Market Commentary – March 2018by Chris Limberg on Apr 01, 2018
The ASX200 index fell 5.0% in a volatile quarter to close at 5,752.
Australia’s economic outlook continues to improve with growth expected to continue on-trend this year. Though the housing market cycle appears to have peaked with both Sydney and Melbourne prices easing and auction clearance rates returning to average. Planned infrastructure projects are expected to support the domestic economy for several years. While employment trends continue with strong jobs growth in the economy. However, Australian households remain under pressure with high debt and slow income growth constraining consumption.
- The Reserve Bank of Australia (RBA) maintained the cash rate at 1.50% p.a.
- The housing market continued to ease with Sydney and Melbourne auction clearance rates returning to average levels
- In the labour market unemployment rate rose 0.1% to 5.5% due to higher participation rate likely resulting from a period of strong jobs growth
- The inflation rate remains at 1.9% delaying any interest rate increases. However, the RBA is monitoring wages growth closely which has picked up slightly to 2.1% p.a.
- The Australian dollar retreated over the quarter falling 2 cents to US$0.77 primarily due to increasing US interest rates
- US Stock markets snapped nine consecutive quarterly increases with the DOW falling 2.9% and the S&P 500 falling 2.0%
- Volatility is certainly back, with the Dow Jones trading in a 400 point range 22 times already this year, compared to just once for the whole of 2017
- US interest rates continue to increase. Up another 0.25% this quarter to 1.75% p.a. with the market expecting another two or three increases of 0.25% each this year
- A trade war between the US and China has destabilised the market with both countries threatening to impose damaging tariffs. Some market commentators were calling for the end of a 9 year bull run however despite the rhetoric from both parties the White House stated it was open to negotiations with China which has eased the situation and markets responded positively to the announcement.
- The US is approaching Mid-term elections in November, a key test of the Trump Presidency
Reporting Season Wrap
The best description of the latest February reporting season is solid not spectacular with Australian companies laying the groundwork for future growth. With 135 companies of the ASX 200 reporting the following are key themes and trends emerging from this reporting season.
- Department stores remain under pressure but less so specialty retailers
- Broadcasters have benefitted from advertisers waning enthusiasm for social media
- Export focused consumer goods are experiencing strong demand from Asia
- Construction and development companies have benefitted from high building activity
- Transport and infrastructure companies have out-performed the market
- Technology and Telecom companies have struggled
- Business conditions are at decade highs with all but 8 companies reporting a profit
- Overall profit is down marginally on a year ago with only 56% able to lift profits compared to last year
- Base level revenues are higher however global competition continues to rise; companies are investing more; and domestic energy prices increasing has seen expenses rise faster than revenues
- Growing numbers of infrastructure projects will support the prospects of construction, industrial and transport companies
- Global sharemarkets have been volatile however the Australian sharemarket remains attractively valued with a price-earnings ratio of 15.79 slightly above long-term average of 15.65
Many portfolios have been long term holders of Praemium (PPS) and RXP Services (RXP) which have been strong contributors to positive performance. Over the March quarter both stocks fell from highs which contributed to negative performance within some portfolios. PPS was down 27% and RXP 36%. There have been no major changes in either of these businesses and we are confident that the prices will recover. Generally, the entry price in portfolios remains profitable and in the case of RXP the yield is very attractive.