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ASX 200 bounces back – so was cash the answer?

After ‘Black Monday’, the ASX 200 opened much lower but then rose 209 points during the day to close up +2.72% on Tuesday. Of course nobody can reasonably predict turnarounds like this with any precision but it is not unreasonable for analysts to attempt to distinguish bouts of short-run volatility from a long-run, secular decline. During times like those experienced in the last few weeks, some people question whether a fund, such as ones from the Alpha Funds Management suite, should have held a larger position in cash.

Cash held inside a managed fund should be distinguished from cash held directly in an investor’s say term deposit. The latter can be used for transactions without the costs of drawing down from a fund or, importantly, drawing down from a fund during a downturn. All investors should have some direct cash holding but the amount held depends upon the investor’s specific circumstances. In this note, we will focus on a cash holding within a managed fund. For simplicity, let’s nominate a 30% cash holding.

At the moment cash rates are so low that we can think of the cash rate over a month or so as being effectively zero. That assumption greatly simplifies the maths. If the non-cash part of a fund (let’s call it portfolio ‘A’) returns 2% (capital gains) over a month, ‘A’ combined with 30% cash would earn 0.7×2% = 1.4%. If portfolio ‘A’ combined with 30% cash earned ???2% over the month, the composite portfolio would earn ???1.4%. In other words, cash dampens the composite return towards zero. However, cash holdings also reduce distributions – and a fund that charges fees is implicitly charging for cash holdings.

If the 2% return example in the previous example was accompanied by an intervening short-term fall of say -10% and a bounce-back to still achieve the 2% return on the month, there is no gain or loss unless the fund traded in the dip, or the investor needed to draw-down funds. Assuming that the latter is accounted for by cash holdings outside of the fund, a significant cash holding such as 30% only benefits the investor if the fund invested heavily in the downturn! In other words, a fund with a significant cash holding in volatile times only gains when the investor agrees with a high degree of risk taking. Until the bounce-back has taken place, it is not known how deep the dip will be.

How many conservative or balanced investors would have been happy if they had known a large cash holding was about to be nearly fully invested on ‘Black Monday’ or Tuesday morning? Of course, if there is an expected secular decline in markets, a cash holding might later be drip-fed into riskier assets over a long period of time and therefore, with less risk than in short-run volatility bursts.

Since Alpha Funds Management believed that increased short-term volatility might accompany the actions of the Fed it was not appropriate to go significantly into cash (of course Alpha always holds a small amount of cash consistent with day-to-day management of funds). If, at some point, the Alpha team expects a secular decline in relevant markets, it has the facility to hold higher cash levels and it intends to do so as appropriate.

In a related matter, an advisor pointed out that the May Economic Update canvassed a ‘high’ of 6,400 before the end of 2015. Importantly, that May issue pointed out that the e-o-y forecast was 5,900 but the market was running ahead of the January 1 forecast. The updated e-o-y forecast was stated as 6,100 but, such is the extent of volatility, a ‘possible 6,400’ could not be ruled out as a temporary high – hence the exclamation mark after the 6,400 in the May update!

Followers of our webinar series will note that we published the high and low ASX 200 forecasts from time to time and specifically in the May webinar. The point of the webinar series is to give more information to advisers than we could reasonably expect to get through directly to our investors. We reproduce the May webinar chart below with exactly the same forecasts that we published in May and other months but with the ASX 200 updated to the close of Tuesday 25th August. We feel comfortable that these bounds and forecasts convey useful information to advisers.

In summary, substantial cash holdings to get through short-term periods of volatility is tantamount to encouraging risky trading by a fund manager. Alpha prefers to take long-term positions by choosing appropriate funds, weights and ’tilts’ – but, of course, Alpha reviews all holdings on a regular basis in team meetings and in annual reviews.

Box forecasts of the ASX 200 as at May 2015 but with updated index data

Notes: For each calendar year, the diagonal solid, coloured lines are the baseline forecasts. The upper and lower dotted lines (of the same colour) are the predicted highs and lows for some unspecified point during each year. These forecasts are not altered during the course of the year but updates are calculated and reported on over the year to show whether the original forecasts are still consistent with actual behaviour.

Yours faithfully,

Ron Bewley PhD, FASSA
Director
Woodhall Investment Research

Economic Update – May 2015

The Big Picture

The ASX 200 spent April toying with the idea of breaking through 6,000 – and breaking through is oh so different from staying above 6,000! We have now had five surges before retreating back to just under the elusive 6,000 figure and this has occurred within the last two months. But that isn’t a problem – it is normal market behaviour. We have the market priced at around 5,850 so we will likely get to 6,000 one day soon – and stay there come the second half of the year.

