• Most share markets managed to rise over the last week, but the lack of momentum seen all year remains a feature. In some ways it seems that after the strong gains in global and Australian shares last year, they are now undergoing a bit of a stealth correction with softer than expected global growth in the first quarter, the mess in Ukraine and uncertainty about China all playing a role globally and this being added to in Australia by uncertainty regarding the impact of the Budget. The past week also saw bond yields move a bit higher, particularly so in peripheral Eurozone countries where it looks like their sovereign bonds had become a bit overbought. Meanwhile commodity prices were mixed with oil and gold up but metals and the iron ore price down. The $A fell further, not helped by the lower iron ore price and the fall in consumer confidence, as did the Euro on increasing signs the ECB is set to ease next month.
• The minutes from the Fed’s last meeting confirmed that it’s more confident regarding growth picking up and inflation bottoming but not so much that it’s signalling an imminent rate hike, which still looks likely to be around mid-next year. That said, as part of its “prudent planning” process, the Fed has started to revisit how it will eventually exit from its extraordinary monetary stimulus measures with New York Fed President Dudley suggesting that it will not start unwinding its stock of bonds until after it first starts raising interest rates. But whatever the order, as the start of tightening approaches it will likely see bond yields move higher.
• Uncertainty remains high around China, but as yet there is still no evidence of a hard landing and we remain of the view that the authorities will do enough to ensure growth comes in around 7.5% this year (which means 7% at least). The combination of a further slowing in house prices in April with official measures to curb the interbank lending market added to fears of a hard landing. This arguably all contributed to a fall in the iron ore price below $US100/tonne. Against this though a stronger than expected bounce back in the HSBC flash manufacturing conditions index for May supports the view that growth may be stabilising after the first quarter slowdown. More announcements of incremental loosening measures add confidence to this. These included announcements of support for employment and allowing ten provinces and cities to issue their own bonds.
• Political developments in the emerging world were all over the place highlighting why investors need to be a lot more selective regarding emerging market assets this decade. At one end of the scale, the huge mandate delivered to the BJP to reform the Indian economy augurs very well for the Indian economy and asset markets. At the other end Thailand’s latest coup highlights the mess Thailand has fallen into with civilian politicians unable to work things out. While coups are normal in Thailand, this being the 12^th since 1932 and arguably are better than red shirts and yellow shirts fighting it out, the risks are greater that there will be a negative flow on to the economy and Thai assets than was the case with the 2006 coup as the two sides are more polarised now. And of course Ukraine remains a huge source of uncertainty.
• In Australia, a 6.8% slump in consumer confidence and evidence of a fall in retail sales in the last week confirms the Budget has had a negative impact on sentiment. This may prove to be an over-reaction, but quite clearly the Government needs to do a better job of selling the Budget. Ditching some of the Budget’s harsher measures, eg the plan to prevent those up to age 30 from getting unemployment benefits for six months, and funding them by dropping or delaying paid parental leave might be an option and might be necessary to get Senate passage anyway. Clearly if the blow to confidence remains it will be bad news for consumer spending and have the effect of pushing any RBA rate hikes into next year.

Major global economic events and implications

• US data was mostly good. A fall in mortgage applications and a rise in unemployment claims were the main disappointments but the level of claims remains low. More significantly, the Markit manufacturing PMI rose to a quite solid 56.2 in May, the leading index rose and existing home sales rose, albeit after several months of falls.
• European data was also reasonable with May data showing a rise in consumer confidence and in the Markit services sector conditions PMI. The manufacturing conditions PMI fell slightly but the combined services and manufacturing PMI was little changed at 53.9, which is consistent with Eurozone economic growth rebounding to around 0.4% in the current quarter from 0.2% in the March quarter.
• There were no surprises from the Bank of Japan which left monetary policy unchanged, as it’s too early for it to gauge whether the April tax hike has had anything other than a temporary impact on growth. In terms of the latter there are some positive signs with machine orders up in March and the May manufacturing PMI up slightly.

Australian economic events and implications

• In Australia, a slump in consumer confidence confirmed the Budget has had a negative impact on sentiment, with ALP voters and those earning between $60,000-$80,000 showing the biggest drop. It does look like a bit of an overreaction though and a similar fall after last year’s Budget saw a bounce back in the subsequent month. This may occur next month as some may be a bit confused about the impact on their personal finances and many of the Budget measures will take a long time to phase in, even if they do get through the Senate. Meanwhile wages growth held at a record low of 2.6% year on year in the March quarter which is another drag on household spending, but at least confirms that labour costs are no threat to inflation.
• The slump in consumer confidence and low wages growth are consistent with the RBA remaining on hold. We were looking for the first rate hike to be around September/October but given the negative reaction to the Budget this is increasingly looking like it will get pushed into 2015. If consumer confidence does not bounce back in the months ahead it’s likely that there will be increasing talk that the next move in interest rates will be down.

What to watch over the next week?

