Market Commentary – June 2017

by Chris Limberg on Jun 30, 2017

Market Commentary – June 2017

The ASX200 index experienced a disappointing quarter falling approximately 2.5% to 5,721. The market began the quarter surging towards 6,000 points before being dragged back primarily by the four major banks. The banks experienced large share price declines between 10-20% triggered by the announcement of new taxes by the Federal Government. These banks currently account for approximately 25% of the ASX200 market capitalisation.

The good news is the RBA (Reserve Bank of Australia) believes the Australian economy is on track to return to trend growth of around 3% per year in the next few years. The economy is showing significant signs of rebalancing with green shoots in the mining sector and stabilising house prices leading board members to believe the next rate movement will be an increase. They are now looking for evidence of raising wages to trigger the next interest rate cycle.

 

Australia

  • RBA maintained the cash rate at 1.50% p.a.
  • In the labour market unemployment has reversed falling to 5.5%
    • The tightening in labour market is expected to lead to a gradual increase in wages growth over time
  • Board members noted the slow progress of wage growth to date is impeding household consumption resulting in challenging retail trading conditions
  • The housing market is showing tentative signs of decelerating most likely due to recent changes in lending standards designed to slow the property market and increase its resilience
    • Board members noted the increase of apartments due for completion in Eastern capital cities
  • The Australian dollar rallied to end the quarter where it started at $0.76 USD
  • The inflation rate has risen over the quarter from 1.5% to 2.1%pa achieving the RBA target inflation rate of between 2-3%

 

US

  • US Stock markets recorded another robust quarter with the DOW increasing 3.1% and the S&P 500 3.2%
  • The political environment is currently dominated by North Korea as they continue to push for intercontinental capable nuclear weapons. Recent media reports indicate they have significantly increased their missile reach which is cause for increased alarm. This may lead to periods of heightened volatility as a consequence of ongoing nuclear activities of North Korea

 

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 has stabilised with the outcome of recent elections being relatively benign in France and Germany but posing additional hurdles in the UK with Prime Minister Theresa May returned with an unexpected hung Parliament

 

Recent Activity

We have been discussing the impact on portfolios of liquidity on thinly traded stocks particularly when events like end of financial year tax loss selling creates aberrations in share prices. Recent examples of such stocks include Abundant Produce (ABT), Praemium Ltd (PPS), RXP Services (RXP), Nvoi Ltd (NVO) and Direct Money (DM1). For greater detail we can explore DM1 share price machinations, this company has been relatively quiet as the new management iron out internal operating systems and prepare for loan book expansion. On the 8th of June the company was valued at $16.32 million. Over the next two weeks 1.6 million shares were transacted with a valuation of approximately $72,000 where upon the company’s market capitalisation halved to $8.16 million. The company maintains no debt, has approximately $15 million of cash and loan assets on its balance sheet, is arguably in the best shape since listing and poised for growth. On the positive side based on current market dynamics a transaction of 1 million shares (circa $80,000) could potentially see the share price jump past 10 cents per share. Therefore it is necessary to understand such businesses and the opportunity they represent.