Market Commentary – December 2015

The S&P ASX 200 increased 5.5% over the quarter. The volatility continued into December with the ASX 200 trading up to 5,400 points, with daily movements of 1% or more persisting. The major financial themes impacting the Australian market are the continuing decline of commodity prices, Chinese economic transition and the first US interest rate increase since 2008. We believe these trends will remain for the foreseeable future and we believe caution is warranted in the current market volatility.

Australia

• The Reserve Bank of Australia (RBA) kept the cash rate at 2% p.a. stating “policy remained appropriate…Members judged that the outlook for inflation may afford some scope for a further easing should that be appropriate to support demand”.
• The labour market continues to improve with the unemployment rate falling to 5.8%.
  • Wage growth remains soft and below average over the decade but improving gradually
• Sydney and Melbourne housing markets recent strong returns have abated and prices look set to ease in the coming months
• The Australian dollar continued its decline slipping below $0.70 USDs. Given the weak economic outlook, continued fall in commodity prices and increasing US interest rates the Australian dollar is likely to continue its slide.
• The headline inflation rate has remained below the RBA target range of 2-3% pa currently 1.5% pa leaving scope to further cut interest rates in order to stimulate the economy should the support be required.
• The new Prime Minister Malcolm Turnbull appears to be having a steading effect on the Australian economy evident from a gradual increase in business confidence

US

• The US S&P 500 (6.2%) and Dow Jones Industrial Average (7.1%) have both increased during the quarter
• The US FED (Federal Reserve System – The US Central Bank) have finally increased interest rates to 0.5% for the first time since 2008
• Speculation has now turned from when rates will increase to how quickly the FED will move to increase rates to more normal levels
• The US economy continues to strengthen with:
  • Above trend growth
  • Household consumption above average
  • Increasing employment
  • Stable inflation
• US presidential election campaigns have begun for the November 8, 2016 Election. Currently candidates are vying for party nominations.

Europe

• European economy continues to struggle although growth seems to be improving.
• The quarter has been a traumatic period for Europe with previous turmoil of Greece and Russia falling out of the current news cycle and focus shifting to ISIL and terrorism.
• The ongoing anaemic European economy coupled with The Paris Terrorist Attacks are unfortunately playing out in predictable fashion politically with the raise of “le Front National” a French political party who are anti:
  • Austerity
  • American
  • Euro
  • immigration

The Parties leader Marine Le Pen has been gaining votes for the presidential elections in 2017. A poll prior to the Paris Terrorist attack have her on 29% of the vote. Post the attack this is anticipated now to be even higher.

China

• The Chinese market is a big deal and “a bigger threat than Greece” because:
  • In 2016 the World economy is expected to grow by 3.6% of which China is anticipated to contribute 1% of this growth rate.
  • The Chinese economy’s growth continues to slow because, much like the Australian economy, the Chinese economy is transitioning from manufacturing driving growth to services and household spending.
    • This shift in economic growth is likely to exacerbate Australian mining and energy woes but assist other areas such as food production, tourism, education, health and financial services.
• Previously we noted the Chinese Financial Market was significantly overvalued with a Price to Earnings ratio of greater than 23. The devaluation of this stock market has led to Worldwide volatility:
  • The Chinese Government is attempting to manage the bubble through rapidly changing regulation and market shutdowns at predetermined daily levels
• The amount invested in the Chinese Sharemarket is relatively small compared to China’s overall GDP (Gross Domestic Product) which we believe should limit the impact on the wider Chinese economy.

Looking Ahead

Two weeks into 2016 and we have seen significant falls in Australian and Global markets. Generally, the Chinese and US sharemarkets remain expensive. In the US, sharemarket earnings season for the forth quarter is underway and from all reports results are likely to be on average 6% lower than the same time last year. This could be a catalyst for further share price falls.

The events that will impact the market this year are likely to derive from politics and currency valuations. The currencies will be the falling Chinese Renminbi and the raising US Dollar. The major political events this year are the US Presidential Election in November and an Australian Election is expected be called late 2016. With respect to China we believe stability issues are political in nature with the Chinese leadership attempting to root out significant corruption and shore up their leadership.