• In the US, the bad news is likely to be that March quarter GDP growth (Thursday) will be revised to -0.6% annualised from an initially reported 0.1% reinforcing that it was a poor quarter. However, a range of indicators suggest growth is bouncing back this quarter. Durable goods orders (Tuesday) are expected to fall slightly but this reflects a payback for the very strong gain seen in March with the underlying trend likely to remain strong. Consumer confidence (Tuesday) is expected to have increased slightly. House prices (Tuesday) are expected to show further gains but pending home sales (Thursday) are likely to be flat after a strong March.
• In Europe, the focus is likely to be on the results from the Ukrainian and EU parliamentary elections. Whether the Ukrainian elections resolve the uncertainty hovering over the country is doubtful. A successful orderly election with whole of country participation won’t be sufficient to end the crisis, but its nevertheless likely to be required if it is to end. The EU elections are likely to see Euroskeptic parties do well which may cause some investor concern, but it’s unlikely to change policy directions in Europe, in particular support for peripheral countries. May economic confidence indicators (Thursday) will be watched for an improvement after the slight setback seen last month.
• Japanese data for April will show the initial impact from the recent sales tax hike. This is likely to show up as a fall in household spending and industrial production (both of which were boosted prior to the hike) and a spike in inflation to around 3%. Labour market data is unlikely to be much affected.
• In Australia, March quarter construction data (Wednesday) is likely to remain weak as a rebound in residential investment only partly offsets the ongoing slump in mining investment and March quarter capital spending (Thursday) is expected to show a further decline. Of greater interest will be capital spending intentions data which will show further weakness in mining investment but will be watched for signs that the outlook for non-mining investment is starting to improve. Credit data (Friday) is likely to show a further modest lift in momentum.

Outlook for markets

• Shares remain vulnerable to a mid-year correction, consistent with weak seasonal influences that kick in around May and continue into the September quarter. However, with shares having been in a bit of a stealth correction all year, any pull back may well be mild and in any case the broad trend in shares is expected to remain up. Share market fundamentals remain favourable with reasonable valuations, global earnings are improving on the back of rising economic growth and monetary conditions are set to remain easy for some time. So any dip should be seen as a buying opportunity. Our year-end target for the ASX 200 remains 5800.
• Bond yields are likely to resume their gradual rising trend as it becomes clear that US inflation has bottomed and this combined with low yields is likely to mean pretty soft returns from government bonds. Cash and bank deposits continue to offer poor returns.
• With $A short positions now largely unwound, it’s likely that the broad downtrend in the $A is resuming. Commodity prices remain relatively soft, interest rate hikes are getting pushed out and the $A is likely to revert to levels that offset Australia’s relatively high cost base.

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 23 May, 2014 appeared first on AdviserVoice.

• Shares rose over the past week thanks to a combination of soothing comments from Janet Yellen, good Chinese trade data, talk of more easing in Europe and, in Australia, good earnings results & soaring dividends. Emerging market worries seem to be fading a bit. Growth optimism also saw commodity prices rise with the $A making it back above $US0.90. Bond yields generally rose though as safe haven demand continued to fade.
• Steady as she goes from Janet Yellen. Those who were uncertain about US monetary policy following the handover from Ben Bernanke as Fed chair can breathe easy. The key message from Janet Yellen is clearly one of continuity: gradually winding down QE but only if the economy continues to improve as expected and interest rates to remain on hold well after unemployment has fallen below 6.5%. While Yellen painted an upbeat picture on the economy she clearly still sees unemployment as being too high (despite falling participation) and inflation too low and therefore sees the US requiring accommodative policies for a while to come.
• No debt ceiling debacle in the US, with Congress smoothly suspending it till next year. Quite clearly the Republican leadership has decided that a re-run of the battle last year was not in their interest given the mid-term elections later this year. So the political truce in the US continues and for now the economy is a key beneficiary, at least till after the mid-terms. But with the US budget deficit having fallen to 3.4% of GDP from over 10% post the GFC and government spending flat the last five years, it’s rapidly receding as a political issue.
• Will Toyota’s decision to cease making autos in Australia in 2017 following exit moves by Ford and Holden knock the economy into recession? No. Toyota’s decision seemed inevitable, but it’s still horrible news for the workers, families and communities that will be directly affected. Direct and indirect job losses from the shutdown of auto manufacturing could run up to 40,000 or so.  But claims of recessions and economic disaster for Australia are ridiculous. First, even if 40,000 jobs are ultimately lost this is still tiny compared to total Australian employment of 11.5 million people (just 0.3%) and the job losses will be spread over the next 3 years. Second, this impact is likely to be reduced by government assistance programs. Thirdly, it should be noted that manufacturing has been in decline for 50 year or so. Back in 1960 manufacturing employed 26% of the workforce and now it’s just 8%. And yet the economy has performed well despite this. Finally, we need to accept that government assistance of the auto industry amounting to $30bn over the last 15 years in tariffs and subsidies was a waste of taxpayers’ money. The subsidies can now be re-directed to well-targeted infrastructure spending which is what the economy really needs and tariffs on car imports should now be eliminated leading to lower car prices and a boost to real household spending power.
• Looks like a big round of privatisation on the way in Australia. The impression from the Treasurer is that the May budget will likely see big savings focussed on spending cuts rather than tax increases and that another big round of privatisation is on the way. Providing the spending cuts are not too short term focussed but are rather aimed at getting long term spending growth back to more reasonable levels, this is all a move in the right direction. Renewed privatisation is particularly positive as the private sector invariably runs assets better than governments do, it will provide opportunities for super funds to invest in Australia infrastructure rather than having to go offshore and it will free up public money for new infrastructure spending and/or debt repayment.

