Economic Update

Economic Update April 2017

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Global conditions continue to improve

– The “Fed” hikes rates but markets liked it

– China continues to impress

– The United Kingdom (UK) manages Brexit well

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

March could have gone either way. We were waiting for: a big rates decision by the US Federal Reserve (“Fed”), Trump’s first bill through Congress on Obamacare; the UK actioning of “Brexit”; and the usual plethora of statistics.

March turned out much better than most expected – particularly for the Australian stock market. Janet Yellen, the Fed chair, must take most of the credit. She played the markets beautifully by talking up – well before the meeting – the number of rate hikes for 2017 and the renewed strength of the economy under Trump.

The market locked in an almost certain March hike. The market had already priced in the hike so that wasn’t taken as a negative signal when she pulled the trigger. And Yellen said at the press conference the hike showed the economy had sufficient strength – but she hosed down notions of more than the three hikes the Fed had flagged after last December’s meeting.

The net result was that markets were very happy because all the recent talk of four or more hikes had gone away. It felt like a rate cut! The United States (US) jobs data were very strong in March and inflation was just under the target rate. A great economic mix!

The Republican Party embarrassed itself by not agreeing on the changes to Obamacare (Affordable Health Care Act). There is a new faction of about 30 Republicans – including the Tea Party members from the Sarah Palin days – that have extreme right-wing views. In short, the so-called ‘Freedom Caucus’ simply disrupted.

Trump handled the defeat well. He just moved on to the next bill which is on tax reform. In some sense that has accelerated the short-term economic plan – and markets liked that too.

Is it not surprising, therefore, that the US recorded its highest consumer confidence reading in 16 years – and it was much, much stronger than the month before. The media are less than kind to Trump but the population obviously loves what he is doing.

China also impressed with a very good manufacturing number, reasonable retail sales, and a target of 6.5% economic growth for 2017. On top of that they recorded the strongest producer price inflation in nine years. That sort of inflation is very good because it measures how much businesses are earning.

The UK has now actioned ‘Article 50’ which means the Brexit must be complete by March 2019. The UK economy jogs along at a brisk pace against the predictions of the many who thought it ‘would mark the end’ for Britain.

Sydney house prices posted another strong quarter making for a very rapid rise since late 2013. However, if we go back a decade further, Sydney house prices were flat or down when compared to the CPI! At one point, the market was down nearly 15% against the CPI from late 2003. The market has just played catch-up.

It is a fact that average house prices usually go through extended periods of stagnation followed by a handful of years of rapid growth. From 2003 to today, Sydney prices have only averaged +2.5% p.a. faster than the CPI. Yes – that makes it harder for people to get into the market. But it is not the stuff of bubbles and property crashes.

In our opinion, the banks are safe from a housing crash so the ASX 200 is safe and the RBA has room to cut rates to help the sagging labour market. So why don’t they? The big banks are starting to raise rates on their own!

One should never rule out markets being side-swiped by some unpredictable event. But conditions seem very stable for the medium term. Market volatility has been unusually low through March.

Asset Classes

Australian Equities

The ASX 200 had a wonderful March gaining around 3.3% on the month including dividends. The ASX easily outperformed Wall Street and London. As such it was playing catch up.

We noted that, towards the end of the month, the ASX had strong days when the lead-in from overseas was weak. The market breached 5,900 for a few minutes on the last day of March. Our January 1 forecast for an end-of-year value of 6,000 is very much on track.

Most sectors performed well in March. The broader index was brought down by Materials, Property and Telcos.

Foreign Equities

Wall Street was flat over March. We take this behaviour as a sign of strength since Wall Street had run so hard since the November 8th election. Strong rallies often end in corrections of 5% or more. So far Wall Street has avoided a correction in this rally.

Indeed, market volatility and the VIX ‘fear’ index have been particularly low in March. We interpret these statistics as pointing to the market simply taking a ‘breather’ rather than marking the end of the ‘Trump rally’.

Bonds and Interest Rates

The market appears to be pricing in one, or possibly two more hikes by the Fed this year. We always doubted the Trump effect bringing actual economic stimulus before 2018 – although we believe it will come. It just takes time to put new policies into action.

The ECB kept rates on hold in March, as did our RBA. That has not stopped some of our banks raising home loan rates for both owner-occupiers and investors alike.

Other Assets

Iron ore prices fell from an unexpected high in February but market commentators are generally confident about prices remaining solid for the rest of the year. Oil prices also slipped but then stabilised.

The Australian dollar was flat over March but moved in a two cents range.

Regional Analysis

Australia

The unemployment rate jumped up to 5.9% for February but retail sales came in at a respectable +0.4% for the month. We see no government or RBA action on the horizon to improve the situation.

Labor had a resounding victory in the WA elections and the government slipped further in the polls. However, the swings in popularity are not coming from better economic policies to promote growth but negativity about the incumbents’ policies.

China

China really has solidified its position as a strong economy. Some doubted its strategy a year or so ago but pessimists are relatively few and far between these days. It was particularly pleasing that its producer-price inflation was so strong.

Of course there are always political risks when the China economy is being analysed. In particular, it is not clear what Trump will try and enact and recent dealings between China and Australia were slightly destabilising.

