Infocus

The Big Picture

Most share markets were very strong in October so it was no big surprise to see markets take a breather in November. This was particularly the case as the big trigger for the next major economic trend is due in mid-December (16th) – the US Fed’s decision on its first rate hike in seven years.

Jobs data in the US were a bit weak as released in September and October. In contrast, November’s release was very, very strong. Markets expected a below recent average 185,000 new jobs but the data revealed a rather large 271,000 jobs! Unemployment was steady at 5.0% and there, at last, was some moderate wage growth at 2.5%. It would now take a lot on the 4th December in the next jobs’ release for the Fed not to hike at its next meeting.

On top of jobs, the US economic growth in Q3, measured by GDP, was revised up from +1.7% to +2.1%, and the market has priced in more than a 70% chance of a rate hike. Since a hike means the Fed’s rate will still only be in the range 0.25% to 0.50% there can be no material effect on the real economy. Markets could react but it has been so well telegraphed – and tested a few times before – that volatility should be reasonably well contained – unless, of course, the Fed does not hike! That would be big, bad and ugly for markets.

No matter on which side of politics you belong, Turnbull has turned around the fate of the current government immeasurably. The Westpac – Melbourne Institute Consumer Sentiment Index is up a massive +8.1% in the two months since the leadership spill.

The level of economic argument is now clear and inclusive of all Australians. It will take a while for our economy to return to higher levels of growth but it seems the process has, at last, begun.

Our jobs data surprised many as unemployment fell to below 6% and +58,600 new jobs were created. As we often report here, much of the month-to-month variation is due to statistical sampling error. There is almost no way these numbers can have a bad spin but a return to trend unemployment of 6.1% in December is quite likely.

The Reserve Bank of Australia (RBA) although not cutting rates on the 1 December stated that the next change will be down if any change is made soon. However, the current consensus view of economists is that the next change will be up – but not for 12 months of so.  These views are consistent.

As the China economy rebalances from mining to consumer-driven activity, Retail Sales data is becoming more important than manufacturing data. The sales data is strong and the latest government statement is for economic growth to be around 6.5% for the next five years – only just below the current 7% target.

The biggest issue in China is the South China Seas confrontation. China has built some man-made islands and is claiming new stretches of international waters, and the US is flexing its muscles with its navy patrolling in the area.

Russia and Turkey are also in confrontation – about Syria. Interestingly, sanctions against Russia are not being talked about – as they were with the Ukraine issue.

The migration issue is still growing in its magnitude and now the European Union is offering Turkey money in exchange for Turkey holding onto the refugees crossing the border from Syria into Turkey.

By Christmas, so much economic uncertainty will have evaporated, and 2016 is much more likely to be better than the current year.

Asset Classes

Australian Equities

The ASX 200 was down ???1.4% in November but volatility and ‘fear’ are subsiding. The Materials sector was down ???12.6% in the month and the Healthcare sector was up strongly by +5.3%.

We have seen no evidence that the fundamentals have changed so our long-run view of our market is fine. We just suffered recently from panic selling around the US Fed’s comments.

Foreign Equities

The German DAX was up strongly in November (+4.1%) but other major indexes were relatively flat.

The China Shanghai Composite stock market index had a really bad day (-5.5%) near the end of the month but the next day was flat.

The US and Australian fear indexes are both at below average levels.

Bonds and Interest Rates

The RBA has kept rates on hold at 2.0%. The next meeting is in February but most are expecting rates to be on hold for the best part of a year – and then up.

Everyone is waiting for the statement following the December 15 and 16 meeting of the Federal Reserve. Almost everyone is saying that the first hike since 2008 is virtually a given for December.

The Bank of England was positioning itself for a rate hike earlier this year but now they are saying that there is no rush.

Other Assets

Iron ore prices continued to languish. But BHP’s share price falls are as much to do with the Brazil dam disaster as ore prices. Oil prices did rebound somewhat at the end of the month, but were still down sharply over the month. OPEC is due to meet to consider reducing supply to support prices, and Gold prices hit a five-year low in November.

The jobs data showed that +40,000 full-time jobs were created in October as well as +18,600 part-time jobs. Unemployment fell from 6.2% to 5.9% over the month. However, the official trend unemployment rate has been steady at 6.1% for months.

The proper interpretation is that unemployment is stable at a reasonable rate, and employment growth has been averaging a solid +20,000 new jobs per month over the last year. The economy is stuck in reasonable but not good territory. If the spell of consumer confidence grows further the economy could soon return to full employment.

