would expect some real improvement in the labour force statistics.

Our business and consumer confidence indexes were up in the month however business conditions fell.

China

The emphasis has moved away from watching China statistics, because broad opinion is that the Chinese economy has settled.

The main problems with China relate to its position over territorial claims in the South China Seas. China is moving positively on ratifying global warming action.

U.S.A.

Anyone – other than possibly US voters – watching the lead up to the November presidential elections on TV must be amazed by the goings on. It makes the Sarah Palin era look tame.

Clearly there are strong negative views about both candidates. We think that we should not dismiss the chance that Trump will win. He may not have typical presidential credentials but the world is changing. Large numbers of people in many western countries are getting fed up with how they are being governed. People are looking for change without necessarily considering the full consequences.

Markets prefer Clinton as shown by the reaction to the first debate. But there are more votes in the Mid-West, the Deep South and elsewhere than in Manhattan. The US people will choose who they want.

If Clinton wins markets could rally into Christmas. If Trump wins there might be a little volatility but the president can do little without Congress being onside. Just look at Obama’s lack of success in getting his way over the last eight years.

Europe

The United Kingdom (UK) continues to shine in the sunlight after Brexit. Its Purchasing Managers Index (PMI) came in well above 50. The new Prime Minister, Theresa May, announced a $16 bn improvement of Heathrow. More countries need good infrastructure spending – Australia included.

Europe is slowly dealing with the refugee situation. M. Hollande, the French President, seems committed to dismantling the Calais ‘jungle’ camp. The backlash against the German political policies makes it more likely that all European Union (EU) governments will want to act to resolve the situation without too much downside for the general population.

Rest of the World

Iran declined to deal with OPEC over supply cuts but the next day OPEC stated that it was going to move anyway. Japan’s data shows no signs yet that suggest further stimulus will not be provided.

*Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research

Important information

This information is the opinion of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Wealth Management and may contain general advice that does not take into account the investment objectives, financial situation or needs of any person. Before making an investment decision, readers need to consider whether this information is appropriate to their circumstances.

Find an Adviser

Enter your postcode to find your closest adviser

Postcode