Major global economic events and implications

• US small business optimism rose but retail sales and jobless claims look to have been dampened by bad weather. With bad weather continuing this month, it will be March before clean US data can be expected again.
• The US December quarter profit reporting season is now 80% complete and is seeing profits come in about 5% better than expected. 76% of companies have beaten on earnings and 65% have beaten on sales.
• Eurozone industrial production was soft in December but this followed a solid gain in November and PMIs point up. Meanwhile, another ECB official indicated consideration was being given to further monetary easing. While PM Letta is stepping down in Italy, clearing the way for Matteo Renzi to take over, the market reaction has been relaxed as a new election is unlikely and Renzi is well regarded and will likely follow similar policies to Letta.
• Chinese data was good with benign inflation and strong exports and imports. The export data could have been distorted by the Lunar New Year but also lines up with stronger economic growth in the US and Europe.

Australian economic events and implications

• Australian data was mixed. On the bad side unemployment rose to 6% and consumer confidence fell. The jobs market is very weak with zero jobs growth over the last year and the highest unemployment rate since 2003. However, a rise in unemployment to 6% or above has been widely expected, including by the RBA and so it’s not a surprise and not enough to get the RBA thinking about more rate cuts. More importantly, the labour market is a lagging indicator of the economy reflecting last year’s weak growth. With more forward looking indicators for the economy pointing up we expect jobs growth to improve later this year which should see unemployment peak around 6.25% before starting to turn back down to around 6% by year end.
• In terms of more forward looking indicators the news over the last week was mostly good. The latest NAB business survey showed further improvement in confidence and conditions including a sharp rise in new orders and hiring plans, housing finance approvals continue to trend solidly up, tourist arrivals rose 7.5% through last year with even US arrivals picking up suggesting the fall in the $A is starting to help and ABS data confirmed solid gains in house prices which provides a strong boost to household wealth.
• The news from corporates has been very good. Its early days as we are only 20% or so through the December half earnings reporting season, but so far the results have been impressive. So far 57% of companies have exceeded expectations (compared to a norm of 43%); 72% of companies have seen their profits rise from a year ago (compared to a norm of 66%); a whopping 84% of companies have increased their dividends from a year ago (compared to an average of around 62% in the last two years); and 55% of companies have seen their share price outperform the day they released results. Key themes are a massive turnaround for the resources stocks (notably Rio), banks doing very well (with great results from CBA and ANZ), help coming through from the lower $A, ongoing cost control, improved outlook comments from cyclicals (like Boral) and soaring dividends. The surge in dividends is a good signal that companies are confident about the outlook. The bottom line is that Australian earnings look to be on track for strong growth this financial year.

What to watch over the next week?

• In the US, expect a slight rise in the February home builders conditions index (Tuesday), but weather related falls in January readings for housing starts (Wednesday) and existing home sales (Friday). The February Markit manufacturing conditions index (Thursday) along with the New York and Philadelphia regional manufacturing conditions indexes (due Tuesday and Thursday respectively) are likely to show continued reasonable growth, although all are at risk of being dampened by poor weather conditions. Inflation data (Thursday) is likely to have remained benign.
• In Europe, the flash Markit PMIs are expected to confirm a continued gradual recovery in economic conditions.
• Japanese December quarter GDP data is expected to show a rebound in growth to 0.7% quarter on quarter (or 2.8% annualised) driven by a combination of consumer spending and business investment. The Bank of Japan meets Tuesday but is unlikely to make any changes to monetary policy.
• In China, the flash HSBC manufacturing conditions PMI is expected to remain around the 50 level.
• In Australia, the minutes from the last RBA Board meeting (Tuesday) are likely to confirm the RBA as being comfortably on hold regarding interest rates. December wages data (Wednesday) is likely to show that wages growth is very modest at 2.5% year on year consistent with weak labour market conditions.
• This will be the peak week for Australian December half 2013 earnings results with nearly 100 major companies due to report including BHP, Wesfarmers, Woodside, AMP, Leighton and IAG. Consensus expectations are for 13% earnings growth in 2013-14 led by 35% growth in resources profits on the back of the lower $A and reduced capex and 8% growth for industrials. So far so good.

Outlook for markets

• Although returns will be more constrained and volatile, shares will nevertheless push higher this year helped by reasonable valuations, improving earnings on the back of improved economic growth and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. Against this backdrop the recent correction was healthy in leading to less ebullient investor sentiment. The ASX 200 is expected to rise to around 5800 by year end.
• The recent decline in global bond yields should be seen as a correction against the background of a slow rising trend in yields on the back of gradually improving global growth. Cash and bank deposits continue to offer pretty poor returns given low interest yields.
• The broad trend in the $A remains down on the back of softer commodity prices, a reversion to levels that offset Australia’s relatively high cost base and a decline in Australia’s growth relative to that in the US. However, short positions in the $A still remain excessive and so it appears to be going through another short covering rally – supported in part by the RBA’s more relaxed stance on the currency – that could see it rise to around $US0.92-93 before the downtrend resumes.

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 14 February, 2014 appeared first on AdviserVoice.

