Australian Market Summary – 16 September 2016
This week saw a continuation of the recent trend towards ‘selling winners’, albeit with less intensity than recent weeks.
The key driver behind the fall in many of these shares has been the retracement in global bond markets – Australia’s 10-year bond yield has jumped from 1.80% to 2.10% in the last 4 weeks.
Australian listed property-trusts have fallen 12-13% in the past month, Transurban (TCL) is down 15%, AGL Energy (AGL) 10% and Sydney Airport (SYD) 11%.
In addition to these ‘high-yield’, defensive shares, many of the recent winners across the mid-cap space have similarly faced heavy selling.
Market favourites in the small-mid cap space such as Gateway Lifestyle (GTY), Aconex (ACX), Vocus Comunications (VOC) & Reliance Worldwide (RWC) have all been sold down well over 10% in most cases during the month.
Take it from me, there has been a neat ‘mean reversion’ in markets over the last month and it’s actually a healthy thing.
We’re far from bullish, but encouraged that many of the good quality companies have fallen 10-20%, making valuations look potentially more interesting in due course.
Arguably the more interesting factor behind the ‘profit-taking’ is the sell-off in Australian and global bond markets.
Much has been made in the press about the potentially hawkish remarks made by US Federal Reserve board members, indicative of a speedier pace of US interest-rate tightening, but these remarks miss the bigger picture.
If anything, ECONOMIC DATA in both Australia and the United States in the last fortnight has come in BELOW EXPECTATIONS, making the bond-sell off more curious.
US & Australian Economic Growth softening, not accelerating
US service sector activity growth dropped to a 6-year low last month and US manufacturing activity fell at its fastest pace in over 2 years similarly.
There is some suggestion in the US that inventory levels have now risen to a point at which production needs to pull back from its recent pace.
In Australia it’s no different.
This week, we had figures released for employment and both consumer and business confidence.
The NAB Business Conditions index continued to moderately deteriorate, whilst the Westpac Consumer Confidence index idled.
More revealing, however, was the August employment report.
At the headline level, Australian unemployment fell to a 3-year low of 5.6%, a figure that in isolation would seem a good thing.
However, the underlying underutilization of Australia’s human capacity is revealed by the falling participation rate (the number of working-age persons either employed or looking for work) and the continued rise in Australia’s ‘under-employed’ ratio.
Simply put, a fewer percentage of ‘working age’ people are employed or seeking employment and of those that are, a higher proportion of people are unsatisfied with their working hours (in other words they want MORE work).
The chart below shows in RED that Australia’s UNDER-EMPLOYMENT ratio of 8.7% has been steadily rising, even though the headline ‘UNEMPLOYMENT’ rate in WHITE points to a supposedly healthy 18-month decline.
Australian Underemployment Rate (red), Australian Unemployment Rate (white)
This month’s Australian employment data follows on from THREE disappointing August industry group surveys released a fortnight ago that demonstrated a rather rapid slowing in economic activity post the Federal election.
The chart below depicts the Australian Industry Group’s Service sector performance – you can see the significant deterioration into negative growth (under 50) in August.
Australian Industry Group – Performance of Service Sector Index
Australian Income is Under Pressure
The charts and remarks above are further evidence of a slowing in underlying Australian economic activity and the pressure building on household, corporate and investment income.
I have spent much of the week in Sydney discussing this issue with investors and reinforcing our cautious tone towards Australian equities.
Export incomes are deteriorating on account of weaker iron ore prices in particular, wage growth is at a 20-year low and corporate profitability is suffering.
Household gross leverage-to-income is as high as it has ever been and the prospect of further consumer re-leveraging seems remote.
Portfolio incomes, as many of you will have experienced, fell over 10% during the 2016 financial year if exposed to cash, hybrids and listed Australian blue-chip shares.
Leverage is rising as income and cash-flows are falling.
This is a theme that will continue to play out for the remainder of 2016 and much or all of 2017.
Our key takeaway here is for the client base to again consider raising their proportion of foreign equities as a percentage of their GROWTH assets.
We have made this case for several years now (as recently as a fortnight ago you received our updated research) and continue to strongly advocate for this asset class diversity and growth.
Conclusion & the week ahead
Next Thursday night the US Federal Reserve meet and, as always, we will fixate on the ‘will they, won’t they’ of interest rate rises.
The great likelihood is they again hold off, but perhaps signal a likely 0.25% rise before the end of the year.
Many good quality shares have come back significantly and our eyes are widening to the prospect of using some of our excess cash holdings, however with the moderate weakening in Australia’s economy (in spite of 1.5% cash rates), we don’t feel rushed nor pushed to simply take the first thing that catches our eye.
Prudence and patience will be afforded a premium in the months ahead.
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