While the Westpac confidence index has shot up by +8.1% in two months, it is still only just above the 100 level that separates optimism from pessimism.

Access Economics – Deloittes – a very well regarded group of analysts – is now saying that at current settings, the budget deficit will never close! Indeed forecast deficits are starting to blow out and action must be taken.

The Hockey budget of two years ago was on the right track but the government failed to sell the policy initiatives, and Morrison appears to be taking stakeholders with him. The budget situation is certainly not yet dire but it will become so if solutions are not passed through parliament.

China

China’s Purchasing Managers Index (PMI) for Manufacturing started October at 49.8 – the same as in the previous month – which beat expectations. Today, it came in at 49.6 which was slightly below expectations. So manufacturing is more or less holding its current growth levels.

Retail sales stood at +10.9%, so the consumer side of the economy is working very well. As consumerism grows, the relative performance of Retail Sales will grow.

The ‘fifth plenum’ – or meeting of the major government players emerged with a strong statement for future growth. They are targeting +6.5% pa or the next five years.

U.S.A.

In the first month following each quarter, the government releases a preliminary estimate of economic growth and then revises it in each of the next two months. It is often the case that the first number is revised upwards. This month was no exception. The moderate +1.5% (annual) estimate for the September quarter was revised upwards to a quite reasonable +2.1%.

All in all, the US economy is fine but the Fed needs to confirm that view with a rate rise at its December meeting. More hikes will follow but at a much slower rate than is usual.

Europe

The European Central Bank (ECB) is positioning itself to bring in more stimulus and the markets like that. The German economy is doing quite well and the debt disruptions are becoming a thing of the past.

Migration issues are, of course, worsening but the terror attacks in Paris – and thwarted attacks elsewhere in Europe – seem to have focused attention on finding a solution that does not simply mean free movement across the borders.

Rest of the World 

Japan’s economy continues to disappoint. It just shows how hard it is for an economy to get out of a deflationary spiral which is why everyone else is pumping money into their economies to avoid deflation.

Russia is involved in Syria but more in propping up the government rather than fighting IS. The shooting down of a Russian jet fighter has obviously heightened tensions in that part of the world. Although there are reports that Putin is ready to mobilise troops, the matter seems to have been contained – so far. The US and Russia need to join forces to solve the IS problem.

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

** Australian Bureau of Statistics

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.

The Big Picture

After two quite bad months on world stock markets, October produced strong results largely based on comments from the US Federal Reserve.

Fed members were on overdrive at the end of September and the beginning of October, to tell all who would listen, that it still plans to lift its interest rate in 2015 for the first time since 2006.

The October Fed meeting produced a statement which dropped the controversial comments about concerns for global growth and volatility. It also upgraded its description of US growth prospects from modest to solid. It is reasonable to conjecture that, had the Fed used those words in September, we would not have seen the big sell-off at the end of September.

The provisional US annual growth figure for Q3 came in at a low +1.5% compared with the twice revised figure of +3.9% for Q2. There does seem a recent tendency for the customary monthly revisions to growth estimates to raise the estimate, so +1.5% on its own is not a problem.

But US jobs data has been a bit softer in the last two months. The next number scheduled to be released on November 6th needs to be back above +240,000 new jobs – the average over the last year or two – to completely calm nerves on this front.

China just cut its benchmark interest rate for the sixth time since November 2014. It is clearly prepared to manage its economy as the other major countries do. Its economic growth came in at +6.9% which was slightly above expectations. Its export data were much stronger than expected.

With iron ore prices falling again in October, BHP and RIO tabled their quarterly results and both produced much stronger production and shipment data. China is still buying, but it is just at a lower price because of the increased supply by the major miners.

China has been flexing its muscles in the South China Seas around its new artificial islands and sovereignty over the waters around them. The US ended the month by sending in a US Navy ship to show that traffic in that busy shipping lane should not be hindered.

General Secretary Xi Jinping visited both the US and the UK in what seems to have been a very successful tour. China has also signed a trade agreement with Australia and the benefits of trade with the UK are already apparent. Going forward, every London cab will have an electric motor made in China, and China and the UK have signed a nuclear agreement. We will benefit too in the medium term.

At home, inflation came in at the low end of the Reserve Bank’s (RBA) target range and unemployment was stable at 6.2%. A few jobs were lost but the general trend for jobs has been solid. These monthly numbers do bounce around quite a lot so it is the trend that is important.

