Economic Update

Economic Update – April 2018

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

Geopolitical Stability emerges

– National leaders re-elected

– Russia-OPEC deal

– Economic data strong

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

March was not a good month for global equity markets but there were many signs of an emerging global stability.The Big Picture

Russia’s Putin and Germany’s Merkel each got elected to a fourth term in office. China’s Xi also was re-elected after China allowed for more than two terms at the helm. Having stability at the top is more likely to lead to more of the same – and that’s good for expected global growth.

The US Federal Reserve increased its benchmark interest rate by 0.25% but did not change its expectations of three hikes this year, to the four expected by a big chunk of the market.

The Bank of England flagged a rate increase in May but the Reserve Bank of Australia (RBA) continues to remain on hold. The European Central Bank (ECB) removed its ‘easing bias’ from its communications. Again – more of what was expected.

Towards the end of March, Russia and OPEC announced negotiations for a new deal on controlling supply and, hence, price. They are moving toward replacing the current annual plan to one of lasting a decade or more. Of course the member states would have to adhere to the plan but these signs are also encouraging.

The fly in the ointment for March was Trump’s trade tariffs with possible repercussions in the form of a trade war. Trump started loud and strong but, as March progressed, he softened his stance with a view to negotiating a reasonable solution.

While the various incarnations of the tariff policy were bandied around, markets took sizeable hits. Wall Street had a few days of around 2% changes.

The net result was that the World share index was down ?2.5% for March and ?1.8% for the year-to-date. Our ASX 200 index was down ?4.3% in March but we did not benefit from the strong rally in the US after our market closed.

Facebook suffered major losses for unrelated reasons. It transpires that there have been major breaches of security for personal information. Since Facebook’s market capitalisation is so large, the broader indexes were materially affected by these share-price drops.

On the economic front, US inflation came in bang on expectations and just under the target rate. The wobbles caused by a stronger wage inflation number earlier in the year have dissipated. US GDP growth was revised upwards for the fourth quarter of 2017. The initial read released in January was 2.5% but March’s revision was up to 2.9% when only 2.7% was expected.

China’s Purchasing Manager Index (PMI) readings bounced back after the pollution-reduction measures ended for the year.

At home our retail sales figures disappointed at 0.1% for the month but these data are quite volatile. GDP growth came in at 2.4% for the year against an expectation of 2.5%.

The jobs data were quite strong with over 60,000 new full-time jobs reported. Unfortunately, there was a sharp fall in part-time jobs leaving a more modest number of total new jobs created.

The unemployment rate did kick up one notch to 5.6% but the trend unemployment rate remained static at 5.5%.

We interpret all of this new information reported over March as supporting equity markets having a strong year over 2018. We see the wobbles of February and March as being controlled variations as are normal in equity markets and not the start of something sinister.

In spite of the events largely occurring in the US, the VIX ‘fear’ index was quite well-behaved and is now back to a level that is only a little over the average.

Asset Classes

Australian Equities

Our ASX 200 lost ?4.3% over March but Financials and Telcos each lost more than ?6%. Materials, including the likes of BHP, lost ?5.6%. No sector produced a positive return but Property was flat for the month.

We believe that the market is quite cheap at this point (about 4% under-priced) and trend expectations for gains are quite strong (about 7% pa). As in many cases, February-March was a period for holding tight rather one of than trying to trade the market.

The forecast yield for the index is around 4.8% plus franking credits. Shorten’s call for clawing back some franking credits may have contributed to the exit from the traditional homes of fully franked dividends: Financials and Telcos.

Foreign Equities

The S&P 500 index had a very strong final day for the month so it only finished down by ?2.7%. The major markets performed similarly. Markets – including emerging markets – behaved in this fashion, suggests that this was a broad-based sell-off. There have been no strong indications of which industries would be most affected if, indeed, a trade was to build momentum.

Bonds and Interest Rates

The RBA did not change rates at the March meeting. It is doubtful that they will raise rates in 2018 and they might even cut.

The US Fed raised rates by 0.25% at its March meeting. They did not take the opportunity to increase the number of forecast hikes for 2018 but an extra one has now been pencilled in for 2019/2020. The new chair, Jay Powell, comes across as being a strong leader, who is prepared to speak more openly than past chairs. Powell seems confident that the US economic growth will stay at these levels or even improve in coming quarters.

At last the ECB has removed its ‘easing bias’ comment from its statements. It is still a long way from tightening monetary policy. Thankfully, it is also a long way away from the financial crises that faced the European Union shortly after the GFC.