U.S.A

The jobs data were again strong with the unemployment rate coming in at 4.7% which some Fed members consider is lower than full employment!

The main risks associated with the USA are related to Trump’s ability to get his bills through Congress. That he has moved across the aisle in an attempt to woo Democrats is essential as long as he cannot rely on his ‘Freedom Caucus’ to vote with the rest of the Republican Party.

That Trump is moving on to tax reform next is important as there is likely to be more agreement across factions on that front. Experts on US TV have put August down as a likely time for putting a tax bill before Congress. However, given the backdrop, the timing of the bill is inherently uncertain.

Europe

The Dutch decided not to vote in a party that favoured leaving the EU. On that same vein, France’s presidential election seems likely to favour the status quo.

Donald Tusk was re-elected as EU Commission president. And the ECB chair, Mario Draghi, has spoken on not needing to loosen monetary policy any further. Indeed, he spoke in terms of one day tightening!

Rest of the World

North Korea continues to be a major worry for us all. Japan wants to up its missile capabilities to counter the North Korea build up.

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

Economic Update March 2017

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

– Trump rally continues on Wall Street. But are equities over-valued?

– China is back in style

– Australian economy struggles

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture The Dow Jones just completed its longest run of consecutive daily gains in about 30 years. But is that good news? Some fear a correction, but there are always some in that camp.

Robert Shiller was awarded the 2013 Nobel Prize for his work on irrational exuberance, or mispricing, in markets – amongst other contributions. So it comes with more force when Shiller wonders whether it is time to take some profits as he voiced in late February.

But Jeremy Siegel, another Ivy League professor, disagrees with Shiller. Siegel claims that Shiller’s pricing index has been elevated for twenty years. He goes on to argue that accounting standards have tightened over the years to the extent that reported earnings are now less than they once would have been for the same underlying conditions – hence the elevated data for 20 years.

So, when we calculate P/E ratios (share price divided by earnings), the ‘E’ for earnings in the denominator is smaller than they would otherwise have been – hence the P/E ratio is bigger. Siegel claims we can’t compare these ratios over a long period of time. He is not worried about current over-pricing.

While mispricing signals may not make for a clear-cut decision, few would argue that the markets have priced in Trump ‘doing something big’. If Trump fails to deliver, markets may correct. If he delivers, markets could march on and on.

Trump is giving almost daily updates of his plans. We are not waiting for one big announcement – rather a body of statements that point to new world order. The reaction to an accumulation of smaller statements is better for market conditions than one big announcement that could make the market go either way – and sharply.

The US economy is looking a lot stronger. But is it strong enough for a rate hike by the US Federal Reserve (the Fed)? The latest growth figure is only +1.9%. This is the slowest recovery (from the Global Recession) since the Great Depression!

The Fed is certainly warming up for one but they are talking in terms of reacting to Trumps tax cuts, infrastructure spends and simplification of regulation. None of these policies have yet been enacted so March seems off the table. Maybe even June is too soon.

However, the market is starting to price in a March hike because of recent Fed chatter. Is this the Fed trying to soften us up for future hikes – or are they for real?

It seems China is set to stimulate again if, indeed it hasn’t already started. Iron ore prices charged higher in February on the back of China’s strength. And that has translated into bigger company profits just reported in Australia.

The China manufacturing number was comfortably above the benchmark for optimism at the start of February and rose during the month.

The problems with our economy are continuing to accumulate. Retail Sales fell by 0.1%; we lost a large number of full-time jobs; and we got the lowest wage growth on record! Economic growth just came in at +1.1% for the quarter – but that is partly on the back of stronger resources.

But the Reserve Bank of Australia seems bent on not cutting rates because of what it might do to Sydney house prices. The longer they wait, the more they will have to cut later.

Australia continues to operate in an economic policy vacuum. The delivery of the May budget seems so far away, and so unlikely to deliver what we need.

Asset Classes

Australian Equities The ASX 200 posted a solid gain of +1.6% in February – but lagged behind Wall Street’s +3.7%. After strong growth in resource stocks on the ASX before February, some of that growth was given back last month.

However, many sectors posted gains of 4%, 5% and 6% in February – including dividends. The swings between which sectors are performing better continue to be large and frequent making funds management that much harder.

The company reporting season for the ASX 200 was largely positive but the few companies that under-delivered were punished harshly. We expect the ASX 200 to make gains in 2017 but not as strong as we see the gains on Wall Street.

Foreign Equities Wall Street backed up a good January with a very strong February. Indeed, all major markets posted good returns for the month.

The Dow posted 12 consecutive days of gains in late February. This run is the longest since 1987! One more day and it would have taken the record back to 1970 and 1929! However many of these gains were small. Indeed, Bloomberg reports the 40-day average of daily movements is at the 1929 low. It is better to watch steady growth rather than bouts of high volatility.

Bonds and Interest Rates US bond rates have maintained their elevated status since Trump was elected. The Fed is talking up rates but we remember the last two years when the Fed only produced one rate hike per year when they had promised more.

The Fed’s current plan is for three hikes in 2017 but the market is pricing in less. If the Fed waits too long it will be hard to rein in inflation, but at this point inflation is not a problem.