• While share markets mostly rose over the past week helped by a delay to action regarding Syria and on the back of more evidence that the global economy is improving, gains were limited as bond yields rose sharply as stronger US data fuelled expectations that the Fed will start to taper its monetary stimulus this month.
• In Australia, the focus in the week ahead will likely be on the aftermath of the Federal election which if the polls and betting agencies are correct will see a new Liberal/National government. Based on stated policies, key policy changes under a Coalition Government are likely to be the abolition of the mining and carbon taxes, reduced company tax but offset by a levy on large companies to pay for paid parental leave, a refocusing in government spending towards infrastructure, a delayed increase in the superannuation contribution, smaller government, a greater focus on returning the budget to surplus and a range of inquiries (including into the labour market and productivity) which will likely pave the way for less regulation and more economic reform. The likely change in Government towards what would appear to be a more business friendly approach will probably provide a boost to confidence and past experience points to a post-election bounce in shares. This has averaged 5.4% over three months for elections since 1983. However, much will depend on whether conservative forces gain control of the Senate – the prospect of a double dissolution election next year would not go down well – and how hard the new Government goes in cutting spending with an announcement on this front likely in November.
• While an attack on Syria has been delayed it still looks likely with a key US Senate committee approving it, on the grounds its limited and tailored and doesn’t involve troops on the ground. It now goes to a Congressional vote on September 9. As with all US led military interventions in the Middle East, the concern is that it will lead to a wider confrontation threatening oil supplies. Given this it wouldn’t be surprising to see further share market weakness and oil price strength in the run up to any strike, even though Syria only produces 300,000 barrels of oil a day. This is consistent with past experience which saw share market weakness/oil price strength in the run up to interventions followed by a recovery in share markets from around the time it commences. The 1991 Iraq invasion, the December 1998 bombing of Iraq, the March 2003 Iraq invasion and the March 2011 Libyan bombing saw US shares fall 5.6%, 3.5%, 14% and 6.3% respectively in the run up only to see the losses recovered within two months. A similar pattern could be expected this time around, particularly as it becomes clearer that any intervention will be limited and that surrounding countries are unlikely to become involved.

Major global economic events and implications

• US economic data was mostly positive, adding fuel to expectations that the Fed will soon start to slow its monetary stimulus. The ISM manufacturing conditions index improved further in August, the non-manufacturing ISM rose to its highest since 2005, labour market indicators improved, construction spending rose solidly and auto sales rose to their highest since 2007. However, higher mortgage rates and higher oil/gasoline prices are clearly a bit of a headwind for US growth and so if the Fed slows its monetary stimulus following its September 17-18 meeting, as appears likely, it may only cut it back by $10bn a day.  
• Final Eurozone business conditions PMIs confirmed the recovery already evident in the flash readings. As expected the ECB and the Bank of England left monetary policy unchanged but with the ECB retaining a dovish bias. Italy remains a risk point though with the threat remaining that members of Berlusconi’s party will withdraw support for the Government if Berlusconi is forced out of his Senate seat.
• In Japan, the Bank of Japan left monetary policy unchanged but Governor Kuroda made clear it can respond if a planned hike in the GST impacts growth. The Yen fell through 100 to the $US as a result.
• Chinese business conditions PMIs mostly improved in August or stayed around solid levels, adding to confidence that 7.5% growth remains on track for this year. House prices continued to rise in August but the new Chinese leadership seems to be less concerned about it, perhaps concluding that demand curbs are ineffective and the only solution is via increases to supply.

Australian economic events and implications

• In Australia, June quarter GDP data showed that growth remains sub-par at 0.6% quarter on quarter or 2.6% year on year, the same pace it has averaged since the June quarter 2012, reflecting soft consumer spending and investment. The bad news is that growth is below the pace necessary to stop unemployment rising, but the good news is that growth has not collapsed. Other indicators presented a soft picture as well with retail sales very weak, business conditions PMIs still soft and the trade balance back in deficit.
• However, there are some positive signs: house prices continue to rise, building approvals rebounded in July consistent with an ongoing recovery in dwelling construction, household savings remain high at 10.8% indicating a significant buffer in household budgeting, productivity growth is solid at 2.2% and inflationary pressures are weak with falling real unit labour costs and a benign reading on inflation from the latest TD Inflation Gauge.
• The RBA surprised no one in leaving interest rates on hold. What was surprising though was that its post meeting statement was virtually identical to that from last month leaving out yet again any explicit easing bias. As a result it has yet again missed an opportunity for a free kick in pushing the $A down. The risks still point down though for rates particularly if the $A holds up from here, economic data remains soft and the post-election Government embarks on more spending cuts.

Major market moves

• Share markets mostly rose on the back of good economic data and the delay to any attack on Syria, but with gains limited as Fed tapering looks likely this month. Australian and Japanese shares fell slightly.
• While the $A rose earlier in the week as the RBA left out any explicit easing bias from its post meeting statement and GDP growth was fractionally stronger than expected, its gains were limited as the $US strengthened.
• Bond yields rose sharply in most major countries, including Australia, as stronger US data fuelled expectations for Fed tapering. US and Australian ten year bond yields rose to their highest since 2011.

What to watch over the next week?