Other Assets

After a strong February, the price of iron ore had a major correction of ?20% in March. The price of oil gained strongly in March with Brent oil (the international benchmark) touching $70 / barrel. Our dollar slipped to $US 0.7665. It was nearly 81 cents earlier in 2018.

Regional Analysis

Australia

In a trend sense, about 19,000 new jobs were created in February (and reported in March). The more volatile seasonally adjusted number was just a fraction lower but the full-time / part-time changes were stark.

There were approximately 65,000 new full-time jobs in February but a loss of ?46,000 part-time jobs. Closer examination reveals that this imbalance over new jobs by hours worked is simply a reversal of the previous month’s job creation pattern. In short, jobs are being created in a trend sense but not enough to bring down the unemployment rate from a trend level of 5.5%.

Economic growth for the final quarter of 2017 missed expectations at 0.4% which translated into 2.4% for the year. Growth is travelling at just short of trend.

China

Unsurprisingly, President Xi was elected to another term in office now that restrictions on re-election have been removed. There is a new governor for the People’s Bank of China (PBOC) in Yi Gang.

China is at last flexing its muscles over North Korea’s nuclear programme. It has used trade sanctions to bring North Korea to the negotiating table.

China’s manufacturing PMI bounced back to 51.5 from February’s 50.3 reading; the services PMI climbed to 54.6 from 54.0 and the combined manufacturing/services PMI came in at 54.0. Since it is a reading of 50 that separates contraction from growth, these are indeed strong readings. Analysts are interpreting the rises since February are at least in part attributable to the relaxation of pollution-reduction measures taken over the winter months.

US

The US started March with a particularly strong jobs report. 313,000 new jobs were created and the unemployment rate was steady at 4.1%.

Fourth quarter GDP growth was revised up to 2.9% from an initial 2.6% and a revised 2.5% in February.

The US CPI data produced a headline figure of 2.2% and a ‘core’ rate of 1.8%. It is the latter that the Fed focuses on. Its target rate is 2%.

It appears that Trump is entertaining the notion of meeting the North Korean president with a view to curbing its nuclear programme.

Europe

Germany’s Merkel at last formed a successful coalition to start her fourth term in office. On the other hand Italy voted in a populist styled government.

The European economy is healing to the extent that the ECB is no longer favouring an easing bias – but it is still a long way from tightening monetary policy.

Rest of the World

It was reported that South Korea is to reduce the normal working week from 68 hours to 52 hours!

India introduced a 60% tariff on the importation of chick peas which reportedly upset Canadian farmers. The US is not the only country using tariffs to balance trade.

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

Economic Update – March 2018

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

Inflation Jitters

– United States (US) jobs data starts a correction

– Market rally hard on no news!

– Australia jobs data are mixed

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

We ended January on a slight sell-off, arguably because markets ran a little bit too hard at the start of the year. But come February 3rd there was one little number in the US jobs report that caused a stir.The Big Picture

Wage inflation came in at 2.9% – not big in itself, but a little higher than expected. That caused market participants to reprice bond yields and equities dived a little more.

A week later, all was forgiven. When the noise was stripped out of the data, markets rallied hard again. But then they sold off in the last couple of days of the month.

The US got a second bite at the inflation cherry with the mid-February CPI read. Both versions of the index beat by a fraction so market volatility started to fluctuate in normal territory.

We had the local ASX 200 minimally overpriced in January, so it was no surprise that our market didn’t fall as far as Wall Street. And it rebounded sharply!

Our labour force data seemed strong on face value. But full-time jobs growth plummeted, while part-time more than took up the slack. Unemployment is stuck in the mid 5% range.

China produced some stunning trade data. The commodity boom is far from over.

China is also moving to ‘do a Putin’ by removing the restrictions on a president serving for an extended period. President Xi looks set to be around for at least another 5 – 10 years. Not bad for now but how will the next generation be introduced? Of course Australia and the UK have no limits on the tenure of a PM.

Stock market volatility certainly spiked in early February but it has already got back to close to the normal zone.

The fly-in-the-ointment for the next month is how the new US Fed Chairman, Jay Powell, handles himself. He faced his first grilling on Capitol Hill at the end of February. Commonsense dictates he will try to help the market slowly adjust to any new scenario he would like to preside over.

He was quite upbeat on the strength of the US economy. He emphasised that this strength has improved since the December Fed meeting.

The market and the Fed were both pricing in three rate hikes for 2018. But that Powell testimony has pushed up the probability of four rates to 34%.

As new data has come to hand – particularly on inflation – volatility may again spike. But it is our view that, at the end of the year, 2018 will be seen as having been good for equity markets.

Our Reserve Bank seems unlikely to do much for months – if not for the whole year and beyond.