The Bank of England kept rates on hold but pushed up its economic growth forecasts. We also kept rates on hold – as did New Zealand.

Other Assets Iron ore prices were up 11% for the month while oil prices were flat. China optimism seems to be the catalyst for the ore price movements while bringing new rigs back into production took the heat out of oil prices.

Gold prices were up +4% and the copper price was down 1%. The Australian dollar was up just over one US cent.

Regional Analysis

Australia

There are increasingly weak signals for the Australian economy but they are being masked by a mini boom in China.

When we strip away the China effect we see negative growth in retail sales, wages and full-time jobs. The policy response seems to be contemplating small cuts in corporate taxes spread out over 10 years and only for small companies.

Both sides of politics are actively considering tax hikes across the likes of superannuation, capital gains and Medibank levies. None of these changes will support our economy.

The GDP growth data for Q4 2016 came in strongly positive at +1.1% taking two consecutive quarters of negative growth off the table. But this jump in growth might not be sustainable. The resources sector played a big role in the last few months with strong volumes and unexpected high commodity prices.

China

China’s Purchasing Managers’ Index (PMI) came in at 51.3 against an expectation of 51.2 at the start of February. A month later and the PMI has risen to 51.6 against an expectation of 51.1 A number above 50 demonstrates optimism.

China’s inflation was up sharply: +6.9% for producers and +2.5% for consumers. Low and negative inflation has been a problem for China so these strong numbers are a welcome relief. Of course we do not want inflation to rise too strongly.

It is widely considered case that China is on a course to further stimulate its economy – and that will benefit Australia’s resources sector.

U.S.A.

The jobs data were the strongest for four months and unemployment, at 4.8%, is around the Fed’s estimate of full-employment.

US Retail Sales were quite impressive at +0.4% for the month and CPI inflation was good. But the Q4 GDP growth figure stayed at +1.9% after the first revision.

We are yet to get a clear view of what Trump is planning but it seems deconstructing Obamacare is to be first followed by tax cuts. We still think it will be close to 2018 before we see policy translating into much stronger US growth.

Europe

The latest news from France is that the Presidential election is less likely to cause the upset that would impinge on the European Union’s strength. But we should not forget Brexit and Trump!

Britain has passed the necessary legislation in the House of Commons to start the Brexit process. So far, there have been none of the negative economic implications so many predicted.

Rest of the World

North Korea remains an issue with its nuclear programme. While many potential problems lurk around the world this is, perhaps, the threat that is the most dangerous.

Julie Bishop is recalling the entire set of ambassadors from over 100 locations to Canberra for a two-day conference. Given the rapidly evolving foreign diplomacy issues – including Trump, South China Seas, and Europe – she wants to refocus our energies and ensure policy is aligned with our needs.

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

Economic Update February 2017

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

– Trump has hit the ground running

– Australian economy is struggling

– China may again save us!

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

A fascinating economic experiment is taking place. The only major economy that can reasonably be described as performing strongly is China. The US, UK and a few others are growing modestly. We are certainly in the ‘could do better’ basket for our report card.

After nine years of being stuck in a groove, it didn’t look likely that western economies were going to spring into action anytime soon. But then along came Trump – a non-politician. His promise in simplistic terms was to do something different. He has certainly started off the way he said he would – signing executive order after executive order.

The markets have certainly been inspired in the last three months by Trump’s confidence. Wall Street has repeatedly hit new all-time highs. Even the ASX 200 has witnessed strong growth since the presidential election.

Plenty of people have jobs here and in the US. It’s just that they’re not as well-paying jobs as they used to have – and many more are now part-time. As a result, there is little demand pressure to raise wages or consumer prices.

What are we missing? The business confidence to invest! There are two major factors that determine investment decisions: the potential demand for the output; and the cost of the investments.

There have been no flags waving for potential demand for nine years. So Trump aims to cut corporate taxes to make investing cheaper, and kick start potential demand by flagging big infrastructure projects jointly funded by the public and private sectors. The plan seems to have legs but nothing is certain in this world.

The US economy is starting from a low GDP economic growth number of +1.9%. Not bad but it is the slowest growth since 2011. That’s actually good because it is easier for the next few numbers to show an improvement which, rightly or wrongly, might be attributed to Trump. And if that scenario eventuates, the snowball could gain momentum on business confidence.

The downside is that the snowball could get out of control in a year or two and lead to uncomfortable levels of inflation. The US Federal Reserve must become fleet of foot to raise rates at the right time. Too soon and the impetus might fizzle; too late and they create a big problem in trying to control an overheated economy.

So why is the media and public backlash to Trump so great? Could it be that there are many vocal sore losers than normal? In every election, the opposition person or party also get a lot of votes – just not quite as many as the winner. In Trump’s case, he appealed to the less well-off groups. The educated and/or left leaning media and other disenchanted groups have better access to platforms for debate.

The blue collar workers in the US never had much of a voice – until they put up with an extended period of being worse off – and Trump is their knight in shining armour.

There is a very reasonable chance that the US economy will start to grow strongly again and take the world with it. The UK just posted the best current growth figure of 2.0% in western economies.