After iron ore and oil prices tumbled over 2014, there have been impressive bounce backs in both of these commodity prices. We have argued previously in this update that both prices were being manipulated by the big three miners for iron ore and OPEC for oil.

While the doomsayers were predicting the end of the world, iron ore prices surged from around $US47 per tonne mid-April to above $60 before a small end-of-month sell off. Brent oil (the world price) started April at $US54 per barrel and reached as high as $66.76 at the end of the month.

Naturally, these commodity price movements helped stocks in the resources sector of the ASX 200 but some high yield stocks came off a bit in price as some investors rebalanced their portfolios.

The big fall at the end of April (just after the fifth bounce below 6,000) of ???109 points in one day – only to be followed by a fall of ???49 points on the next/last day – certainly brought some investors to their senses. We would rather the market frequently have these ‘baby’ corrections rather than having blasted through 6,000 only to fall back to 5,000 because of a bursting bubble. After the big fall that occurred on the 29th April, the market finished 12 points below our previously-held estimate of fair value of 5,850 – just 60 points above where the index finished in April.

The Reserve Bank of Australia (RBA) kept rates on hold against the odds after its early April meeting. The market had priced in a 75% chance for the RBA to cut its rate by 0.25%. Naturally, the market immediately priced in the next cut for the May 5th meeting with equal gusto – but the change in direction for commodity prices in subsequent weeks have dampened expectations for a cut in the immediate future.

But most analysts seem to be calling for at least one more cut this year from the current 2.25%. However, 2% is seen as a psychological barrier for many making only one cut slightly more likely than two.

The Governor of the RBA, Glenn Stevens, gave a speech at the end of April pointing out that monetary policy – such as varying interest rates – has done just about all of the work it can for the economy. It now needs the government to create a particularly good budget in terms of creating confidence and growth.

The Governor also pointed out that retirees are worse off than those from a decade ago in terms of finding almost risk-free yields from which to generate a stable income (but many do have 10 extra years’ worth of compulsory super savings to help out!) . And he emphasised that this situation is likely to last for a long time. The importance of investors – in this low rate regime – discussing investment strategies with their advisors is becoming increasingly important. But we are not alone. Low rates are a global phenomenon.

Foreign Equities

It took 15 years, but the NASDAQ (the US ‘tech’ index) at last reached a new all-time high. Of course the dot-com boom and bust of 15 years ago was fuelled by some companies listing for the first time (known as IPOs) on the stock exchange with no earnings-to-date and not much of a business plan. Investing in nothing but a dream is what created that bubble.

A new bust on the NADAQ – or any other major international index – does not look likely any time soon because standard capital raising conditions have again become the norm – but markets often go sideways for a while after a significant new high is reached. The end???of???month sell???off on the NASDAQ is of no great concern. It’s called profit taking.

The S&P 500 – and other major markets around the world also reached new all-time highs in April. The recent earnings season in the US was quite good but the consensus seems to be that the next strong rally might not kick off until the second half of 2015. We see around 7% growth in the S&P 500 from the end of April to New Year’s Eve.

Bonds

It is never clear where the discussions between Greece and the banking authorities stand. But, as the Greece economy is only about 2% of the Eurozone economy, we do not expect any major fall-out to markets that affect us, no matter how the Greece situation ends – within reason of course. The very latest talks revealed that the Greece government is giving some ground.

Our 10-year bond yield stands at about 2.6% while the equivalent yield in the US is about 2.0%. But David Murray – former CEO of CBA and Chairman of the Future Fund – and Chairman of the recent Banking Inquiry, has just suggested that Australia could lose its AAA rating if it doesn’t manage its debt problems better. Goldman Sachs joined the chorus. Losing our AAA status would affect our yields and, importantly, have a detrimental impact on our big banks.

Interest Rates

The RBA did not cut rates in April. The inflation read of 2.3% pa released since that meeting, and the flat or improving labour market situation, are taking some of the pressure off the RBA to cut in May.

However, our economy continues to grow at below trend pace and it is very unusual for the RBA to only cut once. Changes in rates usually come at least in pairs, if not longer strings.

The government’s budget comes out after the next RBA meeting so there is a reasonable chance that the RBA will wait to interpret the possible impact of the new budget before it cuts again!

The US Fed has been in no rush to raise rates. We reiterate from last month that the current Fed rate range of 0% to 0.25% is not very different from 0.25% to 0.50% following one little hike, but markets would react negatively in the short run. The Fed’s minutes released in early April showed a split decision for a June cut and the labour market data released on Good Friday was so poor in comparison to the trend, that a June hike was almost ruled out of contention.

The Fed met again at the end of April and released yet another report. This time they removed any mention of a calendar date for a rate hike – supporting the pushing out of expectations for a hike. However, they do see the weak economic growth in the US at the start of 2015 as transitory with a pick up expected in the second half of 2015.

