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For the 6^th week in a row the ASX200 looks like closing the week at or around the 6200-6250 level. Just like last week, and the week before, and the week before that, our share-market remains ensconced in the push-pull of a strong US economy and share-market and the undercurrent of future trade protectionism.

This week – more US strength, more Asian uncertainty…

The US Federal Reserve met this week, confirming the economic strength by upgrading their language to reflect a ‘strong’, not ‘solid’, economy.  It might not sound much, but people in our industry fixate on these changes to terminology, and in this instance, the Fed-watchers are noting that the term ‘strong’ hasn’t been used in reference to activity since 2006, deep into the previous economic expansion.

Further confirming the upbeat mood, early data out points to another month of strong jobs growth in July, and a manufacturing sector that continues to expand strongly, but notably, at its slowest pace in over a year.

The Federal Reserve seem sure to raise rates at the September meeting (92%+ chance) and again in December, which would take US cash rates to 2.50% and their highest level since mid-2008.

Counterbalancing the US optimism, Chinese and Asian share-market performance this week was poorly, and Chinese mainland shares are now back at their July lows with investors fearful the impact of US trade protectionism will be detrimental to local industrial activity. Further rattling nerves is the slow but deliberate slide in China’s currency, which has now fallen over -10% since late March to be within 3% of its weakest level in a decade.

The falling Chinese RMB is a nervy thing since it is ultimately a negative for global growth and profit margins (Chinese firms undercutting global peers for market share), but there is also the fear that the weakening RMB could perpetuate further capital flight from China and ultimately lead to a currency crisis and resulting asset price shock.

Australian economy showing early signs of a credit-crunch…

Locally, the economic data coming out this week with reference to July activity is shifting to a softer tone.  It’s got me pretty convinced that Jonathan Mott’s (UBS bank analyst) call, way back in May, that Australia could easily suffer a sharp credit crunch post the Royal Commission is looking very prescient.

This week we got private credit data out for June and it showed private sector credit growing at its slowest annual rate since 2014, rising at +4.5% only.

Loan growth has slowed to such an extent that both the Commonwealth Bank (CBA) and ANZ (ANZ) cut rates on different mortgage products this week as means of attracting greater share of the rapidly diminishing home loan pie.

Worse, total Australian money supply grew at its SLOWEST RATE ON RECORD rising at a mere +1.88% annually in the June quarter, even lower than the +1.94% growth rate witnessed at the depth of the 1991 recession.

The impact of tightening credit seems to be emerging across multiple sectors now. This month’s manufacturing sector activity report for July saw new orders in that sector fall to a 2-year low, and within the same survey of services sector activity, July new orders collapsed back from a record high to be only modestly growing relative to the previous month.

It has a rather ominous feel to it, and I would think the run in to Spring auction season will bring with it more negative headlines, and ultimately it feels like Christmas could be a little sketchy too for retail.

Results Season commenced – Rio Tinto (RIO) a little soft, but lots more ahead

RIO reported a slightly soft profit figure this week, citing rising cost pressures as an increased burden on the business. The profit figures missed by -2-4% depending on where you looked, and the 1H dividend came in -10% under market forecasts too, albeit the company cited a willingness to return proceeds from future asset sales, meaning another $4bn of further capital returns are likely in the coming year.

In the coming fortnight we will get results or trading commentary from each of ANZ, CBA, Challenger (CGF), NAB, Computershare (CPU), CSL (CSL), Insurance Australia (IAG), SEEK (SEK), Wesfarmers (WES), Woodside (WPL), Downer (DOW), QBE (QBE), Telstra (TLS), Sonic Healthcare (SHL) and Treasury Wine (TWE), and we have high hopes for many of the stocks we hold, but also for the possibility of adding new names to the portfolio.

VGI Partners Global Investment (VG1) full -year results and commentary released

Lastly, just a small recognition of the terrific performance of VGI Partners this last year since its IPO.

At the start of the week we received the group’s annual investor, and we were incredibly impressed with not only the results delivered, but the manner in which the fund has deployed the capital entrusted it.

I have included the investor relations email address for those of you seeking a copy of the note, but a precis of their performance is that the portfolio generated +9.2% after all fees in the 9-months to June 30^th, but that they had achieved this with an average monthly net equity exposure of only 32c on every $1.00 invested.

VGI Investor Relations – investor.relations@vgipartners.com

It’s a tremendous achievement, and unsurprisingly the VG1 LIC has now traded to +20% on IPO price and to a healthy premium of nearly 10% on its underlying net asset value (NAV).

It’s been a tremendous outcome.

Best Regards,

Jono, Guy and Jordan

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