It so happens that many high-profile analysts have called the latest US company reporting season (February) as “excellent” and the Australian season that is just ending as “quite good”.

With global growth converging to a stronger world economy, and US and Australian companies predicting a brighter future, 2018 looks likely to be quite a strong year for investors.

Asset Classes

Australian Equities

Our market was almost flat over the month but the Healthcare sector was particularly strong with CSL leading the way. The market finished February at 6,016 – which is well off the February low of 5,821.

We have the index priced fairly with above average capital gains expectations going forward.

Foreign Equities

The S&P 500 index sold off at the end of the month to finish down by ?3.9% which is about the same as for other major indexes. Australia was the standout!

Bonds and Interest Rates

The RBA did not change rates at the February meeting. It is doubtful that they will raise rates in 2018 and they might even cut.

The US Fed and the market seemed in lockstep at the beginning of February expecting three hikes in 2018. But Jay Powell’s first appearance on Capitol Hill was read as being quite bullish on the economy. The odds of four hikes rose to 34% on this testimony.

This change in sentiment nudged the 10 year US Treasury bond rate to almost 3% – the highest in 4 years.

Other Assets

The price of iron ore had a particularly strong month. Oil, gold and copper prices were all down a fraction in February.

Regional Analysis

Australia

16,000 new jobs were created in January – the latest published data point – but full-time jobs fell by ?49,800 and part-time increased by 65,900. The unemployment rate came in at 5.5%.

China

China had another spurt in trade volumes. Imports were up 36.8% and exports were up 10.5%. However the China manufacturing PMI missed expectations at 50.3 from 51.3 the month before. The non-manufacturing PMI was also weaker than expected at 54.4 from 55.3 but it was still very much higher than the value of 50 that divides contraction from expansion. Some experts said that the Lunar New Year celebrations may have adversely affected the data.

The authorities are moving to remove the current limits on the tenure of the President. As a result, President Xi looks set to steer the ship for at least another 5 – 10 years.

On the short-run, an extension for Xi is a positive but the danger is that a lack of new blood in his inner sanctum may make the eventual transition to a new President less smooth.

US

The US started February with a strong jobs report. 200,000 new jobs were created and unemployment was 4.1%. The wage rate grew by 2.9% which caused a change in expectations to a faster rise in interest rates.

Fourth quarter GDP growth was revised down to 2.5% from 2.6%.

Importantly, the wage data contained a significant change to the minimum wage that might only have given a temporary boost to wage inflation.

The US CPI data produced a headline figure of 2.1% and a ‘core’ rate of 1.8%. It is the latter that is favoured by the Fed and its target rate is 2%.

Bloomberg TV reported that Trump has already decided to run for re-election in 2021.

Europe

German inflation slipped in February but not by enough to cause concern.

Brexit negotiations continue to attract attention but again progress is being made but not rapidly enough for many members of parliament across party lines.

Rest of the World

The Winter Olympics concluded in South Korea with apparent harmony between north and south. But the star of the Olympics must be the woman – born and raised in the US – who represented Hungary by virtue of her grandparents. She came last in her event as she did not perform any tricks on her skis that characterise the sport. She qualified by coming in the top 30 in the required number of world cup events. She managed that feat by only entering competitions with less than 30 entrants and coming last in each!

It was reported on Bloomberg TV that the North Korean president, Kim Jong-un, and his father used false Brazilian passports to travel in the 1990’s.

Economic Update – February 2018

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

Davos endorses Trump economic tax policy

– World growth forecasts upgraded
– 2017 China growth exceeds forecasts
– Australia continues strong employment growth

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 

Each year, the powerful and wealthy descend on Davos for the World Economic Forum. Trump attended – against expectations by some – and some key figures backed his new tax policy.The Big Picture

The IMF announced its growth forecasts for 2018 and 2019 had both been upgraded from 3.7% to 3.9% and the IMF Director, Christine Lagarde, attributed this upgrade to Trump’s tax reforms.

Jamie Dimon, the influential leader of JP Morgan, stated that 4% growth for 2018 in the United States (US) was quite possible – again based on Trump’s tax break. Apple had already announced repatriating $US245 bn in cash that will attract a US tax take of $US38 bn.

Some scoffed at Trump’s talk of 4% growth in the US following his election. It seems their mirth was misplaced. Trump is not generally popular but he is effective.

And he’s just started work on his one and a half trillion dollar infrastructure policy.

The latest economic growth figure for quarter four 2017 just missed expectations at 2.6%, but that quarter finished before the tax cuts were enacted.