Other Assets

It does not follow that the recent rebound in oil and iron ore prices means that this is sustainable or prices will continue to rise. However, the particularly gloomy forecasters of a month or so ago seemed to have gone into hiding.

We believe it is unwise to simply extrapolate the April rally into rising commodity pricing but that does not stop us from being positioned to take some additional benefits from any further rally – should prices happen to rise further.

Regional Analysis

Australia

It was only one of many surveys in April but the weekly ANZ-Roy Morgan ‘economic outlook’ poll at the end of April jumped by +8.6% in a week to a creditable index value of 111.8. Of course it might turn out to be a statistical aberration but we cannot rule out that the government’s softening stance in budgetary measures is starting to boost optimism.

ANZ’s weekly consumer confidence index in the same survey release was below its average. Outlook and confidence measures are misaligned at the moment and variable. Could it be that confidence lags economic outlook, outlook ticked at the very end of the quarter? But Retail Sales were up +0.7% for the month! Another indicator of a late change in views after the budget stance increasingly softened.

Some interpreted the fall in our unemployment rate from 6.3% to 6.1% in the April release (for March) as a great sign of recovery. Equally the increase in jobs of +37,700 was particularly well received. But we agree with the Australian Bureau of Statistics (ABS) – and our past, frequent comments in these economic updates – which we should focus on the ABS published trend data rather than the volatile seasonally-adjusted headline data. The trend data have been flat for months. It is far too early to get excited and, equally, gloom should be set aside.

The inflation data came out and they may have looked a bit confusing to non-professionals. The RBA focuses on a measure that strips out the impact of certain volatile items such as oil prices. The ‘headline’ number was a low +1.3% but the RBA-preferred measure was +2.3% which is close to the middle of the RBA’s target range of 2% – 3%. So inflation is not currently a problem.

China

China’s Purchasing Managers’ Index (PMI) for manufacturing came in at 50.1 – the same as in the previous month. A number above 50 signals growing economic growth.

The new China economic growth figure came in at 7% in April, bang on the new target figure for the year. Some analysts were negative about this number because it was the lowest in 9 years.

It is well-known (or at least should be) that most companies and countries that start from a low base go through a period of rapidly growing growth rates to be followed, as the company or country starts to mature, by slowing growth rates to values like the current 3% economic growth (on average) rate experienced in the US, UK and Australian economies.

In terms of the ‘volumes of goods and services’ now being produced in China, 7% growth now is much, much bigger than 7% a decade ago because the China economy has more than doubled in size. One day, when the China economy has fully matured, it will probably grow at around 3% like other developed economies. Do we worry that the US and Australia only grows at around 3% pa on average? No!

U.S.A.

The US had a particularly poor nonfarm payrolls (jobs increase) figure at the start of April when it came in at +126,000 for March – or about half of an average month over 2014. But the unemployment rate remained steady at 5.5%.

Possibly, the particularly cold winter again temporarily impacted on jobs growth in March – or was it another statistical aberration? It was, however, encouraging that the hourly average wages figure ticked up by a moderate +0.3% from +0.1% the month before. The Fed focuses on wages growth because that is a better indicator of labour market pressure than just numbers of people in work.

US GDP growth in quarter one was a miserable +0.2% (annualised) after the +2.2% in the last quarter of 2014. Economists had expected a slowing – but only to +1.0%. The Federal Reserve stated that it believes this low result is transitory and strong growth will resume in the near future.

Europe

Consumer price inflation was only up +0.1% in Europe. Economic growth in the UK was up +0.3% for the quarter. Of course fears of Greece debt problems are muddying the waters.

Rest of World

Japan had its debt downgraded to A from A+ by the Fitch rating agency and that follows a recent downgrade by Moody’s. It seems that Japan and the world shrugged that downgrade off.

^{*Ron Bewley(PhD,FASSA)– Director, Woodhall Investment Research}

^{Important information}

^{This information is the opinion of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Wealth Management and may contain general advice that does not take into account the investment objectives, financial situation or needs of any person. Before making an investment decision, readers need to consider whether this information is appropriate to their circumstances.}

Infocus launches Client Engagement tools

Infocus Wealth Management Ltd today announced the launch of its new client engagement software tool, Client Portal.

Infocus’ Client Portal allows clients of advisers in the Infocus group network to view their assets, liabilities and risk premiums under advice via a secure login. Once logged in, clients can also view their advice documents, client service agreements and fee disclosure statements, as well as self-complete up to date information through Infocus’ online fact find that automatically populates and updates the client’s details in Infocus’ proprietary CRM.

