Economic Review

16 Aug

Economic Review

United States
The US Federal Reserve (the Fed) left official interest rates unchanged following its monetary policy meeting but the accompanying statement suggested that an announcement concerning the unwinding of quantitative easing would be made “relatively soon”. Market participants think this is likely to occur at the Fed’s September meeting.
Data releases were generally favourable. Q2 GDP rose 2.6% (seasonally adjusted annual rate, saar) following a revised 1.4% saar rise in Q1. Private consumption rose 2.8% saar, whilst business fixed investment rose 5.2% saar. June’s employment report was stronger than expected, with jobs growth of 222,000. The unemployment rate was virtually unchanged at 4.4%, whilst average hourly earnings rose 0.2% to be up 2.5% over the year.
The ISM Manufacturing Index was stronger than expected, rising 2.9 points to 57.8 in June, led by strength in new orders and employment. Retail sales fell 0.2% in June to show annual growth of 2.8%.
Inflation data were weaker than expected, with the headline CPI flat in June to show annual growth of 1.6%. Core inflation (ex. food and energy) rose 0.1% to be up 1.7% over the year.

Data in Europe continued to suggest that the recovery is strengthening. Key releases included:

  • June Manufacturing PMI that rose to 57.4 from 57.0 in May;
  • May Industrial production that rose a stronger than expected 1.3% to be up 4.0% over the year;
  • June unemployment rate that fell 0.1pp to 9.1%.

Inflation remains benign in the region although it has picked up from its lows. The headline CPI showed annual growth of 1.3% in July, whilst the core CPI was up 1.2%. The European Central Bank left monetary policy unchanged following its regular monthly meeting.

Data in Japan continues to broadly improve. Real household spending rose 1.5% in June to be up 2.3% over the year. June retail sales rose 0.2% to be up 2.1% over the year, whilst June industrial production rose 1.6% to show annual growth of 4.9%. The Tankan Large Industry Manufacturing Index rose 5 points to 17 in Q2 and the Manufacturing PMI rose 0.4 points in June to 52.4. There were no changes to monetary policy from the Bank of Japan.
China’s growth also seems to be improving despite government efforts to slow the property market. GDP rose 1.7% in Q2 to show annual growth of 6.9%, in line with Q1. June industrial production and retail sales were stronger than expected, rising 7.6% yoy and 11.0% yoy respectively. The official Manufacturing PMI slipped 0.3 points in July to 51.4. Inflation remained well contained at 1.5% yoy in June. There were no changes to the People’s Bank of China’s monetary policy during the month.

Australian economic review
The most significant data this month was Q2 CPI that was slightly lower than expected. The headline CPI rose 0.2% in the quarter to be up 1.9% over the year. This is down slightly on the 2.1% annual inflation recorded in Q1. The weaker result was mainly due to a fall in petrol prices and the subdued retail environment that resulted in clothing and footwear discounts. Core inflation, as measured by the average of the trimmed mean and weighted median, rose 0.5% to show annual growth of 1.8%, similar to Q1.
Employment recorded another solid monthly increase of 14,000 in June, following the 38,000 rise in May. Over the past year, employment is up 2.0%. The unemployment rate was steady at 5.6%. Retail sales were also stronger than expected, rising 0.6% in May to be up 3.8% over the year. This was mainly driven by a 2.2% rise in sales of household goods and suggests some pick-up in consumer demand was evident in Q2.

The Reserve Bank of Australia (RBA) left the official cash rate unchanged at 1.5% after its monthly meeting and the accompanying statement suggested the neutral policy stance remains in place. The statement also suggests the RBA remains concerned about the high and rising level of household debt.

Global share market review
Global share markets had a mixed month, with strength in the US offset by weakness in Japan and some European markets. In the US, the S&P 500 Index rose 1.9%, supported by favourable economic data, the Fed’s decision to leave interest rates on hold and the strong Q2 earnings reporting season. To date, Bell Potter data suggests that just over half of S&P 500 companies have reported, with around 70% beating average earnings expectations. Sales growth has also been stronger than expected on average. Q2 earnings growth across the sectors is currently running at around 9.0%.
European markets were mixed, with the EuroStoxx 50 Index up 0.3% whilst the German Dax Index fell 1.7%. Although the European Central Bank left monetary policy on hold, investors are concerned about when the ECB will start to remove its quantitative easing given the recent acceleration in the European economy.
Most Asian share markets performed well, with the main exception being Japan where the Nikkei Index fell 0.5%, partly in response to the yen strengthening against the weak US dollar. China’s Shanghai Composite Index rose 2.5%, supported by stronger than expected economic data, including Q2 GDP.

