• Global, and particularly Australian, shares have seen a bit of a pull back over the last month which could have further to go in the short term.
• However, what we are seeing is likely a correction as opposed to a new bear market. From a fundamental point of view the cycle still looks okay with no sign of the overvaluation, overheating economic conditions, onerous monetary tightening or investor euphoria that normally precedes major bear markets.

Introduction

Share markets have seen a bit of volatility and a pullback over the past month. This has been particularly so for Australian shares. This note looks at the key drivers and whether it’s just a correction or a new bear market.

Drivers of recent volatility

Our view for this year has been that shares would have positive but more constrained returns than seen over 2012 and 2013 and that volatility would increase. Our basic reasoning was that with shares no longer dirt cheap, investors would have to depend more on earnings growth for share market gains and this would be more constrained and uncertain. Until recently it has been relatively calm though despite a range of worries and deep scepticism amongst many commentators. Lately though, it seems the worry list has intensified and this has been reflected in increased volatility. The list of worries includes the following:

• Top of the list has been unease about the gradual shift at the US Fed towards eventual monetary tightening. Ultra easy Fed policy has been a key source of support for the global economy and investment markets. Investors are naturally concerned about what will happen when this ends with the Fed’s third round of QE set to end later this month and the Fed talking about raising rates next year.
• The global economic recovery has proved yet again to be fragile and uneven: with the Eurozone flirting with deflation; Japan struggling after a sales tax hike; the Chinese economy going through another soft patch; and emerging markets generally remaining subdued.
• Meanwhile a range of geopolitical threats are causing nervousness including: the escalating involvement of the US and its allies in the conflict with IS in Iraq and Syria; the conflict in Ukraine; the protests in Hong Kong accentuating concerns regarding China; & the worsening Ebola pandemic in Africa & the arrival of cases in the US.
• A range of “technical” concerns regarding US shares have added to these worries including: the absence of a “decent” correction since 2012 and low levels of volatility (or VIX) leading to fears investors may be complacent and the narrowing breadth of the US share market rally.
• Finally, we have been going through a seasonally weak period of the year for shares. The September quarter is historically the weakest quarter of the year.

While US and global shares have had only modest pullbacks of around 3 to 4%, Australian shares have been particularly hard hit with a fall of 7% reflecting the overlay of global concerns along with:

• A sharp fall in the iron ore price and commodity prices generally on China worries;
• Increasing talk that Australian banks will be forced to increase their capital ratios; and
• Foreign investors retreating to the sidelines as the $A falls. They are 30-40% of the market and it’s quite normal for them to pull back as the $A falls as they fear a double hit to the value of their investments. Indeed $US based investors lost 12% in Australian shares last month.

The correction in shares could go further: US shares, which tend to lead global markets, are only off slightly so far whereas corrections often go to 5 to 10%; nervousness is likely to intensify in the run up to the end of QE3 later this month; nervousness in Europe may well continue until uncertainty is cleared up around banks with the ECB to announce results of stress tests later this month; and finally seasonal weakness often runs into October. However, we view this as a correction, not the start of a new bear market.

A correction, not a new bear

There are several reasons why what we are seeing is likely a correction, rather than a bear market. First, valuations are not extreme.

This is evident in the previous chart which is based on a range of measures including a comparison of the yield on shares with that on bonds. Recent share market weakness has pushed valuations well into cheap territory again.

Second, the global economic cycle is a long way from posing a major threat to shares. The global economy is growing, but it’s uneven and sub-par. This is a blessing in disguise:

• While the US looks to have recovered from a soft patch early this year, growth in Europe, Japan and China is dragging the chain. Europe is unlikely to slide back into recession with the ECB doing just enough to support growth but weak credit demand and a reluctance to ease fiscal policy growth will remain constraints. Meanwhile, China is doing better than most other regions but its stop/go approach to supporting growth in the face of pressure for long term reforms is likely to see growth stuck around 7%.

As a result global spare capacity and excess savings remain intense so inflationary pressures remain tame and bond yields low.

• In many ways the world resembles the 1990s after the early 90s recession with the US being a growth leader, other regions lagging and disinflationary pressure keeping a lid on inflation.
• The overall result is that global growth is strong enough to boost profits but a long way from the boom conditions that cause escalating inflation. In other words, the global growth cycle is still in the “sweet spot”.

As a result, global monetary policy is set to remain easy.

• While the US is edging towards monetary tightening, Europe, Japan and China are a long way from tightening and if anything are likely to see further easing.
• This means the US dollar will likely remain under upwards pressure, which in turn will have the impact of importing low inflation into the US and delaying/limiting the extent of US rate hikes once they do start to get underway (as occurred in the second half of the 1990s).
• Finally, although the Fed will likely end QE3 this month, a 15-20% fall in US shares as we saw in 2010 and 2011 with the ending of QE1 and QE2 is unlikely as the US economy is now on a much sounder footing.

Finally, we are still a long way from the sort of investor exuberance seen at major share market tops. It seems everyone is talking about share market corrections and crashes. In Australia, the amount of cash sitting in the superannuation system is still double average levels seen prior to the GFC and Australians continue to prefer bank deposits and paying down debt to shares and superannuation. There is still a lot of money that can come into equity markets as confidence improves.

So absent a left field shock the most likely outcome is that, while shares could see more downside in the next month, this is likely to be limited with the bull market to continue.

The threat from geopolitics and pandemics

Perhaps the main potential source of left field shocks are the current geopolitical threats, but our reading is that these are unlikely to pose a fundamental threat to global growth:

• The Islamic State seems unlikely to threaten oil supplies and while a terror attack is a risk, it’s worth noting that the progression of such attacks last decade seemed to have less impact on markets as investors got used to them.
• The threat from Ukraine may be receding.
• The protests in Hong Kong are certainly a risk to China, but there is a good chance that they will peter out as the people of Hong Kong grow frustrated at the disruption they pose to their ability to go about their business.
• The “arrival” of Ebola cases in the US and Spain is worth watching, but our base case is that it should be easier to contain in western countries with modern medical facilities and higher standards and ease of hygiene.

What does this mean for Australian shares?

If global shares have more short term downside then so too will Australian shares. However:

• The Australian share market is now quite cheap again with the forward PE now back below 14 times.
• The fall in the $A will further help the economy avoid recession as mining investment slows and provide a boost to corporate earnings as each 10% fall in the $A adds around 3% to earnings.
• Interest rates are set to remain at generational lows with inflation pushing back towards the low end of the RBA’s target range according to the TD Securities Inflation Gauge and the RBA looking at using credit controls to slow investor demand for housing rather than rate hikes.

As such Australian shares are likely to see a strong rally into year end. Just bear in mind though that Australian shares are no longer the relative outperformer they were last decade. This decade is likely to see continued underperformance versus global shares as the commodity price super cycle is now going in reverse resulting in a headwind for the local share market and the falling $A (which we see heading down to $US0.80 or lower) will boost the value of offshore shares.

Concluding comments

The rough patch we have seen in shares lately could go a bit further. However, the bull market will likely remain intact thanks to a lack of overvaluation, the benign economic cycle, easy monetary conditions and a lack of investor euphoria.

Shane Oliver, Head of Investment Strategy & Chief Economist, AMP Capital

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Share market correction appeared first on AdviserVoice.

