Market Commentary – March 2017

by Chris Limberg on Mar 31, 2017

Market Commentary – March 2017

The Australian market remains resilient despite the ongoing global political turmoil. The S&P ASX 200 rose 3.5% to close at 5,865. The ASX 200 continues to benefit from price recovery in the top 20 stocks by capital weighting including house hold names the likes of the banks, big resource and insurance companies. Locally the RBA (The Reserve Bank of Australia) continues to balance managing the broader economy against house price growth. With any interest rate cuts likely to fuel higher house prices and interest rate increases to restrain economic growth. With the market believing the cycle is swinging towards higher rates baring any significant external shocks.

The first three quarters of the 2017 financial year has seen the stock market focus on top 20 ASX listed stocks. The result is a rally in large financial, resource and commodity based companies. Whilst this has seen the market run strongly recently the concern is this could end abruptly. Our focus remains on companies that continue to deliver strong earnings growth but are not priced to reflect the growth potential. In time the share market will recognise the profitability of such companies and their prices will rerate accordingly. Commodity prices remain volatile and our preference is to focus on companies with consistent earnings and growth.

Australia

  • RBA maintained the cash rate to 1.50% p.a.
    • However the banks have moved to increase their interest rates out of cycle with the RBA
  • In the labour market unemployment has continued to creep higher to 5.7%
    • Previously the RBA commented “wage growth remains soft, dominated by part time jobs and employment opportunities are better in capital cities than rural areas” and Board members were concerned with quality of employment based on these emerging trends
    • Board members noted the accelerating growth of credit compared to household income
  • The housing market continues to be a headache for the RBA who have forced lenders to institute higher lending standards in an effort to slow the property market  
    • Board members noted the increase of apartments due for completion in Eastern capital cities
    • Rental markets remain subdued
  • The Australian dollar has strengthened on both a trade weighted basis ($0.66 this is a weighted measure against a “basket” of international currencies) and against the USD to A$0.76
  • The inflation rate has risen over the quarter from 1.3% to 1.5% still below the target rate of 2-3% p.a. but is expected to improve throughout 2017 to over 2% meaning further rate cuts are unlikely should this eventuate

US

  • US Stock markets recorded the strongest quarter in 4 years with the DOW increasing 4.6% and the S&P 500 5.5% on the back of the Trump effect
  • The political environment dominated recent market activity with three key driving factors going forward:
    • The Republican healthcare bill which was seen as a litmus test of support for President Trump and his ability to implement promises. The bill has since been pulled by President Trump due to a lack of Republican support
    • Likelihood of promised US tax cuts
    • Infrastructure spending

Europe/UK

  • Brexit has officially started with Prime Minister Theresa May triggering the exit clause (article 50) on the 29th of March, putting the UK on course to leave by April 2019
  • European Political situation remains in a state of flux in many countries in Europe:
    • France heading into a General Election in late April
    • German General Election in October

Recent Activity

The February reporting season wrapped and on the whole was quiet encouraging. With 150 companies within the ASX 200 reporting and recording the following results:

  • 142 of 150 companies reporting a profit for the first half
  • 132 of 150 declaring a dividend
  • For the 150 reporting companies cash in the bank rose 11% to over $110 billion combined

During the quarter holdings in Abundant Produce (ABT), Praemium Ltd (PPS), RXP Services (RXP) and Nvoi Ltd (NVO) had declines in share price which placed a drag on portfolio performance. Nothing has changed in each of these companies and they remain on track but sentiment has been influenced by outside forces which have affected the share price. We have been in discussions with the management of each of these companies and are confident that the price will recover in due course as these business continue to achieve milestones. Long term each of these companies has significant growth potential.

In portfolios this quarter we have made an investment into an upcoming IPO called Bifox. It is primarily a phosphate producer with two mines one in Colombia and one in Chile. The reason for listing on the exchange is to raise funding for capacity expansion which should largely filter through to the bottom line profitability.