Australia should benefit from a strong China and US. Commodity prices might be supported, or even grow, but we can’t live off resources forever. At some point we have to restructure our economy. We need tax cuts and infrastructure programmes like Trump. All we seem to have on offer from either side of politics are promises of tax hikes. Of course, in the short run, the deficit would increase but from good (infrastructure) debt – not bad (recurrent) debt.

Asset Classes

Australian Equities

The ASX 200 looked set to post a modest gain for January but it faltered in the last couple of days of January. But after the previous three months, a breather is perhaps welcome.

The resources sectors, Energy and Materials saved the day for us. Iron ore and copper prices made good gains on optimism about China. Australian resources companies are widely tipped to perform well in the upcoming February reporting season.

In the month before reporting – known as the ‘confession season’ – a number of companies experienced sharp prices movements – up or down – on the slightest of unexpected news.

Companies like Bellamy and Brambles lost more than 10% in one day on their share prices. Perhaps less well publicised were the big gains – like CSL, and Resmed.

The forward guidance given by companies in reporting season will not really have had time to have benefited from assessing any Trump-led impact. We’ll have to wait for that.

Australian banks did really well in Q4 of 2016 but stumbled in January as investors realised that prices had run too hard. Unlike in the US, there is not a lot of change in the wings to help this sector. But dividends look largely safe and growth may come later.

Foreign Equities

Wall Street enjoyed a good January. The Dow Jones index broke through 20,000 and stuck for a couple of days. All four major indexes hit all-time highs on the same day!

The London FTSE staged a massive rally of consecutive daily gains. Brexit does not seem to be worrying UK investors.

We continue to think overseas markets will have a better 2017 than the ASX 200. Nevertheless, diversification across domestic and international markets is still wise

Bonds and Interest Rates

There should be little doubt that global rates are on the way up. The question is – how quickly? We think less so than many commentators because we think it will take time to put expansionary plans into action. And, of course at home, we still need cuts.

Macquarie Group reaffirmed its call for two rate cuts at home on 2017 but the consensus is for rates on hold until 2018.

Other Assets

Certain commodity prices (like iron ore and copper) continued to strengthen in January and our dollar (against the US) appreciated. Oil prices were down slightly but are well up on this time a year ago.

Regional Analysis

Australia

Our employment data released in January did nothing to dispel the feeling that our economy continues to struggle. Full-time employment was down -34,000 jobs on the year when maybe +100,000 jobs were needed to allow for population increases.

The Bureau of Statistics pointed out that the annual change in total employment (including part-timers) was less than half of the average over the last twenty years.

Our inflation read missed expectations on the downside. Perhaps the only bright spot was data on resources trade which might save our bacon for the next GDP read.

China

China continues to post solid economic data. China even raised interest rates on 6 and 12 month loans to slow down its economy!

The latest Retail Sales figure was +1.9%, which was ahead of expectations, and economic growth was on target at +6.7%. The IMF upgraded its China GDP forecasts to +6.5% from the +6.2% forecast published last October.

U.S.A.

No one can be sure what Trump is really planning but the ‘old political system’ certainly was ‘broke’. Some of his executive actions seem over the top but, perhaps, he needs everyone to sit and take notice. The world needs a new dawn and nobody before has solved the problem.

All of the early short-term indicators point to an energised US economy. True – there are many unhappy folk – but Trump has surrounded himself with people who were mega-successful in their own rights – and not just a bunch of people getting the nod for services rendered.

Europe

The doomsayers again got caught out. The UK is not a disaster in a Brexit world. Indeed its economic growth in Q4 2016 was better than any other country in the Western World.

There were thoughts by some that a Brexit mentality would sweep Europe and cause chaos. That didn’t happen either.

Rest of the World

Trump’s temporary ban on travel from certain Middle Eastern and African countries to the USA causes angst among many – but the main ban is only scheduled to last for 90 days.

North Korea is still huffing and puffing over its nuclear programme. That’s too difficult a problem to assess in an economic update.

Economic Update January 2017

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Will the Fed trump Donald?

– The United States (US) Federal Reserve doesn’t seem to be learning

– Aussies save AAA rating

– Our economic agenda at home is pointing the wrong way

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

Perhaps the biggest problem facing global markets, as we start 2017, is that people are possibly too optimistic about the ‘Trump effect’. The Federal Reserve – the US Central Bank – started 2015 asking us to be patient about expecting rate hikes. We had to wait until December of 2015 to get the first hike in nine years – but they then pencilled in four hikes for 2016. But they only gave us one in December 2016.

As we start 2017, the Fed has just upped the ante for the number of 2017 hikes from two to three – and then three for each of 2018 and 2019.

Much of the Fed’s (and private) optimism is about Trump cutting taxes and boosting growth through infrastructure spending, etc. He has pledged that, but there isn’t yet even a ‘back-of-the-envelope’ policy. There isn’t even yet a Cabinet sworn in. There is nothing but optimism! The US Consumer Confidence index hit a 13-year high in December!

We think Trump will deliver a much better future than the US and the rest of the world now enjoy – but such a change in attitudes and behaviour takes time. Markets anticipate growth. Perhaps they, and the Fed, are getting a little bit ahead of themselves.