The big take-away from recent data releases and comments is that the pessimism surrounding global growth has subsided but nobody believes the US Fed anymore that they will lift rates in 2015. March or June 2016 is being pencilled in by markets.

But will we cut rates at home? The consensus view is that there will be one or two more cuts but it is so hard to say when they will occur. But with our big banks raising home loan rates without any move from the RBA, a cut sooner rather than later is more likely.

Asset Classes

Australian Equities

There were a few spectacular adverse reactions to company reports and guidance. Woolworths and Dick Smith were hit particularly hard, and the two big banks with significant overseas exposure, ANZ and NAB, did not fare well on their announcements.

Woolworths has been a market darling for a very long time and its cosy position with Coles made market strength a given. But, with new market entrants establishing a presence in Australia investors might be wise to rethink their views of any company likely to face new challenges.

Our market gained +4.3% in October but the last week saw five down-days on the run. We have our market still quite under-priced at -5.5% below fair value. Growth prospects are still strong but we still have to emerge from the recent spells of volatility before a solid up-trend emerges. Santa might bring one!

Foreign Equities

The Q3 US company reporting season produced an unusually large disparity between hits and misses on expectations. This disparity caused some market volatility but the US ‘fear index’, known as the VIX, has been trading at levels well below its average.

The US, S&P 500, had a bumper October gaining +8.3% and the German DAX gained +12.3%. The London FTSE was up +4.9% and the World was up +7.9%. We didn’t even keep up with Emerging Markets that gained +5.4%.

But we don’t see our +4.3% gain in October as a problem. Because our market is closed when Europe and the US is open, and vice versa there is often some nervousness on our part about going too hard on the back of foreign leads – just in case the trend reverses overnight.

Bonds and Interest Rates

After the US Fed kept rates on hold at the October meeting, the market’s odds for a March hike went up to over 60%. The Fed is still talking about raising rates this year but the market has become accustomed to the current situation so no immediate change is now needed.

The Reserve Bank of Australia (RBA) also kept rates on hold again in October and there is an increased chance of a Melbourne Cup cut after the big banks’ home loan rate increases.

Other Assets

Iron ore prices slipped below $50 a tonne from over $55 during October. There was some bounce back in oil prices and our dollar was volatile.

Regional Analysis

Australian employment slipped in September by  5,100 but this read is well within statistical sampling variation of recent stronger results. Inflation came in at around expectations and within the RBAs comfort zone.

But the big change in our economy was the ‘out of cycle’ rate rise by each of the big four banks. The reason for these hikes is simple. Although our banks got through the GFC much better than those in the US, UK and Europe, our regulators have been forcing the big banks to hold an even bigger cushion of cash – particularly, in case if there is any adverse movement in our property prices.

Since cash on a bank’s balance sheet earns a much lower return than a comparable amount lent out for home loans, banks’ profitability would have fallen without some action on their part – so banks lifted home loan rates to restore their levels of profitability. And that means the RBA can now lower rates for general lending without home loan rates falling below recent previous levels. The RBA has to be prudent in the impact of its policies on property prices and any possible overvaluations.

China

China’s imports and exports data in October showed falls but imports fell in line with expectations and exports were almost flat rather than nose-diving as markets had been expecting.

Retail sales data also continued to be strong. And economic growth came in at +6.9% which is just below the +7% target. Officials have again come out supporting continued strong growth but it will be more skewed towards the consumer rather than government spending on infrastructure.

The Purchasing Managers Index (PMI) came in at 49.8 – unchanged from last month. Above 50 is better but 49.8 is just fine.

The China leadership is currently formulating its next five-year plan. But already they have abandoned the one child policy in favour of two. That in itself will boost growth in the medium term.

U.S.A.

The US unemployment rate remained at 5.1% but there were fewer jobs created than anticipated. While the average job creation over the last two years has been around 230,000 – 240,000 a month, the last two numbers came in at 136,000 and 142,000.

But the Fed has improved its view of its economy going forward. It is now saying growth is solid rather than the modest tag it was previously using.
The US is facing a recurrence of the end-of-the-year debt ceiling negotiations to pay for things the government has already committed to!

Europe

With the UK still trying to renegotiate its position within the EU, Standard and Poor’s has announced that it will downgrade UK debt by one notch – or two notches if it leaves the EU and relations with Brussels then deteriorate.

A lot of the issue is how the UK can deal with population movements – particularly from the recent surge in illegal migration. The UK’s generous government benefits schemes are enticing migration to Britain, and that could destroy the system for all. So how can Britain look after its own? Leaving the EU is a strong possibility.