Craig Meller

In his first major public address, Craig Meller, Chief Executive Officer and Managing Director of AMP will update CEDA guests on the fiscal and personal financial challenges presented by an aging population, the importance of lifting the national debate to one about financial sustainability for the country, and the critical role quality financial advice plays in enhancing retirement incomes.

Key points

• Australia is facing a demographic certainty that an aging population will severely strain our country’s fiscal position.
• As a country, we need to act now to address this issue, because the changes we need to make to balance our budget will only get harder with time.
• Our country needs to promote policy that incentivises people to save more, encourages them to work longer and budget for an affordable income in retirement because we do not want our citizens to be poorer.
• Financial advice plays a critical role in not only enhancing retirement incomes but also managing the key risks retirees face when the time comes for them to live off their super.

Other key highlights

• We strongly believe the regulatory changes introduced in the last three years across prudential regulation, across consumer protection regulation and across superannuation regulation will work.
• We are strong supporters of this Government’s approach to letting these changes bed down before embarking on any further disruption to the financial services sector.
• Our industry needs to continue to work to improve the professionalism of its participants to ensure the highest confidence in financial advice.
• With the biggest financial advice network in the country, we decided to strengthen our advice standards and reinforce the strong consumer safety net that we provide.
• We do not believe that a regulatory solution through a new, independent statutory body to oversee the financial advice profession is appropriate.

Click here for a copy of the speech.

The post Grey Expectations: Australia’s retirement saving challenge appeared first on AdviserVoice.

• Share markets had a rough week weighed down by a combination of worries about the Fed, tough action against US companies seeking to reduce their tax by relocating outside the US, worries about Chinese growth, geopolitical concerns and worries about the loss of breadth in the US share market rally. The poor global lead, falling iron ore prices and the retreat of foreign investors to the sidelines saw the Australian share market give up its gains for the year. Weakening share markets saw bonds rally across the board suggesting in part that investors fear that talk of US rate hikes is premature. The outlook for relatively tighter monetary policy in the US versus other major regions saw the US dollar continue to rally, leaving it up nearly 7% over the last three months, and this is also weighing on commodity prices. The falling iron ore price and the rising $US saw the $A continue its slide.
• Geopolitical threats are continuing. While the global threat from the Ukraine conflict seems to be receding a bit, the conflict with IS in the Middle East is hotting up bringing with it the threat of global terrorist activity. So far global oil supplies are not under threat, with the oil price running below the levels when IS in Iraq first started hitting the headlines. But increasing prospects for the deployment of ground forces in Iraq by the US and its allies and talk of the terrorist threat are weighing on investor confidence. Terrorist attacks are horrible in terms of their human consequences and there is no doubt that an IS terrorist attack in a western country would be taken badly by share markets. But the experience with various Al-Qaida related attacks (9/11, Bali Bombing, 2005 London bombings, etc) is worth recalling: after an initial negative impact share markets bounced back as it was clear that there would not be a major economic impact and it seemed the effect on markets weakened as the terror threat continued. It only took just over a month for the US share market to recover from its 12% post 9/11 slump and it took the UK share market 1 day to bounce back from its 1.3% fall on the day of the July 2005 London bombings.
• In Australia, the Reserve Bank’s Financial Stability Review expressed concern that the housing market is becoming too speculative and that if left unchecked poses risks to the broader economy for when the property cycle turns back down. As a result APRA has stepped up its surveillance of the banks and given the desire to avoid a rate hike at this point the RBA is discussing with APRA further steps that may be taken to ensure sound lending practices are maintained, particularly with respect to property investors. The focus looks like it may be on tougher capital requirements and interest rate tests banks apply when assessing new loans rather than restrictions on loan to valuation ratios. It’s likely that if the property market does not soon cool an announcement could be made in the next few months. To the extent that the use of macro-prudential controls might delay the first rate hike further into 2015, it could be good news for existing home borrowers.
• The term “macro prudential controls” is really just the latest buzzword for the failed credit rationing policies used prior to the 1980s. The RBA would be well aware of the risk of unintended consequences – eg, the potential impact on first home buyers many of whom are investors these days and in forcing borrowers into the shadow banking system – but it no doubt feels such controls are better than raising interest rates right now.
• The Australian dollar is continuing to slide helped by an ascendant US dollar, the continuing slide in the iron ore prices (now down 41% year to date) and the possibility that the use of macro-prudential controls to slow the housing market will further delay the first rate hike in Australia. Comments by Reserve Bank of NZ Governor Wheeler that the level of the $NZ was “unjustified and unsustainable” also helped as they apply just as much to the level of the $A. I remain of the view that by year end the $A will have fallen through the January low of $US0.8660 on its way to around $US0.80 over the next year or so. A lower $A will help rebalance the economy.

Major global economic events and implications

• US economic data remains mostly strong. While existing home sales surprisingly fell in August new home sales surged to a six year high, the Markit PMIs for September remained solid and durable goods orders continue to trend higher. While Fed officials are continuing to provide mixed messages on the timing of rate hikes its noteworthy that a couple of hawks will not be voting members at the Fed next year and so their calls for an earlier move by the Fed should be ignored. Our view remains that the Fed won’t start raising rates till around the June quarter, but the 7% gain in the $US since June has probably not been lost on Janet Yellen who would be thinking its delivering a de facto monetary tightening.
• Eurozone PMIs continued to edge down in September leaving them at levels consistent with only modest growth and ECB President Draghi described the recovery as losing momentum. There was a slight improvement in money supply and credit momentum, but not enough to allay the mounting pressure on the ECB.
• A slight fall back in Japan’s manufacturing conditions PMI for September was disappointing but leaves in place a gradual recovery after the April tax hike induced fall. Japanese core inflation excluding the impact of the tax hike is continuing to run around 0.5% year on year, which is better than deflation but not much of a buffer really. The latest leg down in the value of the Yen should help provide a further boost to inflation though.
• While Chinese officials continue to indicate there won’t be any major policy stimulus, it’s worth noting similar comments were made earlier this year before various mini-stimulus measures were introduced. An unexpected slight rise in the HSBC flash PMI for September helped relieve Chinese growth fears a bit.

Australian economic events and implications

• In Australia, job vacancies fell slightly over the 3 months to August according to the ABS but this followed  a 5.3% gain over the previous six months and skilled vacancies rose in August for the 11^th month in a row so the basic picture remains one of forward looking indicators pointing to stronger jobs growth ahead.

What to watch over the next week?

• In the US, the main focus will be on the ISM manufacturing and services indexes (due Wednesday and Friday respectively) which are both expected to remain strong and employment data (Friday) which is expected to show a 210,000 gain in payrolls for September and unemployment unchanged at 6.1%. Consumer spending data (Monday) is also expected to show that the Fed’s preferred inflation measure remained benign with a fall to 1.4% year on year.
• In the Eurozone, business confidence data (Monday) is likely to have weakened a bit further and September inflation (Tuesday) is likely to be just 0.3% year on year. Despite this, the ECB (Thursday) is unlikely to announce further monetary easing but may provide details of its proposed QE program involving asset backed securities.
• Japanese data for jobs, household spending, industrial production, labour cash earnings and housing starts due Tuesday will be watched for signs of further improvement following the impact of the April sales tax hike, but the September quarter Tankan business survey (Wednesday) is likely to have weakened slightly.
• In China, the official PMI (Wednesday) is likely to be little changed from the 51.1 reading for August.
• In Australia, given the RBA’s concern about the property market, credit data (Tuesday) and RP Data house price figures (Wednesday) for September may see greater than normal interest. Expect to see overall credit growth remaining modest but interest will be on whether growth in credit going to property investors accelerated from the roughly 10% annualised pace seen over the last few months. RP Data is expected to show that house price gains remained strong in September. Meanwhile, expect a modest gain in retail sales (Wednesday), a renewed deterioration in the August trade deficit (Thursday) and solid building approvals (also Thursday).