If the Fed starts hiking rates in anticipation of Trump – and Trump takes a little longer to deliver – markets may not like it. The Fed should be patient as they implored us to be at the start of 2015.

We will learn a lot in the next two months. There will be two more US labour market data reports and a Fed statement. Trump will be sworn in on January 20th. But the next two months are even more critical for Australia.

Our labour force data was dismal in 2016 and the so-called MYEFO (budget update) in December did nothing to inspire. But we held on to our AAA credit rating.

Our Reserve Bank needs to act quickly but they are on holiday until February – shades of Nero playing the fiddle while Rome burnt. They don’t seem to have the mindset to do anything just yet.

But is our economy in desperate straits? Part-time jobs are replacing full-time and the last economic growth figure was 0.5%. In all probability, that 0.5% was a blip but the average over the last two quarters was as close to zero as you can get without getting there. Desperate, no; weak, yes!

The problem is that the Opposition for close to a decade has acted as though it was in power and it blocks not just bills – but the construction of good ideas – with rhetoric. We need a ‘Trump’ in Australia to shake things up. We have had it so good for so long, the so-called leaders are living off their track records like ageing boxers going into the winter of their careers.

As long as China and the rest of the world do well – as we think they will – we won’t likely do badly. But to do well at home requires a new approach. Our market posted double digit returns (including dividends) in 2017 but we are still well below our 2015 high – let alone our all-time high. Wall Street – and other markets – keep posting new all-time highs. Our investments have delivered a lot more than Canberra!

But one thing to reflect on as we make our personal New Year’s resolutions is that we, as a country, are not keeping up with the new world order. The global mantra has become tax cuts and infrastructure spending to get the world economy moving again. But at home we are imposing tax hikes on super and balancing budgets at all costs. New thinking – or, at least, energy – is needed and soon.

Asset Classes

Australian Equities The ASX 200 delivered capital gains in December of +4.1% to add to the +2.3% of November in a very nice ‘Santa rally’. Over the year of 2016, the ASX 200 produced a total return (including re-invested dividends) of +11.8% but that figure masks the sharp swings in sectoral returns over the year. Materials delivered a massive total return of +42.9% while Telecommunications returned 7.1%. That is, Telcos had a capital loss which wiped out not only all of the dividends, but a further 7.1% to boot.

Stocks in the high-yield sectors lost heavily to the other sectors over 2016 by a hefty 10.7%. But over the last quarter these aggregate sectors swung in the opposite direction with high-yield sectors winning by +7.5% in only three months.

Our market has not been kind to the set-and-forget type of investor. In fact, a keen eye was needed to pick up new trends and the ends of old ones.

On top of that, there was an unusually large number of sharp sell-offs in only one day from stocks in the top 200! Indeed, 25 different stocks fell by 15% or more in a single day in a year where the broader index was up strongly.

Moderately-sized companies had their share prices pummelled on bad news or even just so-so news. On top of that, there was a knock-on effect to similar companies even though they did not report any problems.

Perhaps more than normal, do-it-yourself stock pickers might have lagged behind the index in 2016 – and they might be facing a similar experience in 2017.

We think the market is fairly priced and returns in 2017 might be around the same order of magnitude as those we got in 2016.

Foreign Equities

While our market languished at times in 2016, all four major Wall Street indexes made new highs near the end of 2016. Indeed, the Dow nearly broke through 20,000 in the last week of December.

For the year, the ASX 200 gained +7.0% (excluding dividends) while the S&P 500 recorded +9.5%. Our higher dividend payouts account for most of the difference. The London FTSE gained +14.4% despite having had ‘Brexit wobbles’ mid-year. The German DAX posted +6.9% but the Tokyo Nikkei was flat at +0.4%.

The Shanghai Composite went backwards with 12.3% but it might be recalled much of the angst in January was due to that market not coping with new measures to control daily market volatility.

Our modelling has the S&P facing a much brighter future than the ASX 200.

Bonds and Interest Rates

It took twelve months of waiting with baited breath but the Fed finally hiked its main rate by one quarter of one per cent in December. Our central bank did not change its rate.

After a decade of gloom surrounding rates, there is now a real push that world rates will rise on the back of economic growth promises. The trouble is, at home, we kept our rate too high for too long and we are now in the cross-fire.

Other Assets

Commodity prices are, in general, so much higher than most were predicting in the early-2016 slump. Our dollar moved around a little. Gold has been on the way down. OPEC agreed to oil supply restrictions, but will they work? They started on January 1st 2017 so we will soon know if they are working.

At this point in time our best forecast is that commodity prices are likely to be stable and possibly rise a little – but not too much. If oil prices go up much further US shale oil producers will open the floodgates. Since China does not seem likely to pump prime economic stimulus in 2017, its growth increases are more likely to be gentle with commodity price increases to match.

Regional Analysis

Australia

Our economic growth for quarter three 2016, came in at 0.5% which was much worse than the worst analyst expectations. Many suggested it was largely a blip and that the next number will be positive. While that might be the case, our labour force data is not stepping up to the plate.

We just recorded the eleventh consecutive month of falls in full-time employment using the official trend data. Part-time jobs have increased but they amount to about half of the hours worked per person on average.