On top of tax, North and South Korea are not only marching together but fielding a joint hockey team in the upcoming Winter Olympics. Did Trump do that? It’s hard to say but his push for sanctions on North Korea seem to be having some impact – as did his missile barrage on ISIS earlier last year. And the US unemployment rate is at a 17-year low.

The world economies are interlinked. China just posted a growth figure for 2017 ahead of forecasts and even government expectations. As far as investors are concerned, the only take-away is that things are bubbling under quite nicely.

At home, we had yet another strong reading on employment growth but unemployment is still stuck a little on the high side and wages growth just isn’t doing any – let alone heavy – lifting.

Against all expectations, our retail sales came in particularly strongly at 1.2% for November which was well up on October’s read of 0.5% which itself was above previous outcomes.

The United Kingdom (UK) is working through Brexit issues and President Macron, of France, paid a visit to Britain. He expressed very comforting sentiments. UK quarter four growth exceeded expectations at 0.5%, but 2017 as a whole was the weakest since 2012. UK CPI inflation fell slightly to 3.0% from 3.1%. The unemployment rate is at a 42-year low of 4.3%.

Wall Street started 2018 with a bang hitting new high after new high before a pull-back at the end of the month. We had that market sufficiently overpriced before the pull back to cause concern – but not enough to predict a full correction.

New data flowing from the economy and earnings from company statements do bode well for market expectations to be revised upwards over 2018.

The booming world economy has ensured commodity prices have remained firm and, in many cases, they are higher than in the last 6 – 12 months.

Going forward we estimate that gains on the ASX 200 and the S&P 500 for 2018 will likely be more modest than in 2017. Given the rapid start to the year, the S&P 500 might have a small correction if company expectations are not revised upwards as quickly as we expect.

In Australia, the February company reporting season will shed light on the different signals being drawn from employment, growth and consumer confidence. It is unlikely that the banks will shine given the Royal Commission hanging over it. But resource companies might look stronger given global growth expectations. Even Bloomberg felt it worth reporting in a headline that, “China sets new records for gobbling up the world’s commodities.”

Asset Classes

Australian Equities

Our market fell a little in January. Resource stocks showed some strength and a rally on the last day of the month – during the US State of the Nation address – kept the ASX 200 comfortably above 6,000.

Foreign Equities

The S&P 500 index recorded a stellar month in January despite a material sell-off in the last few days.

We had the market over-priced by a sufficient amount at the start of the last week of January to argue that the market could correct – but a prolonged sideways movement was more likely given all of the upward pressures on expectations currently being formed

Bonds and Interest Rates

The RBA does not meet in January. It is unlikely to raise rates before the end of 2018 especially as inflation for the 2017 year was only 1.9%. Indeed, we think another cut is quite possible before the next hike.

The US Fed left rates unchanged at the end of January but the wording in the accompanying statement was slightly stronger about the prospects for hikes in 2018.

The new Fed chairman, Jay Powell, takes the reins on February 1 but most expect little change in the direction of monetary policy. Gradually rising rates over the next couple of years are being factored in. The question is how many.

Other Assets

Oil prices were firmly higher in January. The Australian dollar firmed from $US0.78 to nearly $US0.81 over January.

Regional Analysis

Australia

34,700 new jobs were created in December – the latest published data point – and nearly half of them were full-time positions. However, the unemployment rate rose one notch to 5.5%.

Retail sales stormed home at 1.2% for the month of November after 0.5% for the previous month.

CPI inflation missed expectations at +0.6% for the fourth quarter and 1.9% for the year. The RBA target range for inflation is 2% – 3%.

China

China had a spurt in trade volumes – notably in commodities. China imports were up 18%.

But the outstanding result was China’s fourth quarter GDP growth outcome of 6.9%. This reading not only exceeded market forecasts but also the government’s own prediction.

The PMI manufacturing number was a slight miss at 51.3 but well above the 50 that marks the difference between an accelerating economy and one that isn’t.

US

The US started January with a ‘miss’ on jobs growth. 148,000 jobs were created when 190,000 were expected. But the unemployment rate held at the lowest level in 17 years, and the average wage growth was 2.5%.

US inflation was 1.8% which is just below the 2% target level. The latest GDP growth rate was 2.6%.

President Trump gave a rousing State of the Nation Address to Congress where he highlighted the economic successes and other achievements during 2017. The Democrats didn’t seem to be enjoying the lengthy 80 minute speech but it was fine television.

Europe

CNBC called 2017 the best year for the EU economy in the last decade. The UK’s unemployment rate is stuck at 4.3%, but that is a 42-year low!