Outlook for markets

• Shares remain at risk of further short term weakness particularly ahead of the end of US quantitative easing next month, the US mid-term elections in November and as we are still in a seasonally weak part of the year for shares. Australian shares are also vulnerable in the short term to further falls in the iron ore price and as foreign investors stay on the sidelines as the $A falls.
• However, this is likely to be nothing more than a healthy correction, allowing shares to let off a bit of steam, and should be seen as a buying opportunity as the cyclical bull market in shares likely has further to go. We still don’t see the signs of shares being over valued, over loved and over bought normally seen at major market tops. Valuations remain okay, global earnings are continuing to improve on the back of gradually improving economic growth, global monetary conditions are set to remain easy and there has been no sign of investor euphoria.
• Although the falling $A is initially a drag on the Australian share market as foreign investors retreat to the sidelines, after a while it will start to become a source of support as it flows through to upwards revisions to earnings expectations. Roughly speaking each 10% fall in the value of the $A boosts company earnings by 3%.
• Low bond yields will likely mean soft returns from government bonds, particularly as we continue to edge closer to the start of a gradual interest rate tightening cycle in the US.
• The combination of soft commodity prices, the likelihood the Fed rate hikes before the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see it fall to around $US0.80 in the next year or so.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

———–

Important note:While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 26 September, 2014 appeared first on AdviserVoice.

• Global share markets mostly rose over the last week helped by indications from the Fed that it’s still in no hurry to raise interest rates, expectations that the ECB might have to provide more stimulus, the Scottish No vote removing risks over UK assets and the continuing slide in the Yen to a six year low providing a boost to Japanese shares. Chinese shares fell but only slightly thanks to signs of monetary easing. The combination of poor Chinese economic data and the falling $A weighed heavily on the Australian share market as foreign investors tend to retreat to the sidelines whenever the $A is under threat.  Bond yields were little changed but the $US continued its ascent which in turn saw the Australian dollar remain under pressure and falling below $US0.90.
• The US Federal Reserve provided no surprises with another $US10bn taper to its QE program leaving it on track to end next month and an ongoing assessment that considerable labour market slack remains and that a “considerable time” is likely to elapse between the end of QE and the first rate hike. However, the Fed is incrementally continuing to become less dovish with Fed officials’ “dot plot” of interest rate expectations getting revised up slightly and Janet Yellen highlighting that the timing of the first rate hike is dependent on how the economy performs. Our assessment remains that the Fed can afford to take its time for now, but in the June quarter next year it will start to gradually raise rates. The anticipation and then the reality of this could cause bouts of share market volatility – particularly whenever there is a run of strong US economic data, but it’s unlikely to derail the bull market as rate hikes will be reflecting strong economic and profit conditions.  Only when interest rates reach onerous levels will there be a significant problem, but that will be a fair way off.
• Thankfully common sense prevailed in Scotland and the No vote won. This is good news for UK and Scottish assets and more broadly for the Eurozone as other pro-independence movements likely the Catalonians in Spain weren’t given the encouragement a Scottish Yes vote might have provided. Catalonia’s potential referendum for November will be the next one to watch though.
• The Ukraine crisis may be heading towards a resolution of sorts, with the Ukrainian Parliament granting a degree of autonomy to the eastern regions currently in conflict. There may still be more to go before the conflict is resolved, but with Russia describing the move as positive we may be getting to the point where Ukraine starts to recede as an issue for investment markets.
• In Australia, the minutes from the RBA’s last meeting repeated the “period of stability” mantra on interest rates but expressed more concern about the growth in investor housing credit and house prices. The RBA is stuck between a rock – in terms of the risk of accelerating house prices – and – a hard place in the form of the Australian dollar which remains too high, despite recent falls. The best approach is likely to be more jawboning to the effect that home buyers need to be cautious and that the $A remains overvalued. If the property market does not cool down a bit and the $A remains too high, I suspect that the RBA may then be tempted to go down the path of encouraging APRA to raise the risk weighting for home loans rather than start raising interest rates.
• Right now the Australian dollar is going in the right direction helped by the Fed’s gradual move towards monetary tightening. There is a bit of technical support around $US0.89 but I expect that by year end the $A will have fallen through the January low of $US0.8660 on its way to around $US0.80 over the next year or so. A lower $A will provide a shot in the arm for trade exposed sectors of the economy at a time that we need them to perk up as mining investment slows.

Major global economic events and implications

• US economic data was mostly favourable with solid growth readings but low inflation. Industrial production unexpectedly slipped in August, but strong regional manufacturing surveys point to a bounce back this month. While housing starts and permits fell this was only after a huge surge in July and a stronger than expected gain in the NAHB homebuilder index points to strength head. Finally, jobless claims fell and household net wealth rose 10% over the last year, providing a strong wealth boost. Meanwhile, inflation remains low with headline and core CPI inflation falling to 1.7% year on year in August which partly explains why the Fed is in no hurry.
• Bank take-up of the ECB’s first auction of cheap funding under its new Targeted Long Term Refinancing Operation (TLTRO) program was around half expectations at €83bn, which may partly reflect bank caution ahead of the ECB’s review of the quality of their assets. So hopefully the next auction in December will see more interest, but in the meantime it puts pressure on the ECB to quickly ramp up its quantitative easing program.
• In China a sharp fall in the MNI business indicator suggests that the growth slowdown may have continued into September and home prices continued to fall in August with average prices down just over 1% with virtually all cities seeing falls. Meanwhile, the Chinese central bank may be reacting to the growth slowdown with reports that it is providing RMB500bn to the major banks and a fall in the 14 day money market rate. While a cut to the PBOC’s 12 month benchmark interest rate would be more appropriate as Chinese interest rates remain too high for the Chinese private sector, its latest moves are welcome and highlight that the authorities are prepared to support growth.

Australian economic events and implications

• There were only secondary data releases in Australia over the last week and they were all soft. Auto sales and the Westpac leading index both fell in August and the weekly ANZ Roy Morgan consumer confidence index fell slightly.

What to watch over the next week?

• Globally, the main focus in the week ahead will be the release of September business conditions PMIs (Tuesday) in China, Europe and the US. The flash HSBC manufacturing PMI for China will be watched to see whether the latest slowdown continued into September, Eurozone PMIs are expected to remain off their previous highs and the US PMI is expected to remain strong.
• In terms of other US data, expect further gains in existing homes sales (Monday) and new home sales (Wednesday), a fall back in headline durable goods orders (Thursday) after the aircraft inspired surge seen in July but a continuing trend rise in underlying orders and another upwards revision to June quarter GDP growth (Friday) to 4.6% annualised from 4.2%.
• Japanese inflation data will be released Friday, but is being boosted by the April sales tax hike. Excluding this it’s likely to remain around 0.5% year on year on a core basis, which is better than the deflation that prevailed for a long time but still has a fair way to go to reach the 2% inflation target.
• In Australia, the RBA’s half yearly Financial Stability Review (Wednesday) is likely to indicate that the financial system remains in good shape, but express concern that the residential property market may be getting too hot and potentially posing risks for financial stability in the future if it continues to hot up. Speeches by RBA Governor Stevens (Thursday) and Assistant Governor Richards (Friday) will be watched for further comments on how the RBA sees the risks around the property market, the broader economic outlook and the $A. They are likely to reinforce the rates on hold message. Data for job vacancies will also be released.

