Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
– Trump rally continues on Wall Street. But are equities over-valued?
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But Jeremy Siegel, another Ivy League professor, disagrees with Shiller. Siegel claims that Shiller’s pricing index has been elevated for twenty years. He goes on to argue that accounting standards have tightened over the years to the extent that reported earnings are now less than they once would have been for the same underlying conditions – hence the elevated data for 20 years.
So, when we calculate P/E ratios (share price divided by earnings), the ‘E’ for earnings in the denominator is smaller than they would otherwise have been – hence the P/E ratio is bigger. Siegel claims we can’t compare these ratios over a long period of time. He is not worried about current over-pricing.
While mispricing signals may not make for a clear-cut decision, few would argue that the markets have priced in Trump ‘doing something big’. If Trump fails to deliver, markets may correct. If he delivers, markets could march on and on.
Trump is giving almost daily updates of his plans. We are not waiting for one big announcement – rather a body of statements that point to new world order. The reaction to an accumulation of smaller statements is better for market conditions than one big announcement that could make the market go either way – and sharply.
The US economy is looking a lot stronger. But is it strong enough for a rate hike by the US Federal Reserve (the Fed)? The latest growth figure is only +1.9%. This is the slowest recovery (from the Global Recession) since the Great Depression!
The Fed is certainly warming up for one but they are talking in terms of reacting to Trumps tax cuts, infrastructure spends and simplification of regulation. None of these policies have yet been enacted so March seems off the table. Maybe even June is too soon.
However, the market is starting to price in a March hike because of recent Fed chatter. Is this the Fed trying to soften us up for future hikes – or are they for real?
It seems China is set to stimulate again if, indeed it hasn’t already started. Iron ore prices charged higher in February on the back of China’s strength. And that has translated into bigger company profits just reported in Australia.
The China manufacturing number was comfortably above the benchmark for optimism at the start of February and rose during the month.
The problems with our economy are continuing to accumulate. Retail Sales fell by 0.1%; we lost a large number of full-time jobs; and we got the lowest wage growth on record! Economic growth just came in at +1.1% for the quarter – but that is partly on the back of stronger resources.
But the Reserve Bank of Australia seems bent on not cutting rates because of what it might do to Sydney house prices. The longer they wait, the more they will have to cut later.
Australia continues to operate in an economic policy vacuum. The delivery of the May budget seems so far away, and so unlikely to deliver what we need.
Asset Classes
Australian Equities The ASX 200 posted a solid gain of +1.6% in February – but lagged behind Wall Street’s +3.7%. After strong growth in resource stocks on the ASX before February, some of that growth was given back last month.
However, many sectors posted gains of 4%, 5% and 6% in February – including dividends. The swings between which sectors are performing better continue to be large and frequent making funds management that much harder.
The company reporting season for the ASX 200 was largely positive but the few companies that under-delivered were punished harshly. We expect the ASX 200 to make gains in 2017 but not as strong as we see the gains on Wall Street.
Foreign Equities Wall Street backed up a good January with a very strong February. Indeed, all major markets posted good returns for the month.
The Dow posted 12 consecutive days of gains in late February. This run is the longest since 1987! One more day and it would have taken the record back to 1970 and 1929! However many of these gains were small. Indeed, Bloomberg reports the 40-day average of daily movements is at the 1929 low. It is better to watch steady growth rather than bouts of high volatility.
Bonds and Interest Rates US bond rates have maintained their elevated status since Trump was elected. The Fed is talking up rates but we remember the last two years when the Fed only produced one rate hike per year when they had promised more.
The Fed’s current plan is for three hikes in 2017 but the market is pricing in less. If the Fed waits too long it will be hard to rein in inflation, but at this point inflation is not a problem.
The Bank of England kept rates on hold but pushed up its economic growth forecasts. We also kept rates on hold – as did New Zealand.
Other Assets Iron ore prices were up 11% for the month while oil prices were flat. China optimism seems to be the catalyst for the ore price movements while bringing new rigs back into production took the heat out of oil prices.
Gold prices were up +4% and the copper price was down 1%. The Australian dollar was up just over one US cent.
Regional Analysis
Australia
There are increasingly weak signals for the Australian economy but they are being masked by a mini boom in China.
When we strip away the China effect we see negative growth in retail sales, wages and full-time jobs. The policy response seems to be contemplating small cuts in corporate taxes spread out over 10 years and only for small companies.
Both sides of politics are actively considering tax hikes across the likes of superannuation, capital gains and Medibank levies. None of these changes will support our economy.
The GDP growth data for Q4 2016 came in strongly positive at +1.1% taking two consecutive quarters of negative growth off the table. But this jump in growth might not be sustainable. The resources sector played a big role in the last few months with strong volumes and unexpected high commodity prices.
China
China’s Purchasing Managers’ Index (PMI) came in at 51.3 against an expectation of 51.2 at the start of February. A month later and the PMI has risen to 51.6 against an expectation of 51.1 A number above 50 demonstrates optimism.
China’s inflation was up sharply: +6.9% for producers and +2.5% for consumers. Low and negative inflation has been a problem for China so these strong numbers are a welcome relief. Of course we do not want inflation to rise too strongly.
It is widely considered case that China is on a course to further stimulate its economy – and that will benefit Australia’s resources sector.
U.S.A.
The jobs data were the strongest for four months and unemployment, at 4.8%, is around the Fed’s estimate of full-employment.
US Retail Sales were quite impressive at +0.4% for the month and CPI inflation was good. But the Q4 GDP growth figure stayed at +1.9% after the first revision.
We are yet to get a clear view of what Trump is planning but it seems deconstructing Obamacare is to be first followed by tax cuts. We still think it will be close to 2018 before we see policy translating into much stronger US growth.
Europe
The latest news from France is that the Presidential election is less likely to cause the upset that would impinge on the European Union’s strength. But we should not forget Brexit and Trump!
Britain has passed the necessary legislation in the House of Commons to start the Brexit process. So far, there have been none of the negative economic implications so many predicted.
Rest of the World
North Korea remains an issue with its nuclear programme. While many potential problems lurk around the world this is, perhaps, the threat that is the most dangerous.
Julie Bishop is recalling the entire set of ambassadors from over 100 locations to Canberra for a two-day conference. Given the rapidly evolving foreign diplomacy issues – including Trump, South China Seas, and Europe – she wants to refocus our energies and ensure policy is aligned with our needs.
*By Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research