A lot depends upon how Brexit is negotiated, it is a long and complex process. As with the Scottish referendum on staying in the UK, and the last US presidential election, the losers in the elections are “sore losers” so much so that the negative side of the debate is perhaps getting too much exposure.

Economic Update January 2018

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

2018 shaping up as another good year for investors

– Global growth co-ordinated
– United States (US) tax reform
– Strong jobs growth in Australia

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

After almost a decade of economic woes around the world, all the major economies are starting to come good together.

China, as we expected, not only stayed strong, it also gathered a little pace towards the end of 2017. The US certainly gathered momentum finishing the year at a rate of 3.2% pa. Even Europe is looking strong but the big surprise is the way that the third largest economy, Japan, has at last put five strong quarters back to back.

When growth is co-ordinated like this it is much harder for any individual country to fall into recession anytime soon.

But the prospects for 2018 became even better after Trump got his tax reform through at the eleventh hour. It is doubtful if analysts have yet fully digested the consequences. It may well be that macro and market forecasts will be revised upwards in the next few months.

Citi produces a ‘surprise index’ for many major countries. It is based on how often analysts’ forecasts are beaten by the actual events. The US index stands at a reading of +73 which is a six year high. The Australian index stands at 10.9! We keep thinking things are better than they really are.

Global growth is likely to keep us well out of recession but we are likely to continue to underperform. Our jobs creation has been strong all year – largely because of immigration. Our unemployment rate stubbornly stands at a moderately high 5.4%

The Westpac consumer sentiment index stands at just above 100 but that is only for the second month this year. NAB’s business conditions and confidence indexes, however, remain consistently strong.

Major share markets did well around the world with Wall Street being the stand-out performer. But Australia didn’t do too badly after a bad reaction to various bank inquiries. The ASX 200 posted growth of over 13% over 2017 when dividends and franking credits are factored in.

There are a number of things to watch out for in 2018. The Brexit negotiations between Britain and Europe are progressing without any major problems so far. The new US Federal Reserve chairman looks set to make two or three rate hikes while our RBA is not expected to move in 2018.

Our Royal Commission into Financial Services might cause some angst, depending how press releases are handled.

The more difficult possibility to assess is Trump’s wish to commence a big infrastructure programme. In the election campaign he was talking about a trillion dollar deal, but that has since been scaled back to 200-300 billion dollars. With tax reform behind him, we should see some movement on this front in January.

The ASX 200 closed at the highest level since December 2007 on the penultimate trading day of 2017 and we see growth of about 5% in 2018 – but that means that the November 2007 peak is unlikely to be surpassed this coming year.

We see strong growth continuing on Wall Street in 2018. But, if analysts revise earnings forecasts upwards in January based on company tax cuts, we might see very strong growth in the first half of the year.

On the commodities front, copper, gold and oil prices did well in 2017. It would be sufficient for our resources sector to have a good 2018 if these prices just hold over 2018.

In conclusion, we see it unnecessary to take on extra risks in 2018 to chase returns. Volatility on share markets was unusually low in 2017, and that is expected to continue for the foreseeable future.

We wish you all a safe and prosperous New Year.

Asset Classes

Australian Equities

Our market was seemingly stuck in a tight range from mid-2017 but then it blasted through 6,000 at last – and it even finished 2017 above that psychological barrier.

The Resources sector led the charge in December to give the broader index a boost of 1.6% for the month.

The Financials sector was down slightly for the year, but there were outstanding double digit returns to be had in all other sectors except for Property, Telcos and Utilities.

The February reporting season is only just around the corner so this is the time for companies to ‘confess’ if they are likely to miss their guidance for earnings. We found analysts have started revising their forecasts in an upwards direction for the last month or two. Therefore, we are expecting a good “report card” in February.

Foreign Equities

The S&P 500 index recorded another positive month in December making it 12 in a row for 2017 and the first time on record! We do not, however, think the market is over-priced by more than two or three percent.

2017 market growth has been dominated by the big tech companies. Some are looking to Amazon to become ‘master of the universe’ by establishing a major presence across a broad array of industries.

The strong Japan economy has supported its Nikkei index to record near 20% growth in 2017

Bonds and Interest Rates

The RBA was on hold again and is unlikely to raise rates before the end of 2018. Indeed, another cut is quite possible before the next hike.

The Fed hiked rates in December making it three for the year. Their so-called ‘dot plots’ show that they collectively expect three more hikes in 2018, but the market has only priced in two. The Fed is unlikely to want to risk too much so two is much more likely than four. US inflation is still below target.

Other Assets

Oil and copper prices were firmly higher in 2017. Iron ore prices were down on the year but staged a very strong comeback returning 36% from the lows experienced throughout the year.

