Australian Market Summary (Issue 407) – 8 July 2016

Australian Market Summary  – 8 July 2016

It seems I manage to time my holidays with an eye to major events.

This time last year I was in London as the Greek debt troubles reached a peak and markets wobbled.

This year, London again, but in the midst of the surprise BREXIT outcome.

Fortunately, the initial shock of the British decision was overcome in investment markets and the tables below show that, for the second week in a row, equity markets globally have managed to largely hold ground or even eek out further small gains.

All that being said, please don’t for a minute think that all is well in the world, for it isn’t.

The BREXIT decision creates further potential instabilities down the track.

The world got riskier with BREXIT, so please don’t comfort yourselves that markets have been so quick to shake off the surprise decision.

I made these points earlier in the week in a separate note, and I hope you got the chance to scan it, because it matters.

We are INCREASING our level of caution on equity markets and have suggested investors again RAISE THEIR CASH WEIGHTS to 10-15% of investment portfolios.

The BREXIT decision further frays the European socio-economic fabric and so the further it weakens, so too does the magnanimity of European Union (effectively German/Dutch) support for individual member state debt.

If Europe weakens, so too does the implicit debt guarantee on the swathes of sovereign debt held in levered nations such as Greece, Hungary, Portugal and, importantly, Italy.

This is huge and an evolving theme you must acknowledge.

We are cautious and patient.

The Australian market post-election

It was again an impressive effort from the ASX200 to end the week unchanged in spite of the disappointing election outcome and the knock-on news that the credit-rating agency Standard & Poors had placed our sovereign credit rating on ‘negative’ outlook for downgrade.

Australia is currently one of a handful of nations still to hold the coveted AAA rating, but the likely maintenance of this rating is diminishing as Australia’s debt burden rises.

No surprises there – and so it goes that the market took this announcement in its stride.

I have to say, and this is tongue firmly in cheek, that the S&P report discussing the negative outlook for Australian sovereign debt is another example of these wonderful investment reports that make a big headline splash but frankly say nothing.

The report gives us a 33% chance of a rating cut in the next two years – thanks S&P, we appreciate your conviction!

Miners again continued their outperformance, rising 2.7% on little or no news.

This is an opportunity to sell and though we have already flagged our desire to lighten BHP (at $21 back in mid-April), there were many who failed to take this opportunity.

Though BHP is now around 10% lower at $19, I would still be strongly suggesting to clients that they bite the bullet and SELL their BHP and reduce their exposures to the likes of Rio Tinto (RIO) and Fortescue (FMG) also.

The bounce in the miners is not being driven by fundamental improvements in Chinese steel markets – if anything, the rising iron ore inventory poses increased risk.

On the flipside, Australian Banks were the worst performing shares, falling 1.5%.

Again, there was little reason to point to suggest why banks ought be the worst performers, other than the over-arching knowledge that investors still own too many of these things and, that with BREXIT and the split Australian electoral vote, the chances of lower Australian interest rates are as sure a bet as you can get.

Lower interest rates effectively hobble the banks’ ability to earn revenue.

Banks borrow short and lend long, so lower lending rates crimp profitability.

Sadly the Australian banks will continue to see earnings downgrade through the second half of this year and into 2017, so though they remain solid, well-run dividend payers, it is important investors ensure Australian portfolios are well diversified and not overly reliant on them.

This is not a new theme of mine.

Guys I am going to leave it here this week.

There are some increasingly interesting stock situations emerging, and I will start to flag these in next week’s summary.

Please read the note we published on BREXIT and the Australian Election and, as always, do please shout if there is anything we can do to better articulate or explain our current market thoughts.

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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