Outlook for markets

• Shares are still at risk of occasional corrections particularly ahead of the end of US quantitative easing next month, the US mid-term elections in November and with September and October often proving volatile for shares. Australian shares are also vulnerable in the short term to further falls in the iron ore price and as foreign investors stay on the sidelines as the $A falls.
• However, occasional corrections are healthy in allowing shares to let off a bit of steam and should be seen as a buying opportunity as the cyclical bull market in shares likely has further to go. We still don’t see the signs of shares being over valued, over loved and over bought normally seen at major market tops. Valuations remain okay, global earnings are continuing to improve on the back of gradually improving economic growth, global monetary conditions are set to remain easy and there is no sign of investor euphoria.
• Our year-end target for the ASX 200 remains 5800. Although the falling $A is initially a drag for the Australian share market as foreign investors retreat to the sidelines, after a while it will start to become a source of support as it flows through to upwards revisions to earnings expectations. Roughly speaking each 10% fall in the value of the $A boosts company earnings by 3%.
•  Low bond yields will likely mean soft returns from government bonds, particularly as we continue to edge closer to the start of a gradual interest rate tightening cycle in the US.
• The combination of soft commodity prices, the likelihood the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see it fall to around $US0.80 in the next year or so.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

————-

Important note:While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 19 September, 2014 appeared first on AdviserVoice.

• Share markets mostly pulled back over the last week as worries about the Fed, talk of tougher capital requirements for US banks and new trade sanctions over Ukraine weighed. Japanese shares were an exception globally with the fall in the Yen to a six year low boosting confidence. Australian shares were weighed down by the weak global lead and the ongoing fall in the iron ore price. Bond yields mostly rose though on the back of Fed concerns and commodities were generally soft not helped by a stronger US dollar.
• After being wrong on the $A all year (I expected it to fall, but it went up), it’s now going in the right direction again thanks to a combination of a resurgent $US as the Fed edges closer to an eventual rate hike and continuing weakness in commodity prices as highlighted by the plunging iron ore price. This is being reinforced as the $A has broken through technical support including its 200 day moving average. The unwinding of net long speculative positions in the $A is likely to add to its downwards momentum. My view remains that it’s on its way ultimately to around $US0.80 or even a bit below which is a level that would neutralise the relatively high cost and price base in Australia compared to the US. The resumption of the downtrend in the $A may not be so good for us as consumers (as import prices will have another leg up), but it will provide a great shot in the arm for trade exposed industries, such as manufacturers, tourist operators and higher education institutions, which is just what the economy needs. For investors, it means having a greater exposure to foreign currencies (notably the $US) via eg unhedged global shares or short $A positions (which we have done in our funds).
• Scottish independence madness – what are they drinking? On the geo-political risk front attention is turning to the Scottish independence vote to be held August 18. While most polls favour the No vote it’s a close call. A move to independence for Scotland (which is 9% of UK GDP, 8% of UK population) would ultimately see it worse off than staying in the UK as North Sea revenues are in decline, its population growth is weak, its budget deficit would be larger and the transition would involve huge risks for its large financial sector (which accounts for 16% of Scottish employment) as it may not retain the protection of the Bank of England. For these reasons a No vote makes sense and is our base case, but of course this is about more than economics, as some things are I guess!
• A Yes vote would have two significant implications. First it would raise the level of uncertainty around UK and particularly Scottish assets. This is because it would raise a whole bunch of issues around North Sea oil and gas revenue, whether Scotland would take its share of the UK’s public debt, whether it will be able to retain sterling as its currency and the BoE as its central bank and lender of last resort. But of course the UK is no longer a major driver of global growth so don’t expect a major threat globally here. The second and more significant implication is that it could encourage Catalonia’s push for independence from Spain (with a vote on this scheduled for November 4, although this is not officially recognised by the Spain) which could frighten investors in Spanish bonds and raise fears, albeit I think short lived, regarding the Euro. This is the bigger issue to keep an eye on.
• While shares are vulnerable to a correction over the seasonally weak September/October period, the latest Westpac/Melbourne Institute consumer sentiment survey for September provided a reminder that we are still a long way away from the sort of optimism towards shares that we normally see at major share market tops. Bank deposits and paying down debt continue to be seen as the wisest place for savings with less than 10% of those surveyed seeing shares as the wisest place. In 2000 just before tech wreck the latter peaked at 34%.

Major global economic events and implications

• US economic data was generally strong, adding to concerns about an earlier than expected Fed rate hike. Consumer credit is in a solid rising trend, small business optimism rose further, although job opening and hiring rates did not rise further they remained at high levels and health spending data points to an upwards revision to June quarter GDP growth. That said as has been the case for a while it’s not all strong with the rate at which people are quitting jobs (a favourite indicator of Janet Yellen) remaining sub-par and applications for mortgages to purchase properties remaining weak. Meanwhile the US budget deficit continues to shrink – down 22% for the first 11 months of the current financial year on 7% plus revenue growth and virtually stagnant spending growth.
• Japanese data presented a mixed picture but one still consistent with a return to growth in the current quarter. Consumer confidence dipped and an index of tertiary activity was flat but against this the Ministry of Finance’s business survey rose to near pre sales tax hike levels, machinery orders rose strongly and the Manpower employment index rose further. What’s more the Yen fell to 107 (per $US) it’s lowest in six years.
• Chinese August data suggests that the latest soft patch in economic data is continuing with a fall in imports and another slowdown in money supply and credit growth. However, continued strength in export growth will help GDP growth and Premier Li indicated that growth remains on track for “about 7.5%” this year and that the Government will continue with “targeted easing”. Benign inflation readings for August, with non-food inflation at 1.5% year on year, suggests it has plenty of scope for further easing if needed..

Australian economic events and implications

• Australian data provided a rather confusing picture. A fall back in the Westpac/MI consumer sentiment index in September was disappointing although it’s worth noting that this contrasts with the weekly ANZ Roy Morgan consumer sentiment index which is much stronger. While the NAB survey’s business confidence and conditions readings fell in August, confidence remained reasonably high and both are well up on first half 2013 levels. Housing finance data for July showed continuing strength with construction finance up but with the investor share back to 2003-04 peak levels providing cause for concern. Finally the ABS still seems to be having statistical problems with its monthly labour force data highlighted by an unbelievable 121,000 gain in new jobs in August, a big bounce in the labour force participation rate and a sharp fall in unemployment back to 6.1%, from the equally unbelievable 6.4% reported in July. The trend in unemployment suggests it’s still rising but not rapidly. Moreover, while the jobs gain is not believable the trend improvement in ANZ job ads, the NAB survey’s employment intentions and the Manpower Employment Outlook survey continue to point to better jobs growth ahead.

What to watch over the next week?

