Australian Market Summary (Issue 406) – 1 July 2016

Australian Market Summary – 1 July 2016

The British people’s defiant decision to exit the European Union last week ensured global markets including ours remained exceptionally volatile this week.

One could be forgiven for expecting that the decision to secede from the EU after 43 years of membership would heighten such uncertainty and yet, notwithstanding all of this, our market has actually had its best performing week in close to three months.

Despite the well-publicised instability, negative sentiment and concerns over the UK’s future economic growth, which emanated from the Brexit, it seemed investors were out shopping for a bargain this week.

Anchored by the materials sector (+5.9%) and with genuine support for the healthcare (+4.5%), telecommunications (+3.5%) and utilities (+3.9%) sectors, our market managed to eek out a 2.9% gain and recover most of last Friday’s poor performance.

Interestingly, the ASX200 now sits only 1% below the close last Thursday prior to Brexit.

It’s no surprise that investors turned to the typically more defensive stocks such as Telstra (TLS) (+3.8%) and the banks – ANZ, NAB & WBC all up 3% in order to combat the volatility that they deemed likely to plague the market.

As we have witnessed on many occasions in the past, when panic drives the market investors take risk off the table and seek the protection of the more blue-chip stocks. It has been precisely this mass migration towards the ASX20 since the GFC that has now forced investors to look elsewhere to achieve outperformance.

One aspect that could not go unnoticed was the extreme and deliberate sell off in stocks that have any exposure to the UK economy. Henderson Group (HGG), CYBG (CYB), BT Investment Management Limited (BTT) have all fallen around 25% since the Brexit vote.

QBE Insurance Group (QBE) was also not spared (-10% since Brexit) as it earns one-third of its gross written insurance premiums in the UK and EU. The current structure in the EU allows banks and insurers in one EU state to provide services in other states without the requirement of additional licensing – known as “passporting.”

Concerns about the future of “passporting” following Brexit for QBE means insurance contracts currently established in UK regulated entities may no longer be effective in other EU states. This would undoubtedly impact the number of insurance contracts QBE have written not to mention the possibility QBE has to rewrite many of its existing contracts.

The Post Brexit Era

England now finds itself in economic uncertainty and political disorder. Not long after the Brexit vote the Prime Minister David Cameron announced that he would be stepping down in October.

He had what now appears foolishly pledged the continuation of his leadership on a “remain” vote being successful. Having campaigned on such a promise it seemed only fair he remain true to his word.

Ultimately, half of the Conservative party struggled to agree with Cameron on the benefits of the UK remaining in the EU and, as such, it appears likely he would have been deposed anyway.

The fundamental question to ask here is why Cameron put leaving the EU on the national agenda if he thought the outcome of leaving was so dangerous in the first place.

Circumstances do not improve greatly for the Labour party whose voters defied its leaders in casting a “leave” vote. Only a handful of Labour MPs had actually backed Brexit and yet an overwhelming number of their voters opted for an EU exit.

Calls for Labour leader Jeremy Corbyn to follow Cameron and resign have increased following the Brexit vote while labour MPs filed a motion of no confidence. Corbyn has been heavily scrutinized by his own party for failing to rally the Labour vote behind the “remain” campaign and for his tardy start to the campaign.

Finally, leading Brexit campaigner and perceived frontrunner to replace Cameron, Boris Johnson announced he would not seek the PM role. Having been the likely candidate and confidante for the Conservative party “leave” voters, this announcement in the last 24 hours has ensured further uncertainty.

From an economic standpoint a plethora of questions remain. Aside from the obvious market reaction to the vote last week questions now surface over the how and when.

The EU had been good for Britain. The UK had the slowest growth in prosperity amongst the G7 leading economies before its EU membership but has had the fastest growth since.

The questions that now need to be addressed are cumbersome. What trade deals will replace EU membership, what this means for migration into Britain, when and how the balance of UK contributions to the EU budget cease and ultimately what impact this will all have on UK GDP and its currency.

Foreign home loans to buyers NAB

The National Australia Bank (NAB) joined the other major Australian banks and agreed to restrict lending to foreign property buyers who do not have domestic incomes.

The NAB have placed a maximum loan-to-value ratio to foreign borrowers at 60% which had previously been set as high at 80% and contributed to foreign internationals driving up property prices domestically.

The Election & Interest Rates

The federal election occurs tomorrow and the polls have the Coalition clear favourites to retain government, with markets currently pricing the Coalition with an 88% chance to be re-elected.

Heading in to Saturday’s election with a notional 88 seats, the Coalition can theoretically lose 12 seats whilst still retaining majority government. For context, the 25 marginal seat polls have given the Coalition a loss of 2 seats only.

It seems the polls would need to be proven drastically wrong in order for the Labour party to capture another 11 seats whilst not losing any of their existing seats.

The RBA meet next Tuesday and whilst there is an increasing belief another rate cut is imminent, financial markets are giving little chance to that rate cut occurring in July.

The general concensus is that the RBA will wait until the dust settles from the federal election and adjust monetary policy in August. The RBA can only wait so long and as the AUD continues to defy their best efforts to remain lower around the 70c level which we need for growth, it may just force them to make a call.

Jono returns from holidays this weekend and will be back next week to put pen to paper on the complexities and practicalities of the UK referendum and how he sees it all playing out.

Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.


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