SMSF weekly market update
The turmoil in global share markets continued into the past week, but signs of stabilisation and improvement gradually started to appear resulting in several share markets actually rising over the last week.
The turmoil in global share markets continued into the past week, but signs of stabilisation and improvement gradually started to appear resulting in several share markets actually rising over the last week. Believe it or not, this started in Australian shares on Tuesday as buyers saw value around the 5000 mark on the ASX 200 Index and then continued as:
- China eased monetary policy;
- Representatives from the US Federal Reserve (Fed) indicated that a September interest rate hike was looking less likely if global growth worries persist; and
- Global investors refocused on good US and Eurozone economic data.
Despite a strong turnaround Chinese shares still fell 7.9% over the week and Japanese shares lost 1.5%, but US and Australian shares gained 0.9% and Eurozone shares rose 1.2%.
Commodities traced out a similar path, falling initially before rebounding sharply with metals and oil up over the week. The upturn in sharemarkets also saw bond yields rise and the Australian dollar recover partially from a low of $US0.7050 early in the week.
Key economic events and implications
China injects stimulus
China moved into gear over the last week with a cut in both interest rates and required bank reserve ratios, liquidity injections, capital injections into some banks and an expansion of the program that allows local governments to swap their higher cost debt for cheaper debt.
The interest rate and reserve ratio cuts were long overdue. China’s official interest rate of 4.85% was leading to borrowing rates for small and medium sized companies that were way too high at a time when producer prices are falling. China is the only major economy with lots of fire power to provide stimulus and also the only one that needs to. Further easing in China – including fiscal stimulus is needed and likely because the last thing China wants is the sort of social unrest that will flow from a hard landing in its economy.
Economic data shows some improvement
- In the US, residential property data was on the soft side but it’s still trending up. Importantly, consumer confidence rose strongly in August which is positive for consumer spending and orders for capital goods orders rose solidly which is positive for business investment. Furthermore, June quarter GDP growth was revised up to 3.7% annualised and jobless claims fell. Meanwhile, inflation fell to 1.2% year-on-year in July which is well below target. With inventories likely to act as a drag on US growth in the current half year, the US economy is still far from strong growth – but it does look more solid. So while the Fed may delay hiking rates, it’s still likely sometime in the next six months.
- European economic news was also good with overall economic confidence unexpectedly rising in August, money supply growth up and bank lending growth accelerating further, pointing to stronger growth in Europe.
- Japanese data for July showed a strong labour market with the jobs-to-applicants ratio at its highest since 1992, but household spending is still soft and core inflation is too low at 0.6% year-on-year.
The Australian June half profit reporting season is now complete
Although results have been a little disappointing they have not been disastrous. 43% of companies have beaten expectations and 59% have seen their profits rise from a year ago which is okay, but it’s well down on what we have been seeing in the last few reporting seasons. Reflecting the slightly disappointing results and soft guidance, only 48% of companies saw their share price outperform the sharemarket the day their results were released which is down on the experience of the last few years.
While Australian listed company profits fell nearly 2% over the last financial year, this was driven by a 28% slump in resources profits with the rest of the market seeing profit growth of around 7% driven in particular by general industrials, building materials, retail and health care stocks although the latter disappointed relative to expectations.
Key themes have been:
- Constrained revenue growth;
- Strength in companies connected to home building and NSW; and
- Solid growth in dividends with 57% of companies raising dividends.
Weak guidance saw profit growth expectations for 2015-16 revised down to around 2%, but again with the strength coming from non-resources companies which should continue to benefit from low interest rates and the lower Australian dollar.
Outlook for markets
- Sharemarkets could still see more volatility in the short-term as we are still in a seasonally weak period of the year for shares, uncertainties regarding China and the emerging world are likely to linger and uncertainty still remains around the Fed.
- Global economic recovery should continue with the latest global growth scare likely to drive further global monetary easing and see the Fed delay raising rates yet again.
- Low bond yields point to soft medium-term returns from bonds, although the recent share market downswing which saw bonds rally provides a reminder that government bonds remain a great portfolio diversifier.
- The Australian dollar is due for a decent bounce after having hit $US0.7050 early in the last week, but the broad trend is likely to remain down as the Fed is still likely to raise rates sometime in the next six months despite ongoing delays whereas there is a good chance the RBA will cut rates again and the trend in commodity prices remains down. Our view remains that it is heading into the $US0.60s.
About the author
Head of Investment Strategy and Economics and Chief Economist at AMP Capital, Shane is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.