• Globally, Syria will probably be the big one to watch with the US Congressional vote on approving a US strike. Don’t expect much from the G20 leaders’ summit though, other than the usual hot air from such events – it’s unlikely to have any impact on what the Fed does or on what the US does regarding Syria.
• On the data front the focus is likely to be on China though with key activity data due Tuesday likely to show that the improvement in growth evident in July continued into August. In particular, growth in industrial production is likely to have continued to edge higher rising 9.9% year on year, up from a low of 8.9% in June. Meanwhile, inflation (Monday) is likely to show a slight moderation on the back of a fall in food prices.
• In the US, it’s a pretty quiet week till Friday when August retail sales are expected to show a 0.3% gain and producer price inflation data is expected to remain benign. Consumer confidence data will also be released.
• In Australia, the aftermath of the election will likely dominate. On the data front though it will be interesting to see whether the NAB business confidence survey (Tuesday) and the consumer sentiment survey (Wednesday) show an improvement on prospects for a change of Government. Odds are they probably will. Expect an ongoing rising trend to be evident in housing finance data (Monday) but another round of soft jobs data (Thursday) with employment likely to be flat and unemployment rising to 5.8% from 5.7%.

Outlook for markets

• Shares are vulnerable over the next month or so with various events and risks that could trigger investor nervousness including the Fed’s September meeting where it will likely start to taper its monetary stimulus, US Government funding and debt ceiling negotiations, the nomination of the next Federal Reserve chairperson, various imbalances in the emerging world, a likely military intervention in Syria, political instability in peripheral Eurozone countries and post-election fiscal tightening in Australia.
• However, a pullback should be seen as a buying opportunity as the broad trend in shares is likely to remain up: valuations are not dirt cheap but they are not expensive either; monetary conditions will remain very easy with interest rate hikes a long way off in the US and in other developed countries and interest rates still at risk of falling further in Australia; and the gradually strengthening global growth outlook points to stronger profits ahead. So by year end we see further upside in global and Australian shares.
• Despite the bond sell off so far this year, sovereign bond yields still remain low and point to low medium term returns from bonds as yields gradually adjust higher in response to the improving global growth outlook. An unwinding of years of massive inflows into bond funds though runs the risk of causing a more aggressive rise in bond yields and hence losses on sovereign bonds.
• With commodity prices in a downtrend and the Australian economy deteriorating versus the US, it’s likely the $A will fall further. Given its overvaluation in terms of relative prices and costs, expect the $A to fall to $US0.80.

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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 6 September appeared first on AdviserVoice.

• Share markets had another volatile week with concerns about a strike on Syria weighing on confidence, and emerging market assets, particularly currencies, coming under significant pressure.
• The concern in the run up to any US led military involvement in the Middle East is that it will lead to a wider confrontation threatening oil supplies. It’s no different in the case of Syria with worries that it may draw in Iran or Israel. So even though Syria is just a tiny oil producer (about 300,000 barrels a day) the talk of intervention has contributed to a small spike in oil prices and share market jitters. While such concerns invariably are not realised, past experience points to share market weakness/oil price strength in the run up to any intervention followed by a recovery in share markets from around the time it commences. The 1991 Iraq invasion, the December 1998 bombing of Iraq, the March 2003 Iraq invasion and the March 2011 Libyan bombing saw US shares fall 5.6%, 3.5%, 14% and 6.3% respectively in the run up to the events only to see the losses recovered within two months afterwards. I would expect a similar pattern this time around, particularly as it becomes clear that any intervention will be limited and that surrounding countries are unlikely to become involved.
• Meanwhile, the rout in emerging markets, and notably the currencies of India and Indonesia, continued with Fed taper fears combining with current account and budget imbalances to worry investors. Both Indonesia and Brazil hiked their benchmark interest rates again to combat inflation and support their currencies and this will only further weaken their growth outlook making them even less attractive to foreign investors in the short term. This problems in the emerging world look like having a way to run yet.
• More broadly, Syria and emerging world uncertainty has added to an already longish worry list for investors in the short term that includes the Fed’s taper decision, coming negotiations to fund the US Government and raise its debt ceiling, the nomination of the next Fed Chairperson, the German election, political instability in peripheral European countries and the prospect of a post election fiscal tightening in Australia. This vulnerability is enhanced because September is normally the weakest month of the year for US shares (with an average monthly decline of 0.8% since 1985) and October is normally the weakness month of the year for Australian shares (with an average monthly fall of 0.7% since 1985). As a result, shares remain at risk of further weakness in the month or two ahead. However, most of these worries should ultimately be resolved in an unthreatening way allowing a strong rebound in share markets into year end as seasonal strength returns.

Major global economic events and implications

• US economic data was mixed highlighting the difficult decision the Fed will face at its September 17-18 meeting in terms of whether to taper its monetary stimulus or not. On the positive side consumer confidence and house prices rose, jobless claims fell and June quarter GDP growth was revised up from 1.7% to 2.5% thanks to stronger contributions from trade and inventories. But against this, durable goods orders were weak (albeit with a still reasonable underlying trend) and pending home sales slipped again. Higher mortgage rates and now higher oil/gasoline prices are clearly a bit of a headwind for US growth. The net result may be that the Fed will either delay the start of tapering till later in the year or alternatively just cut it back by $10bn a day.  
• German, French and Italian business confidence readings confirmed the ongoing recovery in the Eurozone.
• Japanese data for July was mostly favourable with falling unemployment, a rise in the jobs to applicant ratio, growth in household spending, a solid bounce back in industrial production with a higher August PMI pointing to more strength and fading core pressures. Abenomics looks to be working albeit it’s a slow process.

