Economic Review

20 Dec

Economic Review

United States
The Federal Reserve (Fed) kept interest rates on hold this month, but expectations for a rate rise in December were strengthened upon the release of the October 31/1 November meeting minutes, showing “in light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential build-up of financial imbalances.” President Trump nominated Jerome Powell as the next Chairman of the Fed, to replace outgoing Janet Yellen. If his nomination is confirmed, Jerome Powell will chair his first Fed meeting in March 2018. Expectations are growing that President Trump’s impending, material tax reform is looking more and more likely to be legislated.

Economic data released during the month was generally strong. US November unemployment inched lower from 4.2% to 4.1%, the lowest unemployment rate since December 2000. Despite this, the rise in non-farm payrolls for October was weaker than expected. Industrial production and manufacturing rose +0.9% and +1.3% respectively. Retail sales increased +0.2% while sales in the control group (ex-autos, gas and building materials) were up +0.3%. Housing starts were considerably better than consensus at +13.7% (consensus: +2.5%), reaching a 12mth high.

Real GDP growth was revised up from +3.0% to +3.3% (consensus +3.2%), the fastest pace in the past 3 years.

Growth in Europe continues to positively surprise as the European Central Bank released minutes of their October meeting where they extended quantitative easing for 9 months at 30bn/mth. The minutes showed wide agreement that the economic growth is strong with some short term upside risks.

GDP Growth was revised up by 0.1% thanks largely to Germany which reported strong growth at +3.3%. Retail sales were up 0.7% in September and Core CPI was unchanged at 0.9% in November. Economic sentiment for the European area rose half a point to a 17yr high of 114.6 with all sectors, apart from retail, registering strong gains. Lastly, the unemployment rate dropped to 8.8% in October.

Geopolitical tensions in the area continued this month as the US Pentagon issued a statement that North Korea had successfully fired a missile that travelled approx.1,000kms before crashing into the Sea of Japan. President Trump said “It is a situation we will handle.”
Chinese economic data throughout the month were again mixed. The Official Manufacturing PMI for November rose to a better than expected 51.8 (consensus: 51.5).

The trade surplus widened in October as Exports rose 6.9% and imports climbed 17.2% following an equally impressive September import growth. Industrial production eased 0.2% while retail sales were weaker than expected at +10% growth compared to a 10.3% climb in September. Inflation indicators picked up as consumer and producer prices were up 1.9% and 6.9% respectively year-on-year. Concerns have resurfaced in light of the recent slowdown in cyclical sensitive areas (property as well as credit).

Australian economic review
November delivered some mixed economic data. Capex, building approvals and business surveys were all positive, while retail sales and wage growth were negative. The NAB Survey of Business Conditions rocketed to an all-time record for the month of October. On the last day of the month, the Banks asked for an inquiry “to put an end to uncertainty and restore trust, respect and confidence in the banking sector”. A Royal Commission was subsequently announced that will focus on “misconduct in the banking, superannuation and financial services industry.”

The Australian dollar continued to weaken against most currencies, ignoring the rising Iron Ore price and instead focussing on the falling yield spread between Australian and US bonds which is at multi-year lows.

The Reserve Bank of Australia (RBA) left official interest rates unchanged following its regular meeting acknowledging that forward indicators for business investment have been positive for some time and that the labour market was strengthening, broadly speaking. The recent narrative is that the domestic economic outlook has been slowly improving.

Global share market review
Global share markets were strong again in the month of November led by the US which posted multiple new highs on the back of further evidence of growth, excitement surrounding President Trump’s proposed tax cuts and the Fed keeping rates on hold. In the US, the S&P500 Index rose +2.8%.
European markets were mixed despite some strong economic data. The Eurozone’s industrial sector is now operating at its best level since 2000. The UK was weaker as concerns that the UK would be forced to make significant economic compromises, around BREXIT, grew larger.
Asian share markets were also mixed as both Hong Kong and Japanese markets were up +3.3% and +3.2% respectively while the Chinese markets retreated -2.2%.

Table 1: Global share market performance – July 2017
US S&P 500 +2.8%
US Dow Jones +3.8%
Euro Stoxx 50 -2.8%
German DAX -1.6%
UK FTSE 100 -2.2%
Japan Nikkei 225 +3.2%
China Shanghai Composite -2.2%
Source: Factset, IRESS

Australian share market review
The Australian share market rose in November adding 1.6%, and reaching its highest levels since January 2008. Most sectors were up for the month with the exceptions being Telecommunications and Financials (-1.6% and -1.5% respectively). The biggest gains came from the Real Estate (+5.3%), Technology (+4.4%) and Energy (+4.0%) sectors. Real Estate was supported in part by the decline in the 10yr bond yield as the market reduced the probability that the RBA will follow the FED with early rate hikes.

The Australian dollar continued to weaken against most currencies, ignoring the rising Iron Ore price and instead focussing on the falling yield spread between Australian and US bonds.

Table 2: Australian share market performance – July 2017
S&P/ASX 200 Accumulation Index +1.6%
S&P/ASX 200 Industrials Accumulation Index +1.3%
S&P/ASX 200 Resources Accumulation Index -1.7%
S&P/ASX Small Ordinaries Accumulation Index +3.9%
S&P/ASX 200 A-REIT Accumulation Index +5.3%
Source: Factset, IRESS

Large Caps
The best performing Australian large cap stocks during the month were Santos (+12.9%), Origin Energy (+12.5%) and Northern Star Resources (+11.7%)

  • Santos (STO) reaffirmed its strategic plan with improving performance from core assets allowing for more capital to be spent on reserve extensions and debt reduction. It also benefited from the increasing oil price and press speculation of a potential takeover.
  • Origin Energy (ORG) at an investor day ORG reaffirmed targeting net debt to be below A$7bn by June 2018. In addition to a focus on net debt reduction, ORG also flagged some growth opportunities with all parts of the business contributing. Additionally, ORG is targeting $500m APLNG cost reductions over the next 18mths.

The worst performing Australian large cap stocks during the month were Orica (-17.3%), ALS Ltd (-12.7%) and GrainCorp (-8.7%).

  • Orica (ORI) reported a full-year result for the year ending 30th September. The results were well below consensus expectations. The large factors in the underwhelming results were the impact of currency as well as the rising material input costs.
  • ALS (ALQ) reported 1H results where net profit came in on the low end of company’s previous guidance. The FY18 guidance for net profit of $135-145m was also below consensus expectations.
  • GrainCorp (GNC) reported a full-year result for the year ending 30th September that was below consensus expectations due to a disappointing results from its Oils division.

Listed property
The listed property market rose strongly in November, with the S&P/ASX 200 A-REIT Accumulation Index delivering a return of 5.3%, outperforming the S&P/ASX 200 by 3.7%. Office REITs led the charge returning +6.0% this month with Retail REITs closely in tow with +5.9%.

REITs that performed well over the month included National Storage (NSR), Abacus Property Group (ABP) and Charter Hall Group (CHC). All three of these REITs held their AGMs this month. NSR reconfirmed FY18 guidance, ABP continued to target FY18 distribution per security of 18 cents per share and CHC highlighted the momentum across all parts of its business, reaffirming guidance.

Mirvac (MGR) was amongst the weaker REITs as were Charter Hall Long Wale (CLW) and Shopping Centres Property Group (SCP). MGR and SCP confirmed guidance at their respective AGMs. No other material news was announced.

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.