Regional Analysis

Australia

Over 60,000 new jobs were created in November – the latest published data point – and two-thirds of them were full-time. However, the unemployment rate was stuck at 5.4%.

Around 1,000 jobs were created on each day of the year (on average) but it seems, much of this was matched by immigration flows. Price and wage inflation are also stuck at below target rates.

However, we at last got a better than expected growth in retail sales (+0.5% against 0.3%).

The government presented its mid-year report card (“MYEFO”) in December which argues the deficit is better than that which had been previously expected.

China

China has reportedly been spotted exporting oil to North Korea which got Trump’s hackles up. But other than that, there is less reported bad news about China’s economy. Of course, any developing economy starts to slow gradually as it reaches economic maturity.

We do not see China’s economy being a problem for us in 2018.

US

After a bumpy ride, a tax reform bill passed through Congress giving Trump one victory for 2017.

The infrastructure programme could be even trickier to get through, as the size of it will require a public/private joint venture. That means the private sector will have a big say on which projects start first. That will put the Democrats off-side as they always want to lead with the public interest.

If the bill makes some progress in 2018, the US economy looks set for continued growth for a few years to come.

Europe

Greece finally came out of recession in December! While the European Union as a whole still has some problems to work through – notably Brexit – the general mood appears to be positive.

Rest of the World

Japan’s Q3 growth figure was revised upwards to 2.5% from 1.4%.

Economic Update December 2017

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

The rally that keeps on giving

– Banks take a hit

– United States (US) economy stronger than expected

– Europe strengthening

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.

On the last day of November, Turnbull announced a Royal Commission into not just banking but the broader financial services industry. Turnbull argued that other politicians were destabilising the economy in their witch hunt over the big banks so he has called an end to the squabbling.The Big Picture

Importantly the Commission must report back by February 1st 2019 – short by Commission standards. And broadening the scope to even include superannuation – and industry super funds – might worry the opposition?

He is also guiding the Commission to avoid repetition by rolling some of the other banking inquiries into one big Commission set of findings.

The banks’ share prices took sizeable hits immediately following the news but different banks have been hit disproportionately since.

Staying at home, NAB’s business conditions survey produced the best read since 1997 and the labour force data were reasonably strong. But retail sales continue to struggle.

The US economy is booming. The stock market was off on a tear and the November company reporting season was particularly strong.

US consumer confidence came in at the second best number in 17 years. That is, the index was 129.5 against the only higher number (in November 2000) of 132.6. Its Q3 GDP growth was revised upwards from the initial read of 3.0% to an impressive 3.3%. It was only 12 months ago some mocked Trump’s forecast of 4% growth for around now.

Europe is also very strong. Its latest PMI manufacturing read was 60.0 – not only well above the ‘50’ benchmark, but also well above expectations. Merkel has experienced some problems in forming a stable coalition government but life there will go on.

China too surprised on the upside with a growth figure of 6.9% and a PMI for manufacturing of 51.8.

It is true that there are a few less spectacular results here and there but the overall picture is extremely strong.

Going forward, Jay Powell looks set to lead the US Federal Reserve in a calm fashion with no major change in direction from Yellen when he takes over in February. The odds of a US rate hike in December rose to 93%.

The US tax bill is taking shape but it seems a very complicated way of forming government policy from an Australian perspective. But, with ‘core’ US inflation at 1.8%, economic growth at 3.3% and unemployment at 4.1% a ‘Martian’ would be hard pressed not to say that the US economy has well and truly recovered from the ‘Great Recession’ or the GFC as we called it. Which western economy wouldn’t want to swap its figures for these?

There has been a lot of chatter about Bitcoin. We do not claim to have any particular insights and, it seems, few others do either. But, having the price rising around 10-fold in 2017 only to go from $9,000 to $10,000 in days and then $11,000 in one day – only to fall around $2,500 in 90 minutes suggests that this is not a ‘thing’ ordinary investors should pay much attention to. It is difficult enough to form solid views about equities and bonds!

Whether or not we get a Santa rally should be of little consequence to us. We’ll take gains in December, January or February with equal warmth. What is important is that we forecast 2018 to be another good year for equities both here and abroad. Our strategic asset allocations are largely unchanged.

But, of course, one day the rallies will end but not, we think, just yet. Bitcoin may or may not be in a bubble but we think the ASX 200 and the S&P500 are not far from fair pricing.

Asset Classes

Australian Equities

After a spectacular return in October, the ASX 200 backed up with a very solid 1% capital gain in November in spite of the sell off on the last day, due to the announcement of the Royal Commission. Only Financials and Telcos went backwards in November.