“We’re really excited about launching this great functionality, which is exclusively available to advisers licensed under the Infocus and PATRON dealer groups”, says Infocus Managing Director Rod Bristow. “All advice businesses have ‘legacy’ or ‘C & D’ clients. Providing a way to engage with these clients cost effectively will lead to improved client engagement and reduced risk for advisers”, Bristow said.

Existing and new clients are issued with a login to the Client Portal. Once logged in, clients can view all of the assets, liabilities and risk premiums they have under advice with their Infocus group adviser. Data feeds for a wide range of products on the Infocus group APL provide up-to-date information for clients on the status of their wealth.

“There’s lots of talk about ‘robo-advice’ in the industry. At Infocus we believe the emergence of direct to client solutions will no doubt be important, as we saw in stockbroking with the success of CommSec and E*Trade. However, advice requires a more complex approach to engagement, particularly initially. By providing tools to increase client engagement such as our Client Portal, advisers will be able to increase awareness and ultimately the numbers of clients receiving advice – which is a great outcome for advisers and their clients”, he said.

The Client Portal launch is part of an ongoing strategy of enhancing Infocus’ proprietary CRM, advice generation and practice management software, PlatformPlus. The most recent software release also includes a ‘Dashboard’ of key metrics across client engagement, revenue and staff productivity, providing advisers with an instant snapshot of how their business is performing against plan.

“Infocus sees our role for advisers across our two dealer groups Infocus and PATRON as helping to grow revenue, increase efficiency and manage risk. The Client Portal and Dashboard functionality released this week ticks all of these boxes”, Bristow said.

For more information please contact Rod Bristow on 1300 463 628.

Infocus Wealth Management announced as financial advice affiliate to First Super

Infocus Wealth Management today confirmed it will provide financial advice services to members of First Super as part of a broader initiative championed by Industry Fund Services.

Financial services provider Industry Fund Services and Infocus Wealth Management have been working on developing a national financial advice referral program for client members of Industry Superannuation Funds. Whilst the client referral program between First Super and Infocus Wealth Management starting this month is the first in progress, Infocus anticipates it will be one of many for the group.

Infocus Wealth Management’s Managing Director, Rod Bristow, is delighted with the outcome and acknowledges First Super for making available to its client members, the offer of a full service financial advice offer. According to Bristow, “Infocus is honoured and excited by the opportunity to support First Super in its initiative, especially since offering retail advice to client members has traditionally been something many industry funds were not prepared to consider. First Super is leading the way for other Super Funds and should be celebrated as the first movers that they are. As an independently owned wealth management group, we understand and respect the commercial concerns of Industry Funds. It has been from this foundation that we have progressed with a transparent and accountable process that has given both Industry Fund Services and First Super the confidence to move forward with us”, he said.

Financial advice services to be delivered by Financial Advisers across the Infocus Group will initially roll out to First Super members in South Australia. “It is our intention to work closely with First Super to ensure the success of this initiative in advance of a broader national rollout. We have highly skilled and incredibly personable advisers on the ground in South Australia and right across the country and we’re confident we will be able provide exceptional service to First Super’s members accordingly”, Bristow said.

Beyond this initiative with Industry Fund Services and its member funds, Infocus is in discussions with other organisations and employer groups to provide similar outsourced financial advice services for consumers nationally.