Westpac’s consumer confidence index slumped by a big 3.9% to a level that now shows there are more pessimists than optimists. NAB’s business confidence index also fell and to levels not seen since April 2015 – but the NAB’s business conditions index held.

While the world is now starting to talk about ‘fiscal expansion’, or government spending to promote economic growth, our government is still locked in an austerity mindset. And the Reserve Bank is doing nothing on monetary policy. So we are totally at the mercy of world growth to support commodity prices and our exports.

China

China recorded a two year high in its monthly manufacturing index on December 1st. It then backed up with double digit growth in retail sales and strong industrial output mid-month.

China’s inflation jumped up +1.3% after a series of negative reads. That is very encouraging.

U.S.A.

The US is really getting behind the Trump bandwagon. He has toned down some of his outlandish rhetoric and policies. People also seem to be starting to forget they don’t like him. What they do seem to like is a person with a policy to improve things and just get things done.

Consumer confidence just hit a 13-year high in December! Their labour force data came in at +178,000 new jobs for the month and that was very close to the monthly average for 2016. It was a good result but nowhere near strong enough for the Fed to act to cool things down.

There is a danger that, in a few months, people might realise that they jumped the gun on growth expectations and a small bout of volatility could follow. But the US economy is looking really great for the year after (2018) and beyond!

Europe

The German economy is expected to finish 2016 strongly. Spain is even considering getting rid of the siesta in return for an earlier close to the working day to improve productivity. Perhaps they have installed air conditioning!

Although, sadly, terrorist attacks keep occurring across Europe, the rest of the economy is stabilising.

Christine Lagarde – the then French Finance Minister and now Managing Director of the IMF – was found guilty of negligence with regard to $400m of fraud perpetrated on her watch. However, she was not penalised because the court determined that ‘she was distracted by the GFC’ at the time. Some people get all of the breaks. And what happened to the old excuse, ‘the dog ate my homework’?

Rest of the World

Japan’s central bank made a very optimistic statement about its economy but that country is plagued by falling population levels. Prime Minister Abe made a good fist of trying to pump prime the economy, but sadly it did not do any better to stop – or slow-down – the slide. It just recorded the ninth successive month of negative inflation reads.

Economic Update December 2016

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

It’s all about Trump…

– Trump-fuelled global growth

– Aussie jobs not that great

– Oil prices move markets

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

Love him or hate him, everyone needs to know what Donald Trump means for their investments. He will soon be President of the United States of America.

When we bypass his views on various non-economic issues we see a man who is prepared to stand up for real economic change and growth. Trump will not be more of the same. He will boost United States (US) growth through quality infrastructure spending – and that will flow through to global growth.

Governments around the world have become more and more indebted since 2008 in an attempt to prevent economic collapse and then promote some economic growth. Some say these policies didn’t work. But you would need a time machine to take us back to 2008 and change the policies to make a definitive assessment. Since we can’t do that, we must rely on the fact that economies did a lot better than many economists were predicting in 2008 and 2009.

A couple of Nobel Laureates, and a lot more, were then predicting a recession as deep – or deeper – than the Great Depression of the 1930s. What we got wasn’t great but it certainly wasn’t anywhere near that bad. Australia didn’t experience any sort of recession.

But most analysts now agree that such monetary policy has run its course. The world is not in dire straits – not even slightly. But a common problem in developed economies is that measured unemployment is low only because people on average are working fewer hours, and in lower paying jobs.

No one has stood up to the plate and presented a solution to the problem of underemployment – until Trump came along! He plans – amongst other things – to renew old US infrastructure and build new projects. Not only will the spending flow through the whole economy, it will provide jobs to the sort of people who lost them as manufacturing declined in the west.

But there’s more! Better infrastructure means increased productivity as, for example, transport times fall. And then there is the positive impact of a rapidly growing US economy on the world! It is a gift that keeps on giving.

China reported good economic data during November and before. If they have a bigger market for their exports, a mini resources boom ‘Mark II’ might flow – which is arguably why iron ore prices doubled over 2016.

On the negative side, Trump is also talking about trade restrictions. But he is not a fool and so he may only tinker at the edges of this policy to placate his electorate. The US needs trade just as do we (and everybody else).

Our employment data really disappointed again. It has now been 10 consecutive months that we have experienced falls in full-time employment. We need infrastructure spending too, but our governmental system isn’t working well enough to do a Trump here. It doesn’t matter if one looks at the Labor governments of Rudd and Gillard, or the Coalition governments of Abbott and Turnbull, all we see is squabbling with few decent policies being enacted.

Discussions about oil supply restrictions have seemingly moved markets while alternative views got aired. But part of the oil price increases is not OPEC related. The almost euphoria over ‘Trumponomics’ has fuelled speculation about world growth and the commodities the ‘old normal’ will then need.

Since it is a couple of months before Trump sits in the Oval Office, and a lot longer before he gets any bills through Congress, we are all jumping the gun a little. 2017 economies should be much like we thought before Trump. But markets should lead the 2018 expected economic growth and beyond. At last things are starting to take shape, put the champagne on ice!