We have the market only slightly overpriced but our forecast capital gains for the next 12 months are for slightly below the long-term average.

Foreign Equities

The S&P 500 index reached another all-time-high only hours before the end of November. The end of month rally was spurred on, in part, by the increased likelihood of a tax-reform bill being passed in December.

Brexit appears to be weighing on Europe with the London FTSE and the German DAX going backwards in November.

The general mood on the business TV channels is for the US rally to continue into 2018. Of course, no rally lasts forever and the end can be quite unexpected!

Bonds and Interest Rates

The RBA was on hold again and is unlikely to raise rates before the end of 2018. Indeed, another cut is quite possible before the next hike.

There is an almost a unanimous view that the Fed will raise its rate in December 2017. The question is how many hikes will there be in 2018? The market is still pricing in one or two hikes less than that proposed by the Fed. A lot will depend on if and when fiscal benefits flow through from tax reform in 2018.

The UK raised its prime rate for the first time in a decade.

Other Assets

Oil and copper prices were firmly higher in November. Iron ore prices were up 16% in that same month.

OPEC announced it deliberations with Russia resulted in the supply cut continuing into the end of 2018 – although they will review the situation in June.

These changes in commodity prices bode well for Australia’s resource stocks.

Regional Analysis

Australia

With the Royal Commission into Financial Services now a done deal, the government might be able to focus on other economic matters. But, until the by-elections are settled, uncertainty reigns in Canberra.

Only 3,700 jobs were added in November but, importantly, 20,000 full-time jobs were created while part-time losses offset these gains. The unemployment rate fell to 5.4% from 5.5% in the previous month.

Retail sales are still a worry, with only a +0.1% gain announced for October.

China

China’s GDP growth came in above expectations at 6.9%. The manufacturing PMI also beat expectations with a read of 51.8.

There are always rumours about China debt but the consensus appears to be that we do not need to worry about China at this point.

US

The US posted another stellar consumer confidence number in November. An impressive 261,000 jobs were created and the unemployment rate fell to 4.1%. The so-called beige book, that paints the official regional picture within the US, talks of wage pressures in some sectors and states. With core inflation at 1.8%, the transition back to a solid economy from the patchy one of recent years are seemingly behind them.

The Senate vote on Jay Powell becoming the next Fed Chair from February 2018 takes place in the first week in December. Continuity in Fed policy seems assured.

Europe

Europe is emerging as a powerhouse in world growth. Of course there are issues over Brexit but the squabbling seems contained.

One of the biggest problems is how to deal with Ireland. After the bloodshed and angst over Northern Ireland, stability has seemingly been restored with no economic boundary between the Republic of Ireland and Northern Ireland. If Northern Ireland joins Britain in Brexit leaving the Republic in the Eurozone some border controls seem necessary. A tricky one as all that good work cannot be undone!

Rest of the World

North Korea continues to be a problem but sanctions are closing in on them.

Japan was looking very strong in October and there was no significant negative news in November. The world really is looking strong.

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

 

Economic Update – November 2017

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

The rally that keeps on giving

– ASX 200 and Wall Street surge

– United States (US) economy stronger than expected

– Japan is still performing strongly

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.

Most of the action for this year centres on the end of October and the beginning of November. The US Federal Reserve will announce its new balance-sheet-repair policy, Trump will nominate the new Fed chair, Japan and the UK Central Banks are planned to make big statements. Plus we get the usual US jobs data and the China manufacturing data.

The Big Picture

The year-to-date on the ASX 200 has been quite strong at +8.0% (including dividends but not franking credits) and its October total return was well ahead of the major markets – except for Japan’s Nikkei.

At last our market is on the move but our economy isn’t. Our Retail Sales posted a miserable ?0.6% for the month and inflation was a meek +0.6% for the quarter or 1.8% for the year. Professor Ian Harper – new to the RBA board – stated that he isn’t ruling out a rate cut – and neither are we. Inflation just isn’t strong enough to warrant the rate hike many are predicting.

Our jobs data were not bad, even if the unemployment rate did go up a notch to 5.5%. But we should remember it was as low as 4.0% in 2008 and 5.0% in 2011 after peaking at 5.8% in between.

It is hard to know what impact the citizenship debacle will have on politics but it can’t be good for our economy.

US monetary policy is going through a transition but it has been so well flagged, it is hard to predict more than a modest bout of volatility. The new Fed chair is expected to continue current policy.

The hurricanes had a major impact on jobs as reported at the start of October – a loss of ?33,000. So, as people can get back to work – and there is some repair work in train – we could get a bumper result on the 4th November.