Economic Update – April 2015

The Big Picture	The ASX 200 danced within a range just shy of 6,000 and twice it was only a handful of points away from making a break-through during the trading day. The main focus for the month in markets was the speech by Dr Janet Yellen, the United States (U.S.) Federal Reserve Chair. As with our own Reserve Bank (RBA), analysts go through every word looking for the slightest change in policy stance. This month, analysts expected the word ‘patient’ to be removed from Yellen’s words in reference to the timing of the first rate hike. Expectations had fluctuated between June and September as the start point for hikes. Yellen deftly did indeed remove the word ‘patient’ but emphasised that it did not mean they were now ‘impatient’. Markets loved that and surged on the news. Moreover, the Fed forecast for the Fed rate was halved with 2015 now expected to end at 0.625%. The previous (December 2014) forecast for 2015 was 1.125% and before that it was 1.35%. Clearly, the view now is that the first rate hike will be very small and that may, indeed, be the last increase for some time. The US nonfarm payrolls (jobs) data again came in very strongly with more than one million jobs having been created in the last three months. Unemployment fell from 5.7% to 5.5% but the hourly average wage rate fell back to +0.1% from +0.5% in the prior month. It is this statistic above all that will show any real signs of life in the economy or not – at least in terms as to whether the US economy can sustain a rate hike. At home, the RBA left our rate unchanged but the market has priced in a cut for April or May. Our jobs data were better than many expected after the previous month’s slippage. We created +15,600 new jobs which were more than those lost in the previous month. Moreover, the December jobs data were about three times bigger than the one just released! Unemployment fell from 6.4% to 6.3%. Our economic growth was not great at +0.5% for the quarter and +2.5% for the year but such figures are not weak – they are just a bit below trend. The Intergenerational Report was released by Joe Hockey in March and it showed that, under a no-change in economic policy scenario, our National Debt to GDP ratio would rise to 122% in 40 years – from 12% today – and put us in the same debt category as those countries in Europe and elsewhere that we now think are struggling. As we said in our budget paper report last May, the government was on the right track but it failed to sell its story. It just released a ‘White Paper’ on tax reform to open up that discussion. Carrying on doing what we are doing is simply not an option and it never was in recent years. With only 2% of taxpayers contributing 26% of the total personal tax collected by the country, raising the top rate is not the answer either. Importantly, the government is declining to cherry pick one tax or benefit at a time but to stand back and take the country into a full and proper realisation of the extent of our problems and its solutions. Not only the discussion but also the reduction in the speed of budgetary change will stimulate the economy more than we all previously thought. Things are starting to look pretty good.
Asset Classes
Australian Equities	Our market got knocked around a bit by another bout of instability in iron ore and oil prices. The Energy and Materials sectors fell by about ???6% over March but the overall market was reasonably flat at ???0.5%. Some of the end-of-month volatility was due to ‘window dressing’ by fund managers to square their performance statistics for the quarter. We have estimated the fair price of the market to be 5,750 meaning that we are ahead in making our forecasts made last June and which we refreshed on January 1st. The end-of month March close on the broader index was 5,892 so we are about +2.2% overpriced. The market is so close to 6,000, the first crossing since early 2008 is most likely to happen soon but it did get to 5,996 on March 3rd 2015 before a very sharp retreat! Markets often get the jitters around ‘big numbers’ like 6,000. We are confident that closes above 6,000 (and retreats) will be common in the coming quarter and may even ‘stick’ at some point near mid-2015. Our 2015 forecast is for a close at 6,150 and a temporary ‘high’ before that of 6,500. In other words, the November 2007 high might seem tantalisingly close within the next 12 months. As we stressed last month, with more rate cuts on the horizon by the RBA, cash is certainly not king. When rates start to rise, they might rise quickly! High yield stocks could then take a small beating with capital losses wiping out their recent yields.
Foreign Equities	Wall Street fared worse than us losing ???1.7% on the S&P 500 in March while London’s FTSE lost ???2.5%. The German DAX bucked the trend at +5.0% but they have been embroiled in both the Ukraine and Greek issues and are now finding their way out. The World Index was down ???1.8% but Emerging Markets held up at +0.3%. Yellen helped us all with her well-chosen words but one day those words must include ‘rate increase’. Then, there will almost certainly be some market volatility to follow – even though we all know it will happen and the real impact of a tiny rate rise will be small. It’s a bit like being told at a New Year’s Eve party that ‘the party’s over’ – even though it is 3am.
Bonds	The ECB started its 1.1 trillion euro QE stimulus programme in March. So far there has not been any obvious adverse reaction. Around the world many government bond yields are close to zero or even negative. Our ten year yield stands at about 2.3%.