Australian economic events and implications

• In Australia, while business investment rose a much stronger than expected 4% in the June quarter, this masked a decline in plant & equipment investment which is what feeds into GDP estimates. More importantly business investment plans were revised down for this financial year and now point to a 1% fall in investment this financial year using a comparison of past investment intentions with actual outcomes or an 11% fall based on a comparison of investment plans for 2013-14 with those made for 2012-13 a year ago. However, whether it’s a 1% fall or an 11% fall the outlook for business investment is poor with weakness pretty much across the board, highlighting the need for further monetary easing in Australia.
• Meanwhile, credit growth remained subdued in July albeit with signs of a bottoming and there was mixed news in relation to housing with a fall in new home sales but another rise in housing affordability to its best in a decade pointing to an ongoing housing recovery ahead.
• The June half profit reporting season is now essentially complete. Results have been weak but not as bad as feared and dividends have increased by 10% which partly explains why the Australian share market has performed reasonably well in August. Overall, results have been a little bit better than expected with 39% of companies exceeding analyst expectations as against 27% missing expectations. 64% of companies have seen their profits rise from a year ago and 60% of companies have increased their dividends from a year ago as against only 12% which have cut them. And while corporate outlook comments have been subdued, the fact they haven’t been too gloomy is a good sign.
• Consequently, and because the bad news had already been factored in we haven’t seen the earnings downgrades some had feared. Earnings expectations for 2012-13 are little changed at -0.5% (with resources earnings down by around 21% but with earnings for the rest of the market up by around 6%). And for 2013-14 earnings growth expectations remain around 13%, made up of a 35% gain for resources and 8% growth for the rest of the market. As a result of increased dividends from resources stocks, dividend growth ran much stronger than earnings last financial year, rising by around 10%. Reflecting the better than feared results and increasing dividends, 53% of companies have seen their share price outperform the market on the day their results were released. Key themes are ongoing cost control and weak revenue growth, but a prospective boost to profits from the lower $A and for iron ore companies from a higher iron ore price. Strong dividend growth reflects both a degree of comfort with the profit outlook along with pressure from shareholders for increased dividends.

Major market moves

• Shares had a rough week, not helped by worries about a strike on Syria and problems in some emerging countries.
• Commodity prices were mixed with gold and oil up on Middle East uncertainty, but metal prices down.
• A stronger $US and weaker metal prices saw the $A fall.
• Bond yields fell in the US, Germany, Japan and Australia partly as a bit of safe haven buying crept back in.

What to watch over the next week?

• In the US, the focus is likely to be on the manufacturing conditions ISM (due Monday) and payroll employment data (Friday) as guides to whether the Fed will commence tapering its monetary stimulus this month. Both may not provide decisive readings though with the ISM expected to slip slightly to 54 from 55.4 and payroll employment growth expected to be around 180,000 which is solid but not overwhelmingly strong. The Fed’s Beige Book of anecdotal indicators along with trade data and the non-manufacturing ISM will also be released.
• In the Eurozone, final manufacturing PMIs (Monday) and services PMIs (Wednesday) are expected to confirm the recovery already reported in the flash estimates. The ECB and the Bank of England are both likely to leave monetary policy unchanged when they meet Thursday, but indicate they retain easing biases.
• The Bank of Japan is also expected to leave monetary policy unchanged on Thursday.
• In Australia, the focus will no doubt be on the election to be held on Saturday 7^th September. The RBA meets Tuesday but, given the proximity to the election and its signal that another interest rate cut is not imminent, rates are likely to be left on hold. However, the post meeting statement is likely to retain an easing bias, particularly with the capex outlook weakening further and inflation benign, which the RBA is likely to act upon at its October or November meetings unless the $A falls rapidly.
• On the data front expect a solid bounce in July building approvals after a sharp fall in June, soft June quarter company profits and continued modest growth in RP Data’s house price series (all due Monday), continued weak growth in retail sales (Tuesday) and June quarter GDP growth (Wednesday) to have remained subdued at 0.5% quarter on quarter or 2.4% year on year. While consumer spending and building activity look to have been weak in the June quarter, trade is likely to have provided a modest boost to GDP growth. Data for the June quarter current account deficit, the trade balance and the AIG’s business conditions PMIs will also be released.

Outlook for markets

• Shares are vulnerable over the next month or two with various events and risks that could trigger investor nervousness including the Fed’s September meeting where it may start to taper its monetary stimulus, US Government funding and debt ceiling negotiations, the nomination of the next Federal Reserve chairperson, various imbalances in the emerging world, a possible military intervention in Syria, political instability in Italy and the election in Australia.
• However, a pullback should be seen as a buying opportunity as the broad trend in shares is likely to remain up: valuations are not dirt cheap but they are not expensive either; monetary conditions will remain very easy with interest rate hikes a long way off in the US and in other developed countries and interest rates still at risk of falling further in Australia; and the gradually strengthening global growth outlook points to stronger profits ahead. So by year end we see further upside in global and Australian shares.
• Sovereign bond yields still remain low and point to low medium term returns as yields gradually adjust higher in response to the improving global growth outlook. An unwinding of years of massive inflows into bond funds though runs the risk of causing a more aggressive rise in bond yields and hence losses on sovereign bonds.
• With commodity prices in a downtrend and the Australian economy deteriorating versus the US, it’s likely the $A will fall further. Given its overvaluation in terms of relative prices and costs, expect the $A to fall to $US0.80.