• In the US, the main event will be the Fed’s FOMC meeting (Wednesday) which is expected to see the Fed taper its quantitative easing program by another $10bn a month, leaving it at only $15bn and on track to end in October. Most interest though will be on how the Fed and Chairperson Janet Yellen characterise the state of the US economy and guidance regarding the timing of the first interest rate hike. Currently, the Fed states that it anticipates a “considerable time” between the ending of QE and the first rate hike, with this taken to mean six months or more. While still low inflation and wages growth and excess capacity in the labour market suggest it may want to retain this characterisation for now it may try to soften it putting a greater focus on economic data to give them more flexibility if needed. Such a move is unlikely to change the timing of the first rate hike though which is likely to be in the June quarter, but may cause a bit of market volatility.
• On the data front in the US expect to see modest growth in industrial production (Monday), continued solid readings for the New York and Philadelphia regional manufacturing surveys (Monday and Thursday), benign CPI readings (Wednesday) leaving inflation running at 1.9% year on year, a further slight rise in the NAHB homebuilder index (Wednesday) and a slight pull back in housing starts (Thursday) after a very strong July.
• In Australia, the Minutes from the RBA’s last meeting (Tuesday) are likely to repeat the “period of stability” on rates mantra and are unlikely to add anything new given Governor Steven’s has already delivered a speech on the economy since the last meeting. A speech by Assistant Governor Kent also on Tuesday will be watched for any clues though.

Outlook for markets

• The correction season consistent with the old adage “sell in May, go away and come back on St Leger’s Day” is still upon us with September historically being the weakest month of the year for US shares and the September-October period often being tough in Australia.Relatively high short term optimism readings in the US also warn of the risk of a correction and worries about an earlier than expected Fed rate hike, the likely ending of QE3 next month and Ukraine are potential triggers for another correction.
• However, a correction should be seen as a buying opportunity as the cyclical bull market in shares likely has a lot further to go as we still don’t see the signs of shares being over valued, over loved and over bought normally seen at major market tops.Valuations remain okay, global earnings are continuing to improve on the back of gradually improving economic growth, monetary conditions are set to remain easy for some time and there is no sign of the investor euphoria that comes with major share market tops.
• Low bond yields, eg 10 year yields of just 0.6% in Japan and 3.6% in Australia, will likely mean soft returns from government bonds.
• The combination of soft commodity prices, the likelihood the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see it fall to around $US0.80 in the next year or so.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

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Important note:While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 12 September, 2014 appeared first on AdviserVoice.

Tim Humphreys

AMP Capital has made it easier for self-managed super fund (SMSF) investors to access listed infrastructure by adding its flagship global fund to the SMSF Suite.

The AMP Capital Global Listed Infrastructure Fund was established in July 2010 and the capability already has more than A$1 billion in assets under management from both institutional and retail investors.

The fund takes advantage of one of the biggest investment thematics globally: the need for both developed and emerging economies to increase their investment in infrastructure. This is driving strong performance in listed companies that are contributing to the infrastructure boom and, subsequently, the asset class.

AMP Capital Head of SMSF Tim Keegan said: “We have added the AMP Capital Global Listed Infrastructure Fund to the SMSF Suite because it can be difficult for SMSF investors to access the best opportunities in listed infrastructure on their own. Listed infrastructure is a relatively new asset class, which presents a lot of good growth opportunities particularly given our fund looks internationally for the best investments.”

AMP Capital Head of Global Listed Infrastructure Tim Humphreys said the fund only invests in what is considered ‘core and pure’ listed infrastructure assets such as water utilities, oil and gas pipelines, electricity transmission and distribution and transportation infrastructure such as airports, toll roads and seaports.

“We look for companies that deliver stable and predictable cash flows as this helps us deliver strong returns and downside protection to investors,” Mr Humphreys said. “SMSF investors can benefit from the diversification global listed infrastructure offers their portfolios while its high dividend yield will help them meet their income goals. It is also a low-risk way to access the growth potential of global equities.”

The SMSF Suite was launched in May with the AMP Capital Corporate Bond Fund and Wholesale Australian Property Fund. There has been a five-fold increase in flows to both funds since the launch of the suite.

Mr Keegan noted: “Through the SMSF Suite, we’re able to bring our customers unique investment opportunities they may not have otherwise considered or been able to access.

“SMSF trustees like the fact we’ve lowered the minimum investment for the Wholesale Australian Property Fund to $10,000 and they have also flocked to the Corporate Bond Fund, which is now the most popular AMP Capital fund among our SMSF clients.

“We’re looking forward to expanding the SMSF Suite next year to bring our customers additional investment options in equities, property and infrastructure.

The post AMP Capital adds Global Listed Infrastructure Fund to its SMSF Suite appeared first on AdviserVoice.

• Share markets were mixed over the last week with Eurozone shares up on the ECB’s monetary easing and talk of a ceasefire in Ukraine, Japanese and Chinese shares up but US shares down partly on worries that strong data might bring forward a Fed rate hike and Australian shares down. Bond yields mostly rose, but yields in peripheral Eurozone continued to slide. The ECB easing saw the euro continue to slide with the rising $US weighing on commodity prices, but the $A remaining stubbornly strong despite a sliding iron ore price.
• ECB announces quantitative easing (QE). In response to poor growth and the rising risk of deflation the ECB eased more than expected in announcing a 0.1% cut to its official interest rate taking it to just 0.05% and that it will begin buying asset backed securities with the aim of expanding its balance sheet by €1 trillion. The ECB won’t announce the details of its asset buying program till next month, but by indicating it will include mortgage backed securities and covered bonds it has effectively allowed a much larger scale program. It’s not US style QE as the ECB will not be buying government bonds (at this stage anyway), but it will have the same effect in pumping cash into the economy, displacing investors from relatively low risk investments and forcing them to take on more risk which will lower the cost, and improve the availability, of funding throughout the economy. And its latest rate cut will lower the cost of cheap four year funding for the banks to just 0.15% pa. Will it work? It will certainly help, particularly all the talk of money printing will head of a deflationary mentality taking hold.
• Ukraine is not over yet. While there was a bit of hope regarding a possible cease fire in Ukraine, this may be Russia’s attempt to look constructive ahead of a NATO summit. At this point the two sides still look far apart and so it’s too early to get optimistic. There are essentially three scenarios worth considering for investors regarding Ukraine. First a peaceful resolution soon, which would probably see Ukraine stay out of the EU and NATO to appease Russia. Second, an escalating war between Ukraine and Russia. Third, an escalating war that draws in direct military involvement from the West led by the US and Europe. Of these: the first would be a minor positive for global share markets but would quickly be forgotten; the second would be a source of volatility but like now would only be a major issue if sanctions get ramped up, but would ultimately not derail the global economic expansion; and the third would be a major concern for the global economy and hence could see a sharp fall in share markets. However, the chance of third scenario occurring – ie direct conflict between the West and Russia occurring is very low. The West may respond with escalating sanctions and NATO sabre rattling but it’s very unlikely to engage in anything approaching direct conflict with Russia for the same reason it didn’t through the Cold War (ie Russia is a nuclear power). So we remain of the view that Ukraine will likely remain a source of uncertainty for investors (and slower growth for Europe), but it’s unlikely to derail the global economic expansion.
• In Australia, there was nothing new from the RBA which left interest rates on hold for the 13th month in a row and reiterated that a period of stability remains prudent with this message effectively backed up by a speech by Governor Stevens. Right now the uncertainty around the economic outlook and the strong $A preclude any thought of a rate hike, but by the same token signs the economy is responding to lower rates and the risk of boosting financial risk and house prices preclude rate cuts.
• Meanwhile, there seems to be lots of doom and gloom on Australia lately with talk of the economy in the “danger zone” and even ads on my iPad apps screaming “Australian recession 2014 – why it’s unavoidable…” This is way over the top! Sure the fall in commodity prices and specifically the iron ore price is a blow to national income. But thankfully lower interest rates are helping to drive a bounce back in the sectors of the economy like housing and retailing that were suppressed by the mining boom. And there is still plenty of scope for interest rates to fall further if needed and for the Australian dollar to fall, which I think it will over time, providing a shock absorber for the economy. But the real story on the Australian economy – as evident in the data seen over the last week – is that the shift back to a more balanced economy is proceeding.
• It’s been a somewhat messy week for policy making in Australia. The mining tax hit the dust, but the increase in the super levy has been delayed yet again, leaving likely super retirement savings inadequate for most workers needs and there’s talk of a fund to bailout failing companies. While the latter is nice in theory, in practice such government intervention rarely works, so hopefully the Government will reject it.

