Australian Market Summary (Issue 453) – June 16th, 2017

Investment markets in Australia this week don’t know if they’re coming or going.

After the public holiday on Monday, the ASX200 rose in a straight line 2.5% without much of a reason, led by the banks, who rose around +3.5%.

This move came without much of an offshore lead (the S&P500 was flat) and reversed part of the previous month’s underperformance of both Australian shares in a global context, and Australian banks within a local context.

We then gave back -1.5% on Thursday, again without much rhyme nor reason.

There was little impetus for either the up or down move, and this volatility points to an increasing level of investor uncertainty in the future direction of our local share-market.

Time to be Cautious, time to be patient

To be clear, I think there are increasingly few local investment opportunities available for domestic investors.

It feels to me that the risks are rising in the medium-term, as I will highlight later in today’s piece.

Now is a time to be patient, to book profits when they are there and to be comfortable holding a little more cash if that happens to be the right thing to do.

I think this week’s volatility will continue to ratchet higher locally, and that this week’s gains aside, we will maintain a firm trend of underperformance relative to offshore equity markets.

This week we chose to offload our position in Sonic Healthcare (SHL) in large part because it was trading at its highest valuation in over 7 years.

The last time SHL traded over 22x in mid-2015, it fell back -25% in the subsequent 6 months.

The stock has delivered us gains of almost +40% since we recommended the share back in January 2016, and importantly it outperformed the ASX200 by +20% in that time.

When the stocks look full we would prefer to let them go and raise cash.

We have in recent weeks trimmed holdings within our separately managed portfolios (SMA’s) in the likes of IOOF (IFL), SEEK (SEK) and QUBE Holdings (QUB), all stocks which we feel are core to our portfolios for the medium term, but who had rallied to nearer full valuations in the short-term.

These SMA’s now hold maximum cash and await fresh opportunities for deployment.

THE BIGGEST GAME IN TOWN – The U.S Federal Reserve announce plans to reduce their balance sheet

This week the U.S Federal Reserve raised interest rates for the third time this year (as expected they would).

Interestingly they also announced plans for unwinding much of the massive stimulus the Fed have had in place post the GFC, and this is the interesting bit.

Recall, not only did the Federal Reserve and other central banks around the world drop interest rates to nearly zero in the aftermath of the GFC, they also pumped trillions of dollars into the financial system by buying government bonds and mortgage backed securities from the market.

The Fed ‘created’ money, bought these bond securities and the sellers of the securities then had money to spend in the economy and in asset markets.

That’s the simple explanation of Quantative Easing (QE).

In doing this, the Federal Reserve balance sheet expanded by a whopping 350% and unsurprisingly share markets, bond markets and property markets all exploded higher.

The Federal Reserve balance sheet is now US$4.48 trillion, having been under US$1 trillion in 2008.

The plan announced this Wednesday sees the Federal Reserve allow US$10 billion in bonds to expire EACH MONTH, ratcheting up by US$10bn a month every 3 months until it reaches US$50 billion a month a year after commencing.

Though we don’t know the endgame, if this was carried out to the letter, the Federal Reserve would have withdrawn $900 billion in liquidity from the market in a 2-year period and would take the Federal Reserve balance sheet back to the size it was in mid-2013 when the S&P500 was -30% lower than it currently is today.

This is important to understand.

I accept it is entirely difficult to hypothesize on the precise impact on asset markets of this withdrawal of liquidity, but do understand that it will surely have an increasingly large impact on asset values as it commences and ratchets up.

Effectively the biggest buyer of asset markets is now set to turn seller.

This is something we need to watch out for and to build in a degree of caution on.

It will move slowly and it is hard to predict just how smoothly this withdrawal will be, but it will surely be a negative drag on equity markets in the coming 12 months.

Equity & Bond investors see different futures

As we stand today, global share-markets are in fine fettle and near their highs, seemingly buoyed by the strong economic growth witnessed across each of the United States, Europe and Asia.

But if you look at the bond-market, its pointing to a completely different future.

Global bond yields have rallied enormously in recent months, effectively pricing out the prospect of an escalation in inflation.

The fall in oil has had a lot to do with this. The delay in policy stimulus from a Trump White House has also impacted.

But the rally in bonds speaks to a less optimistic economic future, and one completely at odds with the share-market optimism we have seen recently.

Again, this is another factor to note and a factor that confirms my renewed caution.

More mixed signals – this time on employment

I have spoken at length about the slowing in our domestic economy year-to-date and the ongoing slowing I expect in spite of a still reasonable business climate.

My caution is entirely driven by household indebtedness and a pending slowing in housing markets and residential construction work.

Wages have been pressured and will remain so to my mind.

And yet this week we saw the release of some truly astonishing employment figures. Figures that at face value would ordinarily make me sit up and re-think my thesis above. After all, this week’s May employment report showed a RISE IN FULL TIME EMPLOYMENT OF 52,000 JOBS, only two months after rises in February and March of 43,000 and 66,500 respectively.

For context, the statistics suggest Australia has added 165,000 new full-time jobs in the last 4 months – the equivalent of 2% growth in the full-time workforce in only 4 months of the year.

In other words, I don’t believe it.

I expect we will see these numbers downwardly revised in the months ahead.

Elsewhere this week, the Westpac Consumer Confidence figure for June dropped to its lowest level since April last year.

Business Confidence declined modestly, but it has been quite good of late.

Also, interestingly, we had April home lending volumes released last Friday which showed the rate of growth in owner-occupier lending fall -6% YoY whilst investor lending was still +14% annually in spite of the recent tightening in bank credit.

My point?

That there is still a long way further to go in terms of the fallout from higher mortgage rates and tighter bank lending policies if investor lending is still +14% YoY

Metrics Credit – please take a look, let’s have a chat

The potential listed-investment trust (LIT) offer for Metrics Credit Partners that we have flagged in recent weeks is one for discussion.

Can I implore you to all have a conversation with your adviser on this in the coming week?

It’s entirely worth your time.

On that note, I will sign off for the next few weeks and leave the weekly in the more than capable hands of Guy.

The last 2 years when I have been off on holiday at the time we had both BREXIT and the Greek debt drama.

Here’s hoping to a less tumultuous fortnight ahead this year.



Jono & Guy

Financial Services Guide Update

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Friday 12pm Values

All Ordinaries 5823 +103 +1.8
S&P / ASX 200 5791 +108 +1.9
Property Trust Index 1436 +47 +3.4
Utilities Index 8964 +213 +2.4
Financials Index 6460 +162 +2.6
Materials Index 9666 -85 -0.9
Energy Index 8913 -40 -0.4

Key Dates: Australian Companies

Mon 19th JuneDiv Pay Date – NABHB, NABPB, SUNPC, SUNPE
Tue 20th June  


Redemption of ANZHA Notes

Wed 21stJuneDiv Ex-Date – WBCPG
Thu 22nd JuneDiv Pay Date – WBCPF
Fri 23rd JuneDiv Pay Date – NABPC, WBCPE


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