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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 August 30 appeared first on AdviserVoice.

The key points are as follows:

• After strong gains shares are at risk of a correction as we move into a seasonally weaker period of the year and given ongoing risks in Europe, a possible soft patch in US economic data and threats from a variety of sources such as bird flu and North Korea and as Australian economic conditions remain messy.
• However, less scary conditions in Europe, stronger US private demand, aggressive Japanese monetary reflation & emerging signs the Australian economy is responding to lower interest rates suggest a re-run of the 15 to 20% falls seen around mid 2010 and mid 2011 are unlikely.
• Notwithstanding the risk of a bout of mid year volatility our broader cyclical view for shares remains positive, with further gains likely this year.

To read this edition of Oliver’s Insights, click here.

The post Oliver’s Insights: another mid year bout of weakness in shares? appeared first on AdviserVoice.

• However, the pattern of rising highs and lows since late 2011, reasonable valuations, improving global economic news and easy monetary conditions suggests shares have likely entered a new cyclical bull market.
• In the post WW2 period, the average cyclical bull market in Australian shares has seen a gain of 126% lasting over nearly four years.

 To read this edition of Oliver’s Insights, click here.

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While there is evidence to suggest that there have been ‘good’ and ‘bad’ months to buy shares, there have been subtle shifts in the out-performing months over time. But, if there is a message to come out of the research, it is the value of consistency. When measured in rolling decade averages, the All Ordinaries has never fallen in records stretching back 70 years.

The Santa Claus Effect – myth or reality?
Is there a Santa Claus rally? That is, does the sharemarket generally rise in the lead-up to Christmas? And more generally are there ‘good’ and ‘bad’ months to buy shares? Click here to read more.

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The latest headlines are not often the best indicator of the direction of the market, as investors look to the future while economic statistics focus on the rear view mirror. They can tell different stories at the same time.

Dominic Rossi, Fidelity’s Global Chief Investment Officer for Equities, has been bearish on equities for the past 18 months or so, believing correctly that shares were unlikely to go anywhere as long as there were large and unquantifiable obstacles to their progress in the form of the banking, economic and sovereign debt crises.

So I was intrigued when he recently told me that he now sees growing evidence for cautious optimism on the part of equity investors.

The thrust of his argument is that the key risks to equity markets – bank deleveraging, policy inaction and political risk with regard to Europe, and commodity prices – have all now been recognised by investors and so priced into the valuation of markets. It is not that they have disappeared – they haven’t – but their capacity to shock the markets has been dramatically reduced.

As investors have taken on board all the myriad problems facing the global economy they have positioned themselves accordingly.

As any contrarian investor knows, generalised distrust of a market like this is very often the trigger for a rally. Only when you get to this stage have all those wishing to exit the market already done so. When no-one wants to invest in equities any more there are no more sellers to drive prices lower.

Dominic points to a handful of reasons to be positive. He points to interest rates, which have been declining for some time, and more generally to expansionary monetary policies which have pushed the yields on longer-dated bonds to very low levels. This, in turn makes a compelling case for equities because, across the board, they now offer higher dividend yields than their respective bond markets.

Another reason is a technical one: markets have shown signs over the past few months of finding support at key levels. There is an unwillingness to push prices lower. This has reduced volatility.

Finally, and this is the most interesting point I think, the leadership of market rallies has changed. Markets are no longer being led upwards by sectors that traditionally do well when confidence returns – like commodities and banks – but by mainstream sectors like consumer discretionary, pharmaceuticals and technology, relatively dull sectors with steady dividend streams that offer investors a store of value.

In other words, investors are buying shares for the right reasons, because they offer income and security rather than the promise of a quick return.

When you look around the world, there is a huge amount of value available in these types of companies.

Does this mean we are out of the woods? Absolutely not.

There are still considerable risks – a slowing economy in China, the yawning budget deficit in America and the ongoing eurozone crisis to name just three very obvious ones.

But importantly the reasons to sell equities have become the conventional wisdom and that is very often a great time to start thinking of reasons to buy them instead. 

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.  2012 FIL Responsible Entity (Australia) Limited.  Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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The same issue was alluded to in a recent Bloomberg observation that in the US bonds have beaten shares over the last 30 years. While one can quibble over the details,  given these observations it is natural to think maybe it’s time to give up on stocks and switch to cash and bonds.

Stocks do outperform over the long term
The first point to note is that over the very long term, shares have provided higher returns than cash or bonds. The next chart is the one referred to earlier and shows the total returns from Australian shares, bonds and cash from 1900. Despite numerous disasters along the way, such as World Wars, the Great Depression, the stagflation of the 1970s, the 1987 share crash, a major Australian financial crisis in the early 1990s – $1 invested in Australian shares in 1900 would have risen to $287,087 by last month with a compound return of 11.9% pa. By contrast, the compound returns of 4.6% pa and 6% pa for cash and bonds would have seen $1 invested in these assets rise to only a fraction of this.