Major global economic events and implications

• US economic data was pretty solid with the ISM indexes rising to very strong levels, construction activity and auto sales rising solidly and labour market indicators remaining strong. This is all keeping alive the prospect of a Fed rate hike coming earlier than mid next year.
• In Europe, economic news was mixed with a downwards revision to August PMIs albeit to levels still consistent with modest growth but a sharp rebound in German factory orders.
• The Bank of Japan made no changes to its super stimulatory monetary easing program. But there was good news on the economic front with nominal cash wages up 2.6% over the year to July suggesting wages growth and inflationary expectations are responding to the BoJ’s campaign to end deflation.
• Chinese economic data was mixed with the manufacturing conditions PMI for August falling back a bit, but services conditions PMIs strengthening suggesting that overall growth remains okay.

Australian economic events and implications

• The avalanche of economic data in Australia over the last week painted a reasonably hopeful picture for the economy. Sure the ongoing slide in the terms of trade is a blow and growth slowed in the June quarter, but the growth slowdown was nowhere near as bad as many feared and there are clear signs of improvement in the non-mining economy. Given that the main reason for the slump in quarterly growth from 1.1% in the March quarter to 0.5% in the June quarter relates to volatility in exports and imports it makes sense to average the two quarters which gives 0.8% quarter on quarter or 3.2% annualised, which is a pretty good outcome given the circumstances. More fundamentally, July data for retail sales point to a bounce back in consumer spending growth in the current quarter, the trade deficit also improved in July suggesting that net export volumes are likely to bounce back and continued strength in building approvals points to ongoing growth in dwelling construction.
• The June quarter National Accounts also included a couple of long term positives for Australia. First, productivity growth is solid at 3.2% year on year in the market sector, which will help minimise the hit to living standards from the fall in the terms of trade. Second, the household saving rate remains strong at 9.4% indicating households have a good buffer against shocks to income and are continuing to improve their net debt position.

What to watch over the next week?

• In the US, August retail sales data (Friday) are expected to show modest growth after the disappointingly flat outcome for July. This is likely to be supported by a further lift in consumer confidence (also Friday).
• In China, the focus will be on data releases for August. Expect trade data (Monday) to show exports up 10% and imports up 4%, lending and credit data to show a bit of a bounce back after weakness seen in July, CPI inflation (Wednesday) falling back to 2.2% year on year and slight moderations in growth for retail sales, fixed asset investment and industrial production (Saturday).
• In Australia, expect ANZ job ads (Monday) to show a further trend gain, housing finance (Tuesday) to rise 1%, the NAB business confidence and conditions measures (also Tuesday) to remain around the reasonably solid levels seen in July, consumer confidence (Wednesday) to show a further slight improvement and employment to show a 10000 gain with unemployment falling back to 6.3% after July’s partly statistical spike.

Outlook for markets

• While shares have seen a strong recovery from the early August mini-slump, the correction season consistent with the old adage “sell in May, go away and come back on St Leger’s Day” is still upon us with September historically being the weakest month of the year for US shares and the September-October period often being tough in Australia.Relatively high short term optimism readings in the US also warn of the risk of a correction and there is no shortage of potential triggers including worries about the Fed and Ukraine.
• However, despite the risk of another correction the cyclical bull market in shares likely has a lot further to go as we still don’t see the signs of shares being over valued, over loved and over bought normally seen at major market tops.Valuations remain okay particularly once low interest rates and bond yields are allowed for, global earnings are continuing to improve on the back of gradually improving economic growth, monetary conditions are set to remain easy for some time and there is no sign of the euphoria that comes with major share market tops. In fact, in terms of the latter there still seems to be a lot of wariness regarding shares.
• Low bond yields, eg 10 year yields of just 0.5% in Japan and 3.4% in Australia, will likely mean soft returns from government bonds.
• The combination of soft commodity prices, the likelihood the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see $US0.80 in the next few years, but getting the timing right is hard.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist, AMP Capital

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Important note:While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 5 September, 2014 appeared first on AdviserVoice.

AMP Capital’s Infrastructure Debt Fund II has arranged and structured loan for Alterra Power Corporation, who operate Hydroelectric plants.

AMP Capital’s Infrastructure Debt Fund II has arranged and structured a C$110 million subordinated loan for Alterra Power Corporation, a leading global renewable energy company headquartered in British Columbia.

AMP Capital acted as the sole lead arranger working on an exclusive basis with Alterra to successfully close the transaction.

Alterra Power Corporation is a renewable-focused independent power producer that operates six power plants totalling 568 MW of operational generation capacity including British Columbia’s largest run-of-river hydro facility (Toba Montrose) and largest wind farm (Dokie 1).

The loan facility will be secured against a 264 MW portfolio of equity interests in four renewable energy projects. The proceeds will be used to fund development and construction costs and sponsor equity contributions for the Jimmie Creek hydro and Shannon wind projects and for other general corporate purposes.

AMP Capital Global Head of Infrastructure Debt Andrew Jones said: “This transaction adds another core infrastructure asset to our portfolio in North America and highlights AMP Capital’s continued strength in the energy sector globally. We are operating in an encouraging environment for infrastructure debt investing both in terms of investor interest and deal flow and look forward to making additional investments in other high-quality assets in the region.”

AMP Capital Infrastructure Debt Principal Patrick Trears said: “We are excited about forming a new partnership with Alterra. This transaction strengthens AMP Capital’s investment strategy in North America and represents another important step in the growth of our global infrastructure debt platform. It also reinforces AMP Capital’s ability to lead arrange and tailor bespoke debt solutions within a tight timeframe.”

AMP Capital has been investing in the subordinated debt of infrastructure assets since 1998 and focuses on defensive, non-cyclical, cash flow-producing assets.

Its first fund, Infrastructure Debt Fund I, was closed to new investment in 2012 after raising US$503 million from 30 global institutional investors. AMP Capital announced in March 2014 that IDF II had reached commitments from more than 40 global investors totalling more than US$750 million.

AMP Capital is a specialist investment manager with more than A$144 billion in funds under management as at 30 June 2014 and more than 250 investment professionals. AMP Capital is one of the most experienced global infrastructure managers with more than 20 years’ experience and over 100 infrastructure (equity and debt) investments globally since 1988. AMP Capital was one of the first to invest in infrastructure when it participated in the financing of the Sydney Harbour Tunnel, Australia in 1988.