Interest Rates	The RBA did not cut again in March and may not do so in April – preferring to wait and see the next inflation read first. To reiterate, it is highly likely that the RBA will cut at least once more this year, otherwise the February ‘rushed cut’ will seem like a mistake. What is interesting is that only 7 of 27 economists surveyed by Bloomberg expect a cut on Tuesday 7th April but the market – those people who take actual financial positions – are pricing in a 70% chance of a cut. It seems easier to position for a cut on Tuesday than simply be forced to wait a month for some action, if necessary. Missing the cut means the chance has gone! The US Fed is in no rush to raise rates but there are consequences on its growth when it eventually does. Quite frankly, the current Fed rate range of 0% to 0.25% is not very different from 0.25% – 0.50% after one little hike, but markets would react negatively in the short run. We still think a hike before September is unlikely. The US jobs data due out on Good Friday (they don’t have a holiday like us!) will give us a big clue – if we focus on how much workers are earning (via the hourly average wage rate) rather than the actual number of people working. If wage rates are not rising, there is no real pressure in the economy that needs subduing and rates will likely be on hold in the US. What was fascinating in a Boston Federal Reserve research paper at the end of March (they usually fall far short of exciting) is a survey that is showing a big shift to so-called ‘informal’ employment – such as baby-sitting and dog-walking – which is not necessarily reported to the relevant agencies – including the IRS! People in the US have been supplementing full and part-time work at quite an unprecedented rate. At least 24 countries have cut rates so far this year. It will be a brave Central Banker that bucks the trend. New Zealand tried it and regretted it!
Other Assets	Iron ore prices seemed to have settled down at above $60 / tonne but then they slipped towards the end of the month. They are now only just above $50 / tonne. Oil prices are still low but off the recent lows. The Saudi Arabian incursion into Yemen is increasing oil-price volatility even further. Gold got back above $1,200 / troy ounce but it has returned to bubbling along just below that level. Our dollar has been fluctuating in the high seventies but it did fall ???2.0% over March.
Regional Analysis
Australia	Australian economic data released during March was largely benign – no important stand-outs and no important failures. But there has been a stand-out improvement in political debate and the polls are starting to show it. Queensland and NSW had state elections that came in with starkly opposing outcomes. The political party popularity polls have started to move, but more importantly, the government has massively changed its short-term policy stance. It seems to have the same long-term plan for Australia’s future but it now realises (at last) that it must take the electorate with it. We find it exciting and refreshing that positivity has replaced negativity – at least on the business TV channels. There are so many confidence polls these days it is difficult to make sense out of the very small changes that we have been seeing in each poll. We can summarise that the results are not yet strong – neither are they seemingly deteriorating. If we are correct in our assessment of the impact of the more recent changes in the government’s approach, both business and consumer confidence levels might be seen to start rising sharply from the end of April.
China	China’s Purchasing Managers’ Index (PMI) for manufacturing came in on the 1st April at 50.1 – just above the 50 that signals constant economic growth – but, importantly up from 49.9 the month before. The new China growth plan is targeting economic growth of 7% going forward, from 7.5% last year. China’s inflation (CPI) came in at +1.4% against an expectation of +0.9%. The limited stimulus is helping get the rate of inflation back into the target band.
U.S.A.	The US had another very strong month with employment data. There were +295,000 new jobs and unemployment fell back to 5.5%. The monthly average for new jobs in 2014 was +246,000, up from +193,000 in 2013. One million jobs were created in the last three months alone! US growth came in at +2.2% in its third and final revision for Q4, 2014. However, most commentators are attributing the particularly cold weather for bringing growth down to that modest rate. On the other hand, the consumer spending part of that GDP read was very strong at over +4%. The US is starting to struggle with its stronger dollar. After several years of having a weaker dollar because of its stimulus programmes, it is now on the other end of the stick. Japan and Europe have big stimulus packages on the go while the US ended its last October.
Europe	The new Greece government was voted in on an anti-austerity platform. But as it has made such a mess in its deliberations with the troika (ECB, IMF and European Commission) to get out of the austerity conditions for its bailout, that comparable anti-austerity parties in France and Spain took a beating in recent polls. Had the new Greece party done a better job, there could have been some very negative ramifications for the whole European economic situation. The ECB has lifted its 2015 growth target to +1.5% but lowered its inflation forecast to 0.0%. Slowly but surely, the recession fears are receding.
Rest of World	Venezuela has joined the ranks of countries suffering from low oil prices. It is struggling with the $50bn debt to China but the deal is that they can pay off this debt with oil rather than cash! Of course, falling oil prices mean that they need to ship even more oil for the same interest payments. China has stepped up to the plate and offered a further $10bn loan. Russia is reportedly talking to Argentina over the rightful ownership of the Falkland Islands that caused a war between Britain and Argentina in the early eighties. Russia is also looking for other allies around the globe. The dominance of the US and Europe is slipping. China and Russia are playing bigger roles. And now Saudi Arabia has mounted air strikes on Yemen. One media outlet questioned whether this could amount to a ‘Vietnam-like conflict’ that the US, Australia and others were involved in over 50 years ago. One can only pray that the parallel is far from reasonable.

