Economic Review

30 Aug

Economic Review

Global Equity Markets 
Global shares made reasonable gains in July. Investors were comforted by supportive comments from the key central banks as well as initial signs of improving US corporate earnings results. Concerns over the US-China trade dispute and weakening global business surveys are still present but failed to dent the tailwinds from lower global interest rate settings.

Wall Street made new record highs in July. Early results for the June quarter US profits season show that a majority of S&P 500 companies are reporting a positive earnings surprise. Given that expectations for US corporate profits were subdued, investors have latched onto this mild improvement as a ray of sunlight. US economic data has also been encouraging with solid jobs growth and strong retail spending. The Federal Reserve (Fed) delivered a 0.25 % cut to their key policy interest rate given uncertainties over global growth and trade tensions. However the Fed Chair Jerome Powell also signaled that the 0.25% interest rate cut was merely a mid-cycle adjustment rather than the beginning of a long series of cuts. These cautious Fed comments tempered Wall Street’s gains.

European share markets posted mixed results given concerns over Britain’s exit from the European Union as well as soft European economic data. The European economy recorded slow economic growth in the June quarter with manufacturing business surveys being particularly weak. The European Central Bank (ECB) President Dr Mario Draghi acknowledged Europe’s growth outlook was deteriorating at July’s policy meeting and signaled that further stimulus would be considered at September’s meeting. By contrast, UK shares benefitted from a weaker currency as the new Prime Minister Boris Johnson pledged that the UK Government is prepared to leave Europe without a deal on 31 October 2019.

Asian share market performances also were mixed. Chinese shares essentially drifted sideways with minimal progress on the trade dispute. China’s economic activity data was more encouraging with improving retail sales and industrial production for June. Japan’s share market made modest gains given lingering trade tensions and subdued economic activity data.

Table 1: Global share market performance – July 2019
US S&P 500 +1.3%
US Dow Jones +1.0%
Euro Stoxx 50 -0.1%
German DAX -1.7%
UK FTSE 100 +2.2%
Japan Nikkei 225 +1.2%
China Shanghai Composite -1.6%
Source: Factset, IRESS, August 2019

Australian share market review
Australian shares made strong gains to new record highs. Falling Australian interest rates and a lower Australian Dollar were the key positive contributors to the share market. The Reserve Bank (RBA) cut interest rates by a further 0.25 % to 1.0 % in early July while Commonwealth Government 10 year bond yields fell to historic lows. This interest rate tailwind boosted share sectors such as consumer staples, health care and AREITs.

Australia’s economic data releases in July were mixed. Housing construction continues to dramatically fall while retail spending is subdued. Price pressures remain mild with the June quarter’s CPI showing annual inflation at 1.6 %. A more hopeful sign is that Australian house prices appear to have stabilised after the June and July interest rate cuts by the RBA while the unemployment rate was stable at 5.2% for June.

The Australian Dollar (AUD) fell sharply against the US Dollar and Japanese Yen. Financial markets expect the RBA will consider cutting interest rates again in coming months. Higher iron ore and gold prices have provided only marginal assistance in supporting the Australian Dollar that finished the month down by 2.6% against the US Dollar to USD0.6840.

Table 2: Australian share market performance – July 2019
S&P/ASX 200 Accumulation Index +2.9%
S&P/ASX 200 Industrials Accumulation Index +3.4%
S&P/ASX 200 Resources Accumulation Index  +1.1%
S&P/ASX Small Ordinaries Accumulation Index +4.5%
S&P/ASX 200 A-REIT Accumulation Index +2.6%
Source: Factset, IRESS, August 2019

Large Caps (S&P/ASX100)
A2 Milk (+23.6%), Magellan Financial Group (+21.3%) and Treasury Wine Estates (+18.6%) were the best performing large cap stocks during July.

  • A2 Milk (A2M) – A strong result from Bubs Australia led to gains across the board for Australian and New Zealand infant formula stocks, of which A2M is a leader in the sector. The company has been increasing the recommended price of its products and has a good footing in the lucrative Asian infant and baby formula market.
  • Magellan Financial Group (MFG) – MFG continued its stellar 2019 on the back of solid investment returns, rising markets and fund inflows.
  • Treasury Wine Estates (TWE) – Having underperformed the market during FY19, TWE’s shares regained some ground over July on no company news. But based on data released by Wine Australia that the value of Australian wine exports to China rose by 7% to a new high of $1.2b for FY19, sentiment towards TWE, as an exporter of premium wine to China, has been more positive.

The worst performing Australian large cap stocks during the month were Cimic Group (-18.1%), AMP Limited (-15.6%) and Iluka Resources (-10.7%).

  • Cimic Group (CIM) – Despite announcing a further on-market buyback of up to 10% over 12 months, CIM’s shares were marked down after the company reported 1H NPAT that was below guidance. A strong performance from mining activity contrasted a drop in construction profitability.
  • AMP Limited (AMP) – AMP shares fell sharply after the company announced that the sale of AMP Life was unlikely because the RBNZ did not approve the deal. The company also announced that the 1H19 dividend would not be paid.
  • Iluka Resources (ILU) – ILU’s 2Q result disappointed the market with lower revenue and higher cash costs than expected, lower than expected price rises for rutile and the prospect of a soft demand outlook for zircon.

Listed property
The S&P/ASX 200 AREIT Accumulation Index rose by 2.6% in July 2019, underperforming the S&P/ASX 200 Accumulation Index by 0.3%.

The Retail and Diversified AREIT sectors posted the highest gains during July, both up by 4.2%. Office AREITs returned 1.3% but the Industrial sector declined by 1.3%.

Written 6 August 2019.

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