AMP Capital’s European infrastructure business invests in a portfolio of infrastructure assets diversified by European countries and sectors including, energy/utilities, transport, social and asset life cycles.

AMP Capital today manages unlisted and listed infrastructure investments in Asia, Europe, North America, Australia and New Zealand. AMP Capital is a subsidiary of AMP Limited. Established in 1849, AMP Limited has more than 160 years of experience providing financial services, and is one of Australia’s largest retail and corporate pension providers.

The post AMP Capital invests in portfolio of renewable assets across Canada and the United States appeared first on AdviserVoice.

• Share markets were mixed over the past week with good economic data propelling the US share market to record highs and hopes of more ECB stimulus helping in Europe, but with soft data and profits weighing in Japan and Australia and increased Ukraine tensions weighing across the board. Bond yields generally fell back again on the prospect of more monetary stimulus in Europe. While the gold price rose slightly, oil and metal prices fell. Notable on the commodity front has been the renewed fall in the iron ore price partly on the back of worries about the Chinese housing market. Despite this, the seemingly Teflon coated Australian dollar rose over the week.
• The somewhat messy and desynchronised global growth environment remains clearly evident with good news out of the US, but Europe and Japanese data disappointing and geopolitical issues continuing to hover in the background. This all means occasional bouts of uncertainty for investors but as long as the broad trend in global growth is one of improvement, desynchronisation is not bad because it means central banks will stay supportive. Perhaps the bigger risk is that the longer rates stay low, the longer investors will expect this to remain the case which could set up bubble like conditions in various assets as investment yields (be they bond yields, dividend yields, rental yields, etc) get pushed ever lower as investors search for yield. However, for growth assets we look to be early in this process.
• In Australia, the June half profit reporting season is now wrapped up. While aggregate earnings growth in 2013-14 came in slightly lower than expected at the start of the results season thanks to misses by some large cap stocks (notably BHP), at around 12% it was still solid with two thirds of companies seeing gains in profits on a year ago. Rising dividends suggest amongst other things that the corporate sector is reasonably confidence in the outlook. See below for details

Major global economic events and implications

• US economic data was pretty favourable. While home prices were mixed in June and new home sales fell in July, pending home sales rose strongly, the Markit services conditions PMI remained strong, consumer confidence rose and durable goods orders surged. While a 23% rise in July durable goods orders owed to strong aircraft orders, the underlying trend is solid particularly for capital goods orders pointing to solid growth in business investment. Stronger investment also drove an upwards revision to June quarter GDP growth to 4.2% annualised from 4% initially reported.
• While momentum in money supply and bank lending improved a bit in July in the Eurozone, various confidence surveys softened in August confirming the loss of momentum seen recently in European growth adding pressure on the ECB to do more to stimulate growth. Quantitative easing focussed on the ECB using printed money to buy securitized bank loans looks likely to be launched soon.
• Japanese data for July disappointed with a smaller than expected gain in industrial production, continued softness in household spending, a rise in the unemployment rate and inflation falling slightly to 3.4% year on year, or 1.4% after the sales tax hike is allowed for. That said, the jobs to applicant ratio held at its highest since 1992 suggesting companies must be reasonably comfortable. Nevertheless, the soft July data will put more pressure on the Bank of Japan to consider further monetary easing.
• Korea was a bright spot though reporting a much stronger than expected gain in July industrial production.

Australian economic events and implications

• Australian economic data was a bit soft with falls in June quarter construction and equipment investment and a fall in new home sales in July. Private credit growth softened a bit after a stronger than expected rise in June with housing related credit looking like it has peaked on a monthly basis. Business investment plans for the current financial year also point to another decline on the back of falling mining investment. However, this has long been expected and there are some positive signs on the investment front. In particular, residential construction is continuing to rise and investment in what the ABS refers to as “other selected industries” looks like rising solidly in the year ahead. So dwelling construction and non-mining investment are helping to provide an offset to the slump in mining investment.
• The profit reporting season is now over and while the quality of results trailed off at the end as usual, overall it was pretty good. Particularly compared to the nervousness ahead of the results being released. 54% of companies have exceeded expectations (compared to a norm of 43%), which is the best result in nine years; 68% of companies have seen their profits rise from a year ago (compared to a norm of 66%); 65% of companies have increased their dividends from a year ago (up from around 60% in the last two years); and 59% of companies have seen their share price outperform the market on the day they released results, which is the best result in four years. Key themes have been strong profit growth for resources (notably Rio, although BHP disappointed a bit), banks doing well (with a good result from CBA) but no better than expected, ongoing cost control making up for still soft revenue growth and strong growth in dividends reflecting investor demand for income and corporate confidence in earnings prospects. Australian earnings growth for 2013-14 looks to have come in around 12%, which while down a bit from expectations a few weeks ago due to the BHP result causing a slight downgrade for resources, is still a solid outcome. Resources led with a 27% gain, followed by banks up 9% and the rest of the market up around 5%. Consensus expectations for the current financial year remain for 5% earnings growth, but this looks a bit low to me.

 What to watch over the next week?

• In the US, expect more solid readings from the ISM and Markit manufacturing conditions PMIs (Tuesday) and services conditions PMIs (Thursday), but the main focus is likely to be on jobs data (Friday) which is expected to show another strong gain in payrolls of 220,000 and the unemployment rate falling back to 6.1%. The Fed’s Beige Book of anecdotes on the economy (Wednesday) and trade data (Thursday) are also due for release.
• In Europe, the main focus will be on the ECB’s meeting on Thursday, where, following President Draghi’s recent comments regarding falling inflationary expectations, there is a 50/50 chance that it will unveil a quantitative easing program involving the purchase of private sector asset backed securities or if not allude that it’s on the way.
• The Bank of Japan also meets Thursday but it’s unlikely to make any changes to monetary policy.
• In China, the official manufacturing conditions PMI for August (Monday) is likely to have fallen back a bit in line with the HSBC flash PMI already released.
• In Australia, the RBA is expected to leave interest rates on hold yet again. Nothing much has changed since Governor Steven’s recent Parliamentary testimony where he expressed comfort with current interest rate settings. Rates have already been cut to record lows and the housing sector has led the response but with mining investment still slowing, non-mining capex still soft and the $A still strong its way too early to consider raising rates.
• It’s also going to be a bit of a data avalanche in Australia. The main focus is likely to be on the June quarter GDP data and here the news is unlikely to be good. Our expectation is for GDP growth of 0.5% quarter on quarter (or 3.1% year on year), but weak readings for net exports, consumer spending and investment suggest the risks are all skewed to the downside. In fact there is a high risk of a slight contraction in GDP. Inevitably this would invite talk of a recession, but as was the case with the previous three negative quarters seen in the last 23 years, a recession is unlikely. First, the soft June quarter result will be payback for the unexpectedly strong trade driven growth seen in the March quarter. So best to average the two quarters out. Second, a range of timely indicators relating to housing, retail sales, consumer confidence and the jobs market point to stronger conditions in the September quarter.
• In terms of other Australian data releases expect to see a further rise in house prices (Monday), a -0.7%  contribution to growth from June quarter net exports, weak public demand and a bounce back in building approvals (all Tuesday), another large trade deficit and modest growth in July retail sales (both Thursday). The AIG’s business conditions PMI’s will also be released.