Asset Classes

Australian Equities

The ASX 200 dipped down to about 5,050 during the election counting (on Wednesday the 9th) but rallied to 5,500 after a few days. Volatility is quite reasonable again.

The index was up +2.3% on the month led by Energy (+3.7%), Materials (+2.3%) and Financials (+4.3%).

We have the market priced at just under fair value, compared to having being cheap by about 6% earlier in the month.

Foreign Equities

All four Wall Street indexes hit all-time highs on the day after Thanksgiving. Before that, Wall Street suffered nine consecutive days of losses leading into the election – the worst run since December 2008 when markets were in melt-down!

Europe experienced 11 consecutive days of losses but, by and large, all markets rallied into the November close.

Market volatility has also subsided leaving investors increasingly comfortable about getting back into the market.

Bonds and Interest Rates

Bond yields rose dramatically on Trump’s victory. That means the price of the bonds fell.

The US Fed is almost certain to hike rates for the first time in a year come mid-December. While the market has a hike priced in with about a 100% chance, there is no reason for the Fed to rush, especially as Trump may not ignite the economy until 2018. We think the Fed will move slowly until stronger growth takes hold. There is an outside chance the Fed is on hold in December!

The Reserve Bank of Australia kept rates on hold at 1.5% and some are now saying the next move is up. Until our government can do something positive on infrastructure spending or the like we need cuts – yes, more than one. Analysts are divided, but after next week’s economic growth data the deal may be done.

New Zealand cut its rate to 1.75% in November while the Fed, the Bank of England, the Bank of Japan and the RBA were all on hold.

Other Assets

Regional Analysis

Australia In November, Australia reported the lowest wage growth (1.9%) since data started being collected – nearly a quarter of a century ago! That means no demand pressure. Unemployment was a very reasonable 5.6% but full-time employment continues to fall. It is now almost impossible to record a gain in full-time employment for 2016.

Our growth results are out in the first full week in December. After a strong quarter two, some are actually expecting a negative result for quarter three. Everyone seems to be expecting a weak result at best.

China

China started November with the best monthly manufacturing number in two years and well above that needed to signify expansion. Mid-month data met expectations but the mini-boom in resource stocks in Australia and elsewhere is largely due to expectations about China’s future.

U.S.A.

The US, having recovered from the shock of having Donald Trump as its next president, is awash with positivity. US inflation expectations surged on the result. And quarter three economic growth just got revised upwards to 3.2% beating analysts’ expectations.

Since both the House of Reps and the Senate are to be controlled by Republicans, Trump has a good chance of getting his policies to work. He still needs to work across the spectrum of opinions within his own ranks – they are less than united. And the US system also requires some support from the Democrats.

Europe

The UK is still struggling with the problem of how to ‘Brexit’. A number of countries are facing government elections or referenda and the ‘perverse’ results of Trump and ‘Brexit’ weigh heavy on combatants in the elections.

But UK quarter two economic growth was revised up to 0.7% from 0.6% making it about 3% pa. Not bad.

Rest of the World

Japan suffered another major earthquake nearly six years after the big one that destroyed the nuclear plant. Thankfully this one had less impact.

Japan recorded economic growth at 2.2% but inflation fell for the eighth successive month.

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

Economic Update November 2016

By Ron Bewley*. Brought to you by Infocus

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Global economic growth story strengthens!

– US, UK and EU economic growth surprise on the upside

– China growth strengthens

– Australian inflation strengthens

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big PictureLast month we reported that Australian economic growth surprised with a more than solid +3.3% for the year. This month we can add that United Kingdom (UK) growth came in above expectations at +2.3% for the year – in spite of prior concerns about the negative impact of Brexit. United States (US) growth rounded off the month with a much better than expected +2.9% while the European Union (EU) delivered a more modest, but most welcome surprise on the upside, +1.6%.

China came in again at +6.7% growth but the partial indicators of Retail Sales and Industrial Output backed-up the story. Other indicators were even stronger.

What is really important is that, at last, interlinked growth is emerging as export markets open for each other. Sadly growth in Japan is still struggling but it has been struggling for more than two decades. Japan’s main problem is a falling population. Unlike many other countries, including Australia, net migration inflows help stimulate growth.

While one should never get too excited about one good month’s data, it is the co-ordinated growth that is starting the buzz. As a result, bond yields are starting to rise and that may put a bit of a dampener on our high-yield equities.

At home, inflation also surprised. It came in at +0.7% for the quarter or +1.3% for the year. But that, on its own, is insufficient to change the Reserve Bank’s (RBA) view on what to do with interest rates.

The new inflation data means that the RBA does not have to cut rates for that reason – nor does it have to hike to control inflation. It was a ‘Goldilocks’ number.

But our employment data continues to worry us. Jobs are increasing in a trend sense – and the unemployment rate is falling. But what continues to happen is a substitution of part time work for full time. Given that the average working week for full-time workers is 39 hours and only 17 hours for a part-timer, the individuals concerned are doing it tougher – but the collective, Australia is doing better!

The US is going to provide even more of a lead than normal in the coming months. The Trump v Clinton election is not as simple as previous elections. The FBI just weighed in by reopening the emails case on Clinton. Trump continues to take flak from all sides. Rightly or wrongly on each side, such a situation spells market volatility in the short run.