*Ron Bewley(PhD,FASSA)– Director, Woodhall Investment Research

Important information

This information is the opinion of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Wealth Management and may contain general advice that does not take into account the investment objectives, financial situation or needs of any person. Before making an investment decision, readers need to consider whether this information is appropriate to their circumstances.

Economic Update – March 2015

The Big Picture

The Big Picture Just when things were starting to look predictable at Central Bank level, spanners from all directions were thrown into the works. India and Denmark had already got the ball rolling with rate cuts when, on January 16th, the Swiss National Bank (SNB) walked away from its cap on the Swiss franc against the euro.

Any move like that would always be a surprise but the three year deal was strongly supported in a statement by the SNB only two weeks before. Traitor may well have been uttered as the franc ‘popped’ a massive 41% on the news. These days, a 1% change in one day for most currencies is thought to be big. 41% (even though it later pulled back) ruined some retailer investors, brokers and hedge funds.

So why did the SNB do it? Who knows? But they knew the European Central Bank (ECB) was due to meet and probably announce a money printing scheme that would undermine the value of the euro. Such an event would have placed further pressure on the Swiss franc and something had to give.

Days later, just as we were getting used to the full impact of the SNB decision, the Canadian Central Bank surprisingly cut its interest rate from 1% to 0.75%. Not one economist expected this decision – just like with the SNB. The Canadian dollar plummeted 2% on the news and took our dollar with it.

However, Canada and Australia have very different economies. Both are heavily reliant on commodities, have large land masses with relatively small populations and are related by the Commonwealth games. The big difference is that Canada is an exporter of oil while Australia is a net importer.

Canada loses income from low oil prices. Australia gains by leaving consumers better off from lower oil prices. Of course there are some winners and losers in each country but the big picture is that we are much better off than Canada on this account.

The trifecta of central bank surprises came from the ECB when it not only announced ‘QE’ (Quantitative Easing meaning money printing), it overachieved – at last! Their programme is much bigger and better than was expected.

Printing money doesn’t guarantee growth – but it does buy time for governments to do what governments must do. We probably have a year or more before we know if it is working. In the meantime, Europe is good.

That didn’t stop Greece voting in a new government that is against ‘austerity’. Nobody likes austerity but one has to face the music when one gets into debt. But the low bond rates across Europe – and the better shape that many countries are now in – means Greece is no longer a major issue for people living outside of Greece. Contagion is not expected this time around.

So with the United States (US) having undergone QE for years, Japan having recently jumped in with both feet, China having its own version – and many other countries doing much the same – what is going on?

At the moment, every county would like to devalue its currency. A lower currency means cheaper exports and more expensive imports – so a country gets the balance sheet in order and devalues their debt! But everyone can’t devalue. It is a race to the bottom.

It is, of course, the same reason why our Central Bank – the RBA – wants a lower currency. So far it has relied on talk (or jaw-boning) but it might act in some way. However, our economy has done so much better than most over the last seven or eight years, we are less reliant on these quick fixes that may or may not work.

Asset Classes

Australian Equities

January was a bumpy month, but it finished strongly – up +3.3% on the month. Stocks reliant on oil and iron prices were hit hard but some stocks reached all-time highs – such as CBA. We see the ASX 200 reaching 5,850 by the end of 2015 with a possible high of 6,200 during the year. The index currently stands at 5,588.

We have our index modestly overpriced by +1.2% in the short-run but our long-run view is that we are about 5% underpriced.

Trading is usually light in January because of the summer holiday season. As a result, volatility can often be elevated and it was. But volume came in big and strong in the last week reinforcing the market strength.

The fall in the $A is thought to benefit many exporting companies. Lower oil prices could help companies outside of the resources sector. But, at this point, our broker-based forecasts point to an ‘average’ year of about 6% capital gains plus 5% dividends and maybe 1.5% franking credits. The total expected return is strong but the headline number for the ASX 200 might not please as much as some would like.

The keys will be revealed in the February reporting season as companies map out their expected futures. Since it takes some time for currency and commodity price effects to ‘pass through’, any real benefits may not become obvious until the August reporting season.

Telstra has been a stand-out performer. Its dividend yield has fallen below 5% but there has been much commentary that Telstra is also becoming a growth stock – based on new technologies and a highly skilled management team. Interestingly, the fall in the BHP stock price is almost lifting it into a yield play with an expected dividend of 4.4%!

Foreign Equities

Wall Street had a poor month with the S&P 500 falling 3.1% while the London FTSE climbed +2.8% in line with the ASX 200. The German DAX rocketed up by +9.1%. The story that played out was heavily influenced by the ECB decision to start stimulus.

Reporting season in the US is not going as well as many had expected or hoped for. Many say it is not the strength of the greenback but a failure of companies to grow their businesses that caused the fall in equities.

Bonds

With the ECB starting its 1.1 trillion euro QE programme in March, bond yields in many countries are particularly low. The US 10 year Treasury Note is yielding about 1.7%.

Our 10 year government bond yield is just over 2.5% and above those of Spain and Italy. It was only a few years ago that the so-called ‘PIGS’ countries, that include Spain and Italy, had yields of around three times more than now.

Interest Rates

The volume of chatter on whether the RBA will cut rates at their February 3rd meeting was increasing until the inflation data came out at the end of January. ‘Headline’ inflation did come in low for the quarter at +0.2% but that was heavily influenced by oil prices.

The RBA’s preferred ‘underlying’ inflation read that trims out some items like oil, came in at +0.7% – an unexpectedly high read.

But on January 28th, a journalist predicted a cut the week after and that had a major impact on market expectations. Using market pricing, the chance of a cut went from about 40% to about 65% in one day!

Given the conservative nature of the RBA, we think it seems unlikely it will move without warning – but, of course, no one can ever completely rule out a cut or a hike. Moreover, the labour market looks to be improving without a cut.

We believe it is quite possible that rates will be on hold all year but a 0.25% change either way would not greatly affect most Australians. Our call remains that the next move could be up – but in 2016.

