Market Commentary – September 2016

by Chris Limberg on Sep 30, 2016

The S&P ASX 200 has achieved a 3.87% increase however the increase does not reflect the extraordinary volatility throughout the quarter. Since February 2014 the market has fluctuated in a tight sideways channel.  Market conditions continue to be fractious, but not without opportunities. With the top companies in the ASX 200 regaining some momentum due to improved commodity prices. The share market continues to present opportunities in smaller companies. With the Australian election completed the focus now turns to the American Presidential election in November.

Australia

  • The Reserve Bank of Australia (RBA) cut the cash rate to 1.50% p.a.
    • Economists are still predicting further rate cuts to stimulate the economy
  • The labour market has steadied with the unemployment rate at 5.7%
    • However, wage growth remains soft, a leading indicator for inflation
    • Full-time employment continues to fall and as part-time employment grows
  • Data suggests the strong housing market of recent years is coming to an end with lower housing loan approvals although house prices continue to creep higher
    • The RBA has noted the “Considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities”
  • The Australian dollar remains stubbornly high against the USD closing around $0.77 USDs, despite the RBA’s desire for a lower Australian dollar
  • The inflation rate has fallen over the quarter from 1.3% to 1.0% and remains below the RBA target range of 2-3% p.a. in theory providing scope for further interest rate cuts to hopefully stimulate the economy

US

  • The US S&P 500 and Dow Jones Industrial Average recorded small gains reaching new highs rising 3.3% and 2.1% respectively
  • The US FED (Federal Reserve System – The US Central Bank) has delayed increasing interest rates leaving them on hold at 0.5%.
  • The recent strength in the US economy has waned with mixed economic data
  • US presidential election draws near with citizens voting on the 8th of November. From all reports it should be an interesting outcome with the divisive Donald Trump and the traditional Democrat support base not rallying to Hilary Clinton

Europe

  • Brexit continues to be the driving force in European markets with the resignation of David Cameron and election of Theresa May as Prime Minister to negotiate the terms of EU withdrawal
  • European economy struggles and growth as a whole remains difficult
  • Russian political issues have been overshadowed by its off shore actions
  • 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 three elections
    • In 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, this has improved commodity prices which benefits the Australian economy
  • 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 attempt to find ways to move their wealth off-shore to escape devaluation of the Yuan and evade capital controls

Recent Activity

This quarter we have continued to selectively increase cash holdings in portfolios. Investments in RXP Services (RXP) and Praemium Ltd (PPS) have performed strongly over the quarter. We continue to hold these investments long term and believe that the strong performance of these companies can continue, however it is prudent to reduce exposure at appropriate levels.