Market Commentary – June 2016

by Chris Limberg on Jun 30, 2016

Market Commentary – June 2016

The S&P ASX 200 has risen 3% with volatility continuing throughout the quarter. Since August 2015 the market continues to fluctuate in a tight sideways channel.  Market conditions are proving difficult but not without opportunities. With the top 20 shares in the ASX 200 continuing to face significant headwinds, in the current market opportunities are presenting in smaller companies. The Australian Election has been counted and the Liberal Party has claimed victory and will form Government with a more fractious Senate than before the Election.

Australia

  • The Reserve Bank of Australia (RBA) cut the cash rate to 1.75% p.a. reasoning the “prospects” for sustainable growth would be improved by lower rates
    • With recent Global market turmoil and a hazy Australian political outlook many pundits are predicting another rate cut in the coming quarter
  • The labour market has steadied with the unemployment rate maintaining 5.75%
    • However, wage growth remains soft, below long term average and is beginning to impact Government spending and budget estimates
  • The housing market is developing at two speeds with Sydney and Melbourne prices creeping higher and the rest of the country price growth is static
  • The Australian dollar remains stubbornly high against the USD closing around $0.75 USDs, despite the RBA’s efforts to apply downward pressure through interest rate cuts
  • The inflation rate has fallen over the quarter from 1.7% to 1.3% and remains below the RBA target range of 2-3% p.a. providing scope for further interest rate cuts to stimulate the economy
  • The re-elected Prime Minister Malcolm Turnbull’s Government:
    • previously produced a Budget which has been widely criticised and is yet to be passed through the Senate
    • is on the brink of yet another difficult term in the Australian Parliament

US

  • The US S&P 500 and Dow Jones Industrial Average were reasonably flat not withstanding Brexit volatility
  • The US FED (Federal Reserve System – The US Central Bank) has left interest rates on hold at 0.5%. With any further increase unlikely until next year.
  • The recent strength in the US economy has waned with mixed economic data
  • US presidential candidates have been selected for the November 8, 2016 Election with Donald Trump the controversial Republican and Hilary Clinton for the Democrats

Europe

  • The UK surprisingly voted to leave The European Union (EU) in a closely contested Referendum with immigration and political sovereignty key issues. The result surprised Global markets resulting in heavy falls which have now been recovered
    • The leave vote has also created tension with Scotland who collectively voted to stay
  • European economy continues to struggle and growth as a whole remains illusive
  • Terrorism threat remains with an attack on Brussels airport
  • Greece continues to have issues but the rest of the world has largely moved on
  • Russian political issues have been overshadowed  
  • European Political situation remains in a state of flux in many countries in Europe with:
    • UK voting to leave the EU
    • Spain is still unable to form a Government after two elections
    • France the far right party of le National Front is gaining momentum
    • The European mood can be summed up as:
      • Anti-Austerity
      • Anti-American
      • Anti-Euro
      • Anti-Immigration

China

  • The Chinese Economy has a new 5 year plan which favours growth over economic rebalancing all be it at lower target of 6%
  • The Chinese Government has increased its spending levels investing in infrastructure projects to offset a decline in private spending
  • The property issues appear to be responding to Government measures with investment increasing and growth in the level of floor space sold
  • China’s capital flight continues as more and more Chinese find ways to move their wealth off-shore to escape devaluation of the Yuan and evade capital controls
    • This poses a problem as the Chinese currency is fixed therefore as citizens move their money out the Peoples Bank of China must replace the money by draining cash reserves to maintain the fixed exchange rate

Recent Activity

Over the quarter we have been increasing cash holdings in portfolios and selectively bidding in Initial Public Offering (IPO) of companies. We are constantly on the lookout for good ideas and upcoming companies. Three such examples of this are Abundant Produce (ABT), Philips River Resources (PRH) and Nvoi (NVO). ABT is a small seed developer with close ties to Sydney University. Its opportunity is to develop hybrid seeds for food production. PRH has a potash field in Chile and looking to expand their production. Nvoi is a digital disruptor targeting the employment of casual staff in white collar roles. The company has developed a platform that manages end to end search, employment and payroll for employers.