The statement from the Fed pushed out market expectations for a hike in the US from June to around September. Again, we think no change this year is the more likely outcome. If the US does hike, it would probably only make a small increase to say 0.25% or 0.5% and leave that rate on hold for quite some time. Having a 0% – 0.25% rate isn’t a good look for the biggest economy in the world.

The main reason why we are not expecting a hike any time soon is that the US did raise rates too soon in 1938 sending the economy back into recession. The US economy is strong but not massively so.

Other Assets

Iron ore prices continue to be depressed and volatile. Recent data shows that Australia gained a big market share in ore against countries other than Brazil for sea-born imports into China. Since this was apparently a desired outcome, further falls in price from increasing supply might slow down.

Oil prices (Brent) fell another -3.2% in January but it would have been much worse had they not risen +12.5% in the last week! WTI oil was down 9.7% on the month. OPEC is predicting a rebound in prices in 2016. Gold prices took a turn for the better in January climbing +7.3% on the month.

Regional Analysis

Australia

Taken out of context, our recent, strong labour market data and moderately high inflation reported in January would be what one might expect from a robust economy. But it doesn’t feel like that, does it? As the squabbling continues in Cabinet, it looks more like Australians are weighed down from a lack of leadership rather than economic reality.

After the so-called labour market data issue in mid-2014, we now have an unemployment rate that has improved in steps from a high of 6.3% to 6.1% for the latest read.

Employment data was also strong with +41,600 new jobs created in December, with more people joining the workforce in search of employment.

Although the RBA focuses on the underlying rate of inflation – which came in at +0.7% – in setting interest rates, the inflation read we all face is the headline rate of +0.2%. With another fall in oil prices that came in since the inflation rate was calculated, consumers are in for more good times at the bowser – for now.

China

China’s Purchasing Managers’ Index (PMI) for manufacturing came in on the 1st February at 49.8, down from the previous month which was 50.1. China exports and imports both beat expectations.

Importantly, Premier Li gave an address at the Davos World Economic Forum assuring us that China will not have a hard landing. The PMI and trade data are consistent with Li’s view.

Imports of iron ore climbed as a market share from Australia, but took a nose dive from the rest of the world (ex Australia and Brazil). The BHP-RIO-Vale ‘squeeze out the expensive producers’ policy has worked by increasing supply to force down price.

U.S.A.

The US had another strong month with employment data. There were +252,000 new jobs added and unemployment fell to 5.6% but wage growth was again negative.

The US also had their best read on consumer confidence in 7 years. Not all data are great but this isn’t a country that is falling over. GDP growth did miss estimates at +2.6% (annualised) for Q4 compared to the revised +5.0% for Q3. However, growth figures go through two revisions before the next number drops and recently those revisions have largely been up. But Wall Street fell sharply on the news.

Europe

Mario Draghi, the ECB president, famously said he ‘would do what it takes’ a couple of years ago. At last he delivered – and in spades. Money printing does not solve real world problems but it does buy time. His plan goes at least until September 2016. The heat is off.

Spain just recorded its 6th quarter of strong economic growth and it is now at levels not seen since 2007!

The problem with Greece voting in a left wing government that is against ‘austerity’ is not what will happen in Greece but what might happen in related countries’ elections in the near future. Is Spain ahead of the curve?

Of course no one likes austerity – and nobody should vote for it (at least willingly) – but when you have maxed out your credit card somebody has to take the loss – the borrower or the lender. At least the SYRIZA party seems to be a reasonable group of left wing people who needed another party to form government. Problem contained!

But the big danger is, Europe has nothing left in the bag if QE doesn’t work to buy enough time. With 12 – 18 months breathing space, investors have time, but time can run out.

Rest of World

The problems in the Middle East that are spilling over into the rest of the world are not going away any time soon. But the possible actions and the consequences are not the stuff for economists. We choose not to comment.

Japan did raise its GDP growth forecast to over 2%, which is not that bad. Canada is joining Russia, Venezuela and Nigeria as those countries are suffering from low oil prices.

In December, Russia hiked its key interest rate from 10.5% to 17% in one go. A month later it dropped that same rate down to 15%. The rouble is in trouble. There seems to be no easy fix for Russia with oil prices and sanctions front of stage.

The best part of the Davos ‘World Economic Forum’ that just concluded was an OPEC chief – and OPEC has controlled oil prices since 1973 – stating that oil prices will stay around current levels for 12 months and then rebound. If he doesn’t know when this will happen, who does? So why didn’t that presentation get more airplay?

*Ron Bewley(PhD,FASSA)– Director, Woodhall Investment Research

Important information

This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Wealth Management.

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Box forecasts of the ASX 200 as at May 2015 but with updated index data

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