There are three central banks in Europe that now have negative deposit rates!

Rest of the World 

The Reserve Bank of New Zealand kept its rate on hold but there are concerns about dairy exports that underpin the New Zealand economy.

Japan is considering more quantitative easing to boost growth but pulled out of that commitment at the end of October.

There are now apparently 60 million people marching to Europe for safety and a better life. That’s three times the population of Syria and about the same as the United Kingdom. As we wrote months ago, it is not feasible to just try and assimilate them as first suggested by some. And there would be at least another 60 million behind if the first sixty are accommodated.

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

** Australian Bureau of Statistics

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.

The Big Picture

August was terrible for stock markets around the world. While September may not have felt great, markets were volatile but mainly moving sideways – at least until the last few days of the month.

By far the biggest news from last month was the United States (US) Federal Reserve indecision on interest rates. This central bank flagged late in 2014 that its first rate hike in eight years from the emergency low setting of 0.0% – 0.25% would be “data dependent” but most analysts pencilled in mid-2015 for the event.

June came and went and September seemed to be the new date in economists’ minds – but not in market pricing by the people, who trade rather than talk. Although jobs creation has been quite strong in the US for a couple of years and inflation has been subdued, there was no need for a hike. But it is now seen to be embarrassing for the US to have rates so low for so long.

In the end, the Fed didn’t hike last month but it was the accompanying statement released at the press conference that spooked markets. In essence, the Fed argued that global growth looked like a bit of a problem and recent volatility made it a good idea to wait. It was that latent Fed fear that put markets into a spin.

Dr Yellen, the chair of the Fed, gave what would normally have been a low-key speech a week after the press conference at a university but everyone was waiting and listening for a signal. Yellen’s voice uncharacteristically faltered during her speech and she wasn’t able to finish the speech or answer questions as planned – and she needed medical attention when she left the podium.

The official statement said that she was suffering from ‘dehydration’ which seems a bit like a ‘drunk’ politician on TV claiming to have been ‘tired and emotional’. The stress for Yellen must have been immense in her bid to quell market uncertainty. We certainly empathise with her. She said what we wanted to here – rates will likely go up this year.

Most of the Fed members have now joined forces to say that rates will go up this year but there are only two meetings to go in 2015 and one of those has no scheduled press conference to follow. A quarter of a per cent rise (or less!) would have no impact on the real economy and inflation is too low to worry about. It is a case of getting a rate hike out of the way so we can all move forward.

But just “carrying on” isn’t what is happening in Australia. Malcolm Turnbull swept into the Prime Ministership and had an immediate big positive impact on consumers. The first consumer confidence index report after the spill came in at +8.7% which is the biggest improvement since the index was created about seven years ago. Unsurprisingly, the index did pull back a little in the following week.

Jobs data at home were again strong. Rates were also kept on hold but a cut soon is quite possible. A hike is out of the question.

So we are all waiting for the Fed to pull the trigger to set our minds at rest. Until then, it is quite likely that market volatility will continue. However, the long-run prospects for us look just as strong as they were a few months ago. It is just so hard waiting!

Asset Classes

Australian Equities

The market moves in the last few days of the month were crazy. No human knows why the daily changes were so large.

Even though only two days in September saw the ASX 200 finish below 5,000, the sinking feeling pervaded most investors’ thinking. The market lost  3.6% on the month. We have estimated that the market has a fair value of 5,700 so the market was very cheap by our reckoning at the end of September by  12.0%.

The current volatility is unlikely to be a long-run problem – or so we think – it is the price for staying in the market. In a month or two the volatility could well subside and we can be headed on a ‘normal’ path upwards. If Turnbull injects that innate quality Australians have to win into our political decision-making – everything could change for the better sooner rather than later.

Foreign Equities

No market was spared from the down draught that hit markets in September. Markets go up and down. Confusion creates volatility but we see the long-run future as solid.

The S&P 500 was down ???2.6% on the month; the German DAX was down ???5.8%; and the London FTSE was down ???3.0%.

Energy, Materials and Healthcare were the sectors worst hit around the globe.

Bonds and Interest Rates

We thought – and still think – that the US Fed does not need to hike rates for the first time this year to control the economy. But it made such a mess of its communications after the September meeting that it needs to act quickly – so that it can signal that it believes the economy can sustain a little hike – even if it doesn’t need one!