US economic growth for Q3 came in at an impressive 3.0% for the year, with unemployment dropping to 4.2%. The chance of one last hike for 2017 has gone up to 80% – as priced by the market. But the Fed’s dot-plots still show their expectation for rates is still well above those priced by the market for 2018 and beyond.

US consumer confidence just came in at the best read since the year 2000!

Japan is still going strong with its third consecutive month of double digit growth in exports. The world economy is moving.

Prime Minister Abe got re-elected with a ‘super majority’ based on Japan’s growth. He has the power to keep growth policies on the front burner.

Even the UK is doing well. Inflation came in at 3.0% and GDP growth at 0.4%. That should be enough for the Bank of England’s Mark Carney to raise rates at the start of November.

And China continues its strength. CPI inflation was 1.6% and its producer price equivalent (PPI) came in at 6.9%. It wasn’t long ago that PPI was more like ?6%. And the manufacturing index at 51.6 was well above the 50 needed to see continued expansion.

The ECB has vowed to keep stimulus going to at least September 2018. Except for us, the world economy is doing great. At least that means we are getting global support for now. Imagine if the world economy was not as strong?

Asset Classes

Australian Equities

The ASX 200 enjoyed a wonderful October. It gained 4.0% and most sectors enjoyed the spoils. Although Property and Telcos gained strongly they performed well below the average.

As we enter reporting season, new paths may be charted. Bad news is usually drip fed during the prior ‘confessions season’ in the month before. So far it looks like our market can grow into the year end – without any help from Santa.

We see capital gains for the ASX 200 continuing at around an average rate of just above 5% pa. With dividends and franking credits, the total returns forecast creeps comfortably into double digits for the next 12 months.

Foreign Equities

The S&P 500 has not recorded one negative month of capital gains in the last twelve months. Nice work if you can get it. The World (MSCI) index performed nearly as well – just one negative month but only a loss of ?0.1% in August!

As far as FY18 year-to-date is concerned of all of the seven word indexes we track all are well in the black. All parties end sometime so how long have we got to go?

Small negative surprises can come at any time and largely cannot be predicted. However, we do not yet see sufficient over-pricing to expect a correction any time soon. Until bond rates rise significantly, investor’s cash needs a home and equities is the main game in town.

Bonds and Interest Rates

The RBA was on hold again and it is likely to stay that way for some time. There are some chinks in our armour – notably in retail sales and inflation – making rates going down still a serious consideration.

The market expects the Fed to raise rates in December but we think the chance is much less than the 80% currently being priced in. There is nothing in the data to require a move and there is so much going on. We would favour them staying on hold for a while longer.

Other Assets

Oil prices had a strong month after the Saudi Crowned Prince came out in favour of stability in the oil market. Brent oil is back above $60 / barrel for the first time in about two years.

Copper, a bellwether for industrial growth, was up 5.8% in October. Our dollar was down ?2.1% on the month.

Regional Analysis

Australia

Politics continues to muddy the waters as the citizenship debacle and its impact on the government unfolds.

Employment data continued to be solid but there is a lack of other data to justify its continuance. Retail sales have become a real problem. The last ?0.6% followed a dismal 0.0% the month before.

China

Consumer and producer price inflation are solid in China. The new politburo has been sworn in leaving the President with even more power.

US

The remarkable result for the month was the +3.0% growth for the USA. After two big hurricanes, only 2.5% was expected but there was a big build-up in inventories. Is business expecting a big tax-cut fuelled surge?

Consumer confidence was expected to come in at 121.6 so the read of 125.9 really caused some excitement. That’s the best number since 2000!

Europe

Brexit may be a problem but UK data keeps rolling along. The Bank of England looks almost certain to raise rates for the first time in many years when it meets on November 2nd. Growth was a respectable 0.4% for the quarter but inflation – at 3.0% – is a number most developed nations can only dream of. The top of the range hence start tightening!

The ECB announced its policies for the next twelve months – which is essentially no change. The Catalans (home to Barcelona FC) caused a stir by voting to exit Spain – so PM Rajoy sacked them all! No one can afford splinter groups trying to exit the EU. Scotland and then Brexit were about as much as the EU can handle. It probably means the EU will play even harder hardball with Britain – and anyone else who looks to be dithering on the fringe.

Rest of the World

North Korea seems to be less in the news so the sanctions might be working.

The Japan economy is surging and Japan has re-elected Abe for four more years with a ‘super majority’. That gives him the power to try and change the constitution so he can build a defence force to protect Japan from North Korea.

New Zealand got an unexpected result in its election – swayed by which way Winston Peters leant. Does that mean more instability in the region?

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

 

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