Economic Update

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 – October 2016

Economic Update

By Ron Brewley*. 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.

Federal Reserve dictates market moves:

– US Fed unlikely to rock the boat
– Australian economic growth shows positive signs
– China bears submit

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 

In December 2015, the United States (US) Federal Reserve (Fed) hiked rates for the first time in nearly a decade. At that time they predicted four more hikes during 2016, so far there have been none!

Some held out hope for a hike in September, but this group have been disappointed at each meeting. December this year is their last chance for 2016 they might just do it to save face but there is no legitimate reason.

After two years of solid job growth, 2016 has been a fizzer so far. New jobs are positive, but about 25% down on 2015 data. The new Fed economic growth forecasts are 2% for each of the next two years – and then 1.8% for 2019.

Central Banks raise rates to slow growth and curb inflation. US growth is at best moderate, inflation is anaemic and wage growth is on life support. We think that there will be at most three rate hikes before 2019. There is just no case for chancing the impact of more hikes than that.

If the Fed does as we think, stock markets will have another couple of good years. But what about Australia? World markets have done well while we have limped along.

Our economy posted strong growth for the second quarter of 2016. Over the year our economy grew at 3.3% and that’s better than moderate! On top of that we note a turnaround in what households have to spend after inflation and after allowing for population changes. After four bad years of growth in that indicator, the latest number was strong.

But the labour force data is still not out of the woods. The basic issue is that part-time jobs have been growing quite nicely but the full-time jobs are down on the year to date. As a result, the unemployment rate appears to be better than it is.

The Reserve Bank of Australia (RBA) kept rates on hold in September at 1.5%. With six central banks having negative rates, and the Fed rate only a bit above zero, our 1.5% is quite large by international standards.

Dr Philip Lowe took over the governor’s position at the RBA in September. There is no urgent need for a cut at home and so the new governor might not want to start his career with a cut. But we think we will get at least one more over the next few months.

September got a boost near the end of the month after what looks like OPEC might strike a deal on cutting the supply of oil which may impact oil prices. But Deutsche Bank dominated the close of the month.

There is talk that Germany might have to support its huge international bank to pay a fine to the US for GFC events. A few hedge funds have withdrawn some of their business so that caused a little volatility.

But will it turn into a big problem? That doesn’t look likely at this stage. Angela Merkel goes to the polls next year and her party suffered some big losses this year over the refugee immigration policy. She has to support the bank if need be. And a rumour has surfaced that Deutsche has cut a good deal with the US.

With the US recently publishing its best consumer confidence read in nine years, its citizens either think they know who will win the presidential election in November or they don’t care who wins.

The world economy continues to improve – albeit slowly. The doomsayers have gone into hibernation for the northern winter – the China bears are asleep.

Asset Classes

Australian Equities

The ASX 200 did end a long losing run in September but it is still up +3.9% for the current financial year to date (FY16). A lot of that gain is due to the Materials sector gaining +11%, Consumer Staples +11% and Financials +4%.

However, for the calendar year to date, the so-called ‘yield sectors’ (Financials, Property, Telcos and Utilities) have lost ground wiping out the dividends received. The other sectors have been going gangbusters.

We see plenty of opportunity for good fund managers to end FY16 on a high note however the broader index might struggle to get through 6,000.

Foreign Equities

Wall Street is off its all-time August highs, but not by much, it is largely trading sideways. The London FTSE shows no sign of struggling after the July Brexit referendum. The Shanghai Composite market is also largely trading sideways.

The world seems to be waiting for a signal for the next leg up in markets but volatility measures suggest there is no imminent downturn from known sources – and, by definition, no one can predict the unknown!

Bonds and Interest Rates 

Central bank activity, or lack thereof, held the markets’ attention again during September. It looks like low rates will continue for longer than most thought at the beginning of 2016.

There is an obvious split in the Fed decision makers. One or two say that they are already behind the curve, there is some support for no rate hikes before 2018!

The Bank of Japan (BoJ) kept rates on hold in September but pledged to do some more on stimulating its economy using less transparent means. Markets responded well to this.

None of these rate forecasts make it any easier for retirees who choose to rely on term deposits and government bonds.

Other Assets 

Oil prices jumped up after OPEC made a preliminary statement about cutting supply. The decision will be put before a formal OPEC meeting in November. Oil prices are currently sitting arround 75% above the low of 2016.

Iron ore prices seem to have stabilised at just under $60 / tonne which is about 40% up from their lows of 2016.

The VIX ‘fear’ index that measures expected volatility on Wall Street is down about 50% from the 2016 high.

In other words – as we tried to explain earlier in the year – commodity and stock markets were going through a temporary but painful wobble. The longer term looked fine then, which is consistent with the outlook now.

Regional Analysis

Australia

Our headline unemployment rate fell to 5.6% however this figure is misleading because of the continuing switch from full time to part time work.

Economic growth reported last month was strong and if that continues we would expect some real improvement in the labour force statistics.

Our business and consumer confidence indexes were up in the month however business conditions fell.

China

The emphasis has moved away from watching China statistics, because broad opinion is that the Chinese economy has settled.

The main problems with China relate to its position over territorial claims in the South China Seas. China is moving positively on ratifying global warming action.

U.S.A.

Anyone – other than possibly US voters – watching the lead up to the November presidential elections on TV must be amazed by the goings on. It makes the Sarah Palin era look tame.

Clearly there are strong negative views about both candidates. We think that we should not dismiss the chance that Trump will win. He may not have typical presidential credentials but the world is changing. Large numbers of people in many western countries are getting fed up with how they are being governed. People are looking for change without necessarily considering the full consequences.

Markets prefer Clinton as shown by the reaction to the first debate. But there are more votes in the Mid-West, the Deep South and elsewhere than in Manhattan. The US people will choose who they want.

If Clinton wins markets could rally into Christmas. If Trump wins there might be a little volatility but the president can do little without Congress being onside. Just look at Obama’s lack of success in getting his way over the last eight years.

Europe

The United Kingdom (UK) continues to shine in the sunlight after Brexit. Its Purchasing Managers Index (PMI) came in well above 50. The new Prime Minister, Theresa May, announced a $16 bn improvement of Heathrow. More countries need good infrastructure spending – Australia included.

Europe is slowly dealing with the refugee situation. M. Hollande, the French President, seems committed to dismantling the Calais ‘jungle’ camp. The backlash against the German political policies makes it more likely that all European Union (EU) governments will want to act to resolve the situation without too much downside for the general population.

Rest of the World

Iran declined to deal with OPEC over supply cuts but the next day OPEC stated that it was going to move anyway. Japan’s data shows no signs yet that suggest further stimulus will not be provided.

*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 – September 2016

Economic Update

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.

With Brexit fears cast aside:

– United Kingdom (UK) confidence bounces back

– United States (US) Federal Reserve claims economy strengthening

– Japan ready to add more stimulus

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

It is just a year since some reports on the China stock market sell-off last August predicted doom and gloom. As we suggested at the time, it wasn’t a major problem because that market was, and is, in its infancy. The market stabilised and it is now comfortably above those 2015 lows.

At the end of 2015, some nerves were rattled about the prospects of Federal Reserve rate hikes in the US. While occasional bouts of uncertainty continue to cloud market movements, the successive Fed meetings have gone reasonably smoothly.

In January 2016, the Royal Bank of Scotland told us to ‘Sell everything’ and