The Reserve Bank of Australia (RBA) also kept rates on hold again in September. It would probably be wise for the RBA to wait and see what impact, if any, the new Prime Minister and Treasurer will have on business and consumer confidence. A rate cut is still possible this year, but it is now much less likely than it seemed last month.

The New Zealand Reserve Bank cuts its interest rate for the third time this year.

Other Assets

Iron ore prices have stabilised at just under $60 / tonne. The Brent oil – world – price is also stable but the US oil price (WTI) did fall a little over September.

Australian employment improved yet again – by +17,400 new jobs in August. Unemployment came in at 6.2%, which is down from 6.3% the month before. GDP growth for the economy was weak at +0.2% for the quarter ending in June but +2.0% for the year.

The main problem we have been facing in growing our economy is getting business to start investing. Lower rates alone are not enough to induce confidence – it is the political backdrop that shapes business conditions.

Turnbull has started off as an assured leader who will not be badgered by questions from the media trying to force him to make policy decisions on the run. While nothing is certain in this world, we now have a good chance to get things going again.

In his ‘previous life’ Turnbull was a journalist, a highly successful barrister and an investment banker. Possibly more than most in parliament he has the experience to communicate with big and small business. And since he seemingly uses public transport whenever reasonable in his work he might well shake off the arrogant tag he had when he was previously the Coalition leader.

China

The China Shanghai Composite stock market index has seemingly settled down after a  30%+ fall from its peak in the middle of the year.

Retail Sales and Industrial Output are still growing at double-digit rates but Industrial Profits did fall significantly last week. The problem in China is similar to the one that is affecting most countries in the world. Oil (and other commodities) prices have fallen significantly over the last year or two and that impacts on measuring inflation and balancing costs and revenues for profits.

China’s General Secretary Xi Jinping visited President Obama in the US to strengthen its role in the world. China is transitioning its economy into one that is no longer just dependent on infrastructure spending and exports. It needs to get its currency accepted as being traded in a mature market. It is a long road but China – like all major countries before – will do all that it can to perform well. It is capable of more stimulus to maintain strong growth if needed and probably will do so.

The 1st of October official measure of manufacturing output exceeded expectations and last month’s number, it was only just shy of the ‘sweet spot’. That’s why markets rallied hard on the news and again the ‘perma-China-bears’ ducked for cover.

U.S.A.

US economic growth was revised upwards for the second and final time for Q2 to +3.9% over the year. The nonfarm payrolls (jobs increase) were a little on the low side at +173,000 but one number does not make a trend. And these numbers also often get revised.

The US unemployment rate now stands at 5.1% but the problem is that, as manufacturing languishes in the US, people are moving into the services industries for work. The average rates of pay in many services’ roles are less than those in manufacturing so wage growth is not accompanying jobs growth – a bit like here in Australia.

Europe

European news is still dominated by how the European Union (EU) can deal with the immigration/refugee issue. Putin is now involved in Syria, but no one is quite sure which targets his air force is bombing! This ISIL problem is exceptionally difficult to solve.

The Greek Prime Minister, Alexis Tsipras, was re-elected in his snap election by forming a coalition with a small number of right-leaning independents. This solution means that it is more likely that Greece will co-operate with the rest of Europe to control Greece’s debt problems.

In due course – if it bites the bullet – debt forgiveness will probably follow so that Greece can rebuild its future.

In spite of strength of its economy, the United Kingdom (UK) has seemingly postponed the mooted rate hike until next year. Jeremy Corbyn was elected leader of the (opposition) Labour party that was decimated when the Scottish National Party took all but one seat from Labour in in this year’s general Scottish election. Since Corbyn is from the extreme left, it looks like Labour will be in the wilderness for many years to come. Tony Blair was arguably such a successful Labour leader because he – like Hawke and Keating – took a far more ‘centrist’ approach.

Rest of the World 

Japan has been struggling for a couple of so-called ‘lost’ decades in a low-inflation environment. Prime Minister Abe brought in three new policies this September in a hope to turn the latest negative inflation read around. But Abe’s main problem is stemming the predicted fall in population. He is claiming he will be able to stop the current population of 127 million from falling below 100 million in the foreseeable future! That is, natural attrition will remove more than the population of Australia from the Japan total in short order!

Iran is getting ready to get its oil exporting up to normal levels after its successful negotiations over its nuclear presence – possibly producing as much as a billion barrels per day. Since oil prices are already depressed, this extra supply is likely to keep a cap on oil prices in the medium term. That’s very good for consumers but not so good for producers.

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

** Australian Bureau of Statistics

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.