It’s been a similar story in other comparable countries.

The long term outperformance of stocks over bonds and cash is as would be expected – the greater riskiness of shares is rewarded with higher long term returns.

The following chart shows a real accumulation index for US stocks since 1900. The trend line represents a real rate of return of 6.2% pa. Whenever the index is rising faster than the trend line, stocks are providing above trend returns. Vice versa when it falls relative to the trend line.

Long term bull & bear phases are evident, of which the bear phase over the last decade is not unusual. This pattern also exists in other countries. 

This suggests that at any point in time the experience of the past 10 to 20 years is no guide to the long term. An investor in US stocks at the end of the 1960s would have been wrong to project the above average returns of the 1960s into the 1970s (when actual real returns averaged –0.7%pa). Likewise the bad 1970s were no guide to the 1980s (when real returns averaged +11%pa).

In other words 10 to 20 years is not the long term when it comes to shares. So the fact that US shares have underperformed bonds over the last decade doesn’t mean they will over the next.

In fact, what’s evident is mean reversion. Ten to twenty year periods with above trend returns and above average returns relative to bonds and cash tend to be followed by weak 10 to 20 year periods where returns are below trend. The table below shows the top performing asset classes (out of equities, bonds, cash and property) for each decade over the past century in the case of the US, the world and Australia.

The 1982-2007 bull market in Australian shares arguably spoilt investors and we have simply forgotten that the superior long term performance of shares comes with a cost, which is that there are sometimes lengthy periods during which shares can perform poorly.

The 10 to 20 year return cycle in shares reflects fundamentals. It’s no guide to the ‘long term’.

The 10 to 20 year secular cycle in shares appears to reflect a combination of factors including:

• Starting point valuations – US share prices were high relative to trend earnings (ie the PE ratio) in 1929, the late 1960s and in early 2000 (after which followed the secular bear markets of the 1930s, 1970s and 2000s) and low in 1949 and 1982 (after which followed two decades of strong returns)
• Underlying economic developments – depression in the 1930s and inflation in the 1970s were bad for shares, whereas solid economic growth, disinflation, economic rationalism, globalisation, etc, in the 1980s and 1990s were great for shares. Right now it’s deleveraging in the private and public sectors in the US and Europe which is proving to be bad for stocks
• Technological innovation – rapid technological innovation helped push stock returns above trend in the 1920s (electricity, mass production), 1950s (petrochemicals, electronics) and 1990s (IT).

Perhaps the most important point is that the starting point matters. Ten years ago US stocks were offering a dividend yield of just 1.5%, but the 10 year bond yield was 4.6%. This made it much easier for bonds to outperform shares as indeed they have over the last decade. But it’s now going to be harder for bonds to outperform over the decade ahead as their yield has fallen to less than 2% whereas the dividend yield has increased to 2.2%. This is still low, but even if share prices do nothing over the decade ahead shares will outperform bonds.

Likewise in Australia, 10 years ago bond yields were 5.6% and dividend yields were just 4.3% so it was comparatively easy for bonds to do well. Today though bond yields are 4.2% and the grossed up dividend yield is 6.8%. In other words, it’s currently easier for shares to outperform bonds over the decade ahead as bond yields are quite low relative to dividend yields. 

This is also highlighted in Australia with the dividend yield grossed up for franking credits now running well above bank term deposit rates which are now falling. In fact, on this basis the grossed up dividend yield of 6.8% compared to term deposit rates of around 5.5% imply shares are paying out 1.3% more cash per annum than term deposits.

Concluding comments
The historical record suggests:

• over the very long term stocks do outperform most other asset classes
• however, there are 10 to 20 year periods over which this is not necessarily the case. In this context the recent experience in share markets is not unusual
• the outlook at any point in time in part depends on the starting point. After a decade or so of above average returns a period of slower returns is likely, & vice versa.

The long term cycle in equity markets should clearly be allowed for in setting investment strategy for individual investors. While 10 years might not seem long for me, it is very long for my mother. So, as discussed in a recent note, an outcome or absolute return investment approach may be appropriate for those with a short term investment horizon or specific investment needs. 

However, for those with a longer term investment horizon it’s worth bearing in mind that in an historical context the turbulence in share markets in recent years is not unusual and doesn’t tell us shares won’t provide superior long term returns going forward. This is particularly so with dividend yields on shares rising at a time when yields on bonds, cash and term deposits are falling.

The post Shares & the long term – how long is long? appeared first on AdviserVoice.

Using data supplied by CBA Quant, CommSec has identified the best performing major stocks over the past 20 years. Head and shoulders above the rest of the pack has been Fortescue Metals Group with returns up a phenomenal 248,624 per cent over the past 20 years, or 12,431 per cent per annum.

Clearly Fortescue is an outlier. But of the current S&P/ASX50 companies, 28 have been listed consistently for the past 20 years. And none of the 28 companies have produced negative returns over the period. Forty-two of the current S&P/ASX50 companies have been consistently listed for the past decade and only 10 of the companies have produced negative total returns over the period.

While investors are currently favouring cash, it’s worth noting that If $100,000 had been invested in stocks at the end of 1990, it would have been worth $804,000 at the start of this year. The same $100,000 would have appreciated to just under $305,000. To read the full paper, click here.

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