Table 1: Global share market performance – July 2017
US S&P 500 +1.9%
US Dow Jones +2.5%
Euro Stoxx 50 +0.3%
German DAX -1.7%
UK FTSE 100 +0.8%
Japan Nikkei 225 -0.5%
China Shanghai Composite +2.5%
Source: Factset, IRESS

Australian share market review
The Australian share market was flat in July but this masks quite strong divergence between sectors. Healthcare stocks (-7.5%) and other companies that have significant US dollar earnings (eg Aristocrat Leisure, Brambles, Boral, James Hardie Industries and Amcor) came under pressure as the Australian dollar ($A) rose 4.1% to 80 US cents. This undermines the $A value of these companies’ offshore earnings. Utilities (-5.3%) and telecoms (-4.2%) also underperformed, impacted by higher bond yields and ongoing perceptions of earnings and dividend risk amongst telecom stocks due to fierce competition in the sector.
By contrast, the resource sector (+5.0%) was boosted by favourable growth data in China and rising commodity prices, particularly iron ore (+13.5%) that responded to stronger demand from Chinese steel makers. Banks (+2.3%) and consumer staples (+1.1%) also had a better month.
Several major resource stocks delivered favourable quarterly reports, including BHP Billiton (BHP) and Fortescue Metals Group (FMG), with FMG flagging another reduction in costs in FY18. Japanese company, Persol, made a takeover offer for Programmed Maintenance Services (PRG) of $3.02 per share, resulting in PRG’s share price rallying nearly 60%.

Table 2: Australian share market performance – July 2017
S&P/ASX 200 Accumulation Index Flat
S&P/ASX 200 Industrials Accumulation Index -0.9%
S&P/ASX 200 Resources Accumulation Index +5.0%
S&P/ASX Small Ordinaries Accumulation Index +0.3%
S&P/ASX 200 A-REIT Accumulation Index -0.1%
Source: Factset, IRESS

Large Caps
The best performing Australian large cap stocks during the month were Harvey Norman (+14.4%), Flight Centre (+13.6%) and Oz Minerals (+12.6%).

  • Flight Centre (FLT) performed well after revising up its FY17 guidance to the top end of the previously announced range of $300-330m. The company’s US business is expected to deliver a record profit and a strong improvement is also being seen in Canada.
  • Oz Minerals (OZL) delivered a solid 2Q17 trading update with lower than expected cash costs and net cash coming in at $625m due to positive net cash flow. Copper production was up 12% compared to Q1, whilst gold production rose 23% during the quarter.

The worst performing Australian large cap stocks during the month were Coca-Cola Amatil (-10.7%), Aristocrat Leisure (-10.2%) and Fairfax Media (-10.0%).

  • Coca-Cola Amatil (CCL) weakened following news that Woolworths is removing three of CCL’s five Mount Franklin water varieties to allow more shelf space for small, niche brands. These water based products reportedly make up around 20% of CCL’s beverage sales.
  • Having performed very strongly over the past 12 months, Aristocrat Leisure (ALL) experienced weakness in July. The strength in the $A negatively impacted ALL (and other companies with US dollar earnings) as it reduces the $A value of ALL’s offshore earnings. The company also announced that its Chief Financial Officer (CFO) role was being relocated to North America from March 2018 but the existing CFO, Toni Korsanos, has declined the offer to move to the US for family reasons. Hence the company has commenced the process of hiring a new CFO.

Listed property
The listed property market was virtually flat in July, with the S&P/ASX 200 A-REIT Accumulation Index falling just 0.1% and marginally underperforming the broader share market that was flat over the month. Industrial REITs (+1.1%) outperformed, along with Retail (+0.6%), whilst Diversified (-1.4%) and Office REITs (-4.7%) were relatively weak. Calendar year-to-date, the REIT sector is down 6.1%, underperforming the broader share market by 7.0%.
Vicinity Centres (VCX) outperformed strongly, rising 7% in the month. Management announced an earnings accretive share buy-back (5% of the REIT), commencing after its 17 August earnings report. Asset revaluations also increased VCX’s net tangible assets to $2.82 per share from $2.73 in December 2016.
Charter Hall Group (CHC) announced it is having exclusive discussions with Westpac about the sale of global infrastructure business Hastings Management Proprietary. Westfield Corporation (WFD) continued to be negatively impacted by concerns about the retail environment in the US following an earnings report from a US shopping centre REIT that included a reduction in earnings guidance.

Important Information
This publication is produced by the MLC Investment Policy Team and issued by MLC Wealth Management Ltd and its related companies and entities for the intended informational use by financial advisers. Whilst due care has been taken in preparing this report, Australian National Consulting, ANC Wealth and MLC does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. This report is general information only and has been prepared without taking into account an investor’s individual objectives, financial situation or needs. The report should not be taken to contain securities advice or recommendations. Past performance is no indication of future performance.