Outlook for markets

• While shares have seen a strong recovery from the mini-slump seen in early August, the correction season consistent with the old adage “sell in May, go away and come back on St Leger’s Day” is still upon us with September historically being the weakest month of the year for US shares partly due to tax loss selling and the September-October period often being tough in Australia.

• However, despite the risk of another correction the cyclical bull market in shares likely has a lot further to go as we still don’t see the signs of shares being over valued, over loved and over bought normally seen at major market tops.Valuations remain okay particularly once low interest rates and bond yields are allowed for, global earnings are continuing to improve on the back of gradually improving economic growth, monetary conditions are set to remain easy for some time and there is no sign of the euphoria that comes with major share market tops. In fact, in terms of the latter there still seems to be a lot of wariness regarding shares. Our year-end target for the S&P/ASX 200 remains 5800.
• Low bond yields, eg 10 year yields of just 0.5% in Japan and 3.5% in Australia, will likely mean soft returns from government bonds.
• The combination of soft commodity prices, the likelihood the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see $US0.80 in the next few years, but getting the timing right is hard.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist, AMP Capital

————–

Important note:While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 29 August, 2014 appeared first on AdviserVoice.

• The global economy is still on the mend, but it’s still a two steps forward, one step back affair. Of the major regions the US is doing the best, but Europe is lagging.
• This means occasional bouts of uncertainty, but it’s not such a bad thing if it keeps central banks supportive.
• The main implications are: we are still in the sweet spot of the global economic cycle, which is good for growth assets; the lack of global synchronisation means that fundamentals for individual regions, assets and stocks matter; constrained global growth will mean constrained returns; and the big event to watch for is when the Fed starts to hike rates – but it still looks a way off at present.

Introduction

We are having yet another year where investors started off optimistic about the global economic outlook with talk of synchronised growth only to find that the global growth story remains patchy. In fact, so much so that it’s possible to paint wildly different pictures as to the outlook – some are worried about growth and inflation taking off, whereas others warn of imminent collapse. The truth is likely to remain somewhere in between these extremes. But, in a way, this is not a bad thing as it keeps central banks supportive.

This note looks at the major regions in terms of growth, inflation and interest rates and what it means for investors.

The US – looking good but not booming

After a contraction in the March quarter driven by mostly temporary factors, the US economy rebounded in the June quarter and looks on track for growth of around 3% in the current quarter. The jobs market and business investment are improving and the shale oil boom is providing a long term boost both directly and indirectly via cheap electricity costs for business. However, while the US is looking a lot stronger it’s a long way from booming, let alone overheating, with growth seemingly stuck in a 2-3% range as the housing recovery and consumer spending have slowed a bit of late.

Which brings us to what the Federal Reserve will do. On the one hand US growth has improved enough to allow the Fed to continue “tapering” its quantitative easing program which means it’s on track to end probably in October. On the other hand it’s unclear that conditions are strong enough to warrant interest rate hikes just yet. This is something the Fed is grappling with, but the conclusion seems to be that – with inflation remaining low at just 1.5% on the Fed’s preferred measure, wages/labour cost growth stuck around 2% and broad measures of labour market slack (ie allowing for the unemployed, underemployed and discouraged workers) remaining high – its unlikely to rush into raising rates.

Our assessment is that the Fed is gradually inching towards an interest rate hike, but it’s probably not going to occur until sometime in the June quarter next year.

The Eurozone – better but not great

The Eurozone returned to growth about a year ago but it is far from robust and stalled in the June quarter with weakness in Germany, Italy and France. Uncertainty regarding Russian sanctions and Ukraine are not helping. What’s more bank lending growth has remained negative and inflation has fallen to just 0.4% year on year. This has all led to concerns that Europe is sliding into Japanese style stagnation and that the ECB needs to do more.

Our assessment though is that Europe is gradually mending: growth has returned to Spain, Ireland, Portugal and Greece; these countries have all made significant structural reforms to their economies and France and Italy look to be gradually heading down that path; the troubled countries have all seen their bond yields collapse, eg Spain’s 10 year bond yield is now just 2.17%; the ECB announced further stimulus in June, but looks to be ready to launch into quantitative easing involving the purchase of private debt in the next few months; and bank lending should improve once the ECB’s bank stress tests are out of the way in a few months.

Japan – Abenomics on track

Japan’s growth was hit in the June quarter by the pull- forward effect of the April sales tax hike. However, a range of indicators suggest that despite the volatility the Japanese economy has weathered the sales tax hike well with ultra-easy monetary policy and economic reforms providing confidence growth will bounce back from the current quarter.

However, given the uncertainty, the Bank of Japan will either have to maintain its very easy monetary conditions or possibly have to ease further.

China running hot and cold

For the last three years now Chinese economic data has been running hot and cold every six months leading to periodic worries about growth. Another slowdown in the Chinese property market is adding to these concerns.

With the Chinese Government repeatedly indicating that there is a floor to growth of around 7%, and supporting this by mini-stimulus measures as they have done this year, our assessment remains that the Chinese economy is on track for growth of around 7.5%. But don’t count on more.

Emerging world

The emerging world more generally is a lot messier than it used to be. Of the major’s, China and Mexico look ok and the election of reform oriented governments in India and Indonesia is positive, but Brazil looks to have lost the plot under the current Government, and Russia already weakened looks to have shot itself in the foot over Ukraine. A lack of structural reforms over the last decade has led to lower growth potential in the emerging world. That said it’s still on track for growth around 4.5% this year and next.

Global growth – two steps forward, one back

Bringing this together, global business conditions indicators are consistent with good but not booming growth.

Although global growth is likely to pick up, it’s hard to describe global conditions as synchronised and the global economic expansion remains very much a process of two steps forward, one step back. This was clearly evident in the first half of the year with the US and Japan both having negative quarters, China slowing in the first quarter and Europe stalling in the June quarter. And of course geopolitical events continue to wax and wane and the threat from Ebola remains in the background – all of which impart a deflationary impact in terms of their dampening impact on confidence and spending. Against this backdrop it is hard to see the Fed wanting to rock the boat prematurely with talk of interest rate hikes, let alone actual hikes, and the ECB, Bank of Japan and People’s Bank of China are likely to maintain ultra-easy policy or ease further.

Investment implications

There are several implications for investors. First, gradually improving global growth, still benign inflation and easy monetary conditions tell us we are still in the sweet spot of the economic cycle which augurs well for growth assets.

Second, the desynchronised global economic and monetary cycles confirm that the “risk off, risk on” phenomenon of a few years ago where all growth assets move up and down together has faded. This should make it easier for fund managers and investors to benefit from opportunities in individual regions, assets or stocks. Eg we think there is currently good value in Chinese shares, European shares and commodities. The divergence in monetary cycles is also likely to mean upwards pressure on the $US but downwards pressure on the Yen and Euro.

Thirdly, the constrained global growth cycle provides a reminder not to expect double digit gains from growth assets year after year. It will still be a relatively constrained world in terms of sustainable returns.

Finally, the big thing globally to keep an eye out for will be when the Fed will start to raise interest rates. This, or rather its anticipation, will likely cause a few bumps (just like last year’s taper tantrum did), but it’s still a fair way off and when it does come its unlikely to spell the end of the cyclical bull market in shares as it will be a long while before monetary conditions actually become tight.

By Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital

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