In the medium to longer term, even US presidents don’t have that much power. They need the backing of Congress.

The US Fed is possibly going to hike rates by 0.25% in December. Last December, when they hiked for the first time in nearly a decade, they predicted four rate hikes for 2016 but so far there have been none. While many economists, and some Fed members, are calling for the Fed to get the process moving soon the Chair, Janet Yellen, has left the door open for more of a wait and see approach. She has stated that she wouldn’t mind if the US economy ran a little too hot for a while.

So long run economic and market prospects are building strength and the so-called ‘earnings recession’ for listed companies on Wall Street seems to have already turned the corner. Once they have a new US President sworn in, we could have a nice settled, but growing, market. Until then, we might find the road a little bumpy.

Asset Classes

Australian EquitiesThe ASX 200 looked like having its worst month since January but a great last day made it a less severe 2.2% for October! Interestingly, the index started to ignore overseas leads towards the end of October. Some of this behaviour is probably due to global bond yields rising on signs of economic strength – and a possible hike in US rates by the Fed.

It is so important – particularly in the case of Australia – to note that sectors have been performing very differently at the moment. The so-called high-yield sectors [Financials, Property, Telcos and Utilities] are well down on the year to date by 2.9% – even after dividends are taken into account. But the other seven sectors have collectively experienced strong double digit growth – at +12.5%.

Foreign EquitiesWall Street’s S&P 500 fell a little less than the ASX 200 at 1.9% for the month. On the other hand, the London FTSE posted a gain of +0.9% and the Frankfurt DAX +1.5%. But it was left to Asia for some stellar results with the Tokyo’s Nikkei up +5.9% and the Shanghai Composite gained +3.2%.

Bonds and Interest Rates

The US Fed is the big game in town until we glide into 2017. We think there will be at most three 0.25% increases in the US before 2018. That is a very shallow trajectory indeed. The Fed will not do anything to interfere with the nascent growth story.

The RBA needs to, and probably will, give us one or two cuts down to 1% in the next couple of quarters or so. The government is not getting any fiscal stimulus programmes in place so the RBA is our only hope in the short term.

Our economic situation is far from dire but we do not have an atmosphere of wanting to invest in long-term, full-time jobs’ projects. Our official interest rate is so far above all of the major Western competitors (USA, Europe, Japan, etc.) and there is no reason to keep it there.

Other Assets

Commodity prices continue to stabilise and some big ‘houses’ are even predicting continued price rises in oil. What is important for us is that the dire predictions some analysts and commentators were peddling at the start of the year have vanished.

Commodity prices are unlikely to rise far enough to stunt growth. The important thing is that they are stable and viable for continued investment in the resources sector

Regional Analysis

Australia We have lost 54,000 full-time jobs in 2016 to date. With official estimates of population growth at +1.4% there are not enough full-time jobs to go around. As it happens, 47,000 of those 54,000 job losses are for men and only 7,000 job losses for women.

It doesn’t take an Einstein to work out the social impact of replacing full-time with part-time jobs. Data is not readily at hand to work out how much the people losing jobs are being paid in part-time employment – but it seems unlikely to be a good swap.

We will never get the old manufacturing jobs back but we are very good in so many other sectors, parliament needs to assist a solution and quickly.

ChinaChina continues to pump out strong statistics on its economy. Of course some just say the numbers are fudged but there is increasing support from a number of independent sources to suggest China is even stronger than the official figures suggest!

China Retail Sales came in at +10.7% and Industrial Output at +6.1%. China’s inflation was +1.9%. This is an impressive set of numbers.

U.S.A.The US nonfarm payrolls (jobs) data have been slightly better in recent months than earlier in the year, but they are still well below the data recorded in 2014 and 2015. The US too has the problem of replacing ‘good traditional’ jobs with lower paying jobs in the services sector. It is a global problem.

The US economy is getting stronger but it is unlikely to ‘pop’ into overheated growth anytime soon – as it often used to do after a lean spell. But that is a good thing. Stability is something that helps investment planning.

EuropeThe UK has not imploded after the Brexit vote. We never thought it would. Sensible discussions are taking place about the best way to exit – and not if they should exit. It is nice to see a mature political debate.

‘Rock star’ central banker, Canadian Mark Carney, has flagged he will step down from the top job at the Bank of England. He plans to exit in June 2019 when the UK is set to exit the EU. He believes in a united Europe and so does not want to work in an economic and social environment that he does not believe in.

The ECB President, Mario Draghi, needs to come up with a new plan soon for stimulus or see the bond-buying plan end. If his form is anything to go by, it will be a slow process of coming to make a plan.

Rest of the World The conflicts in the Russia/Syria (and more) part of the world are going through major transitions. It is inappropriate in an economic report to comment on the rights and wrongs of the negotiations and struggles. But it does look like the impact on markets might start to subside soon.

OPEC seems to be trying to do something sensible about oil prices but some members – and others – are trying to get special circumstance agreements. Given that supply has been well in excess of the current agreement – for years – the impact of a new agreement is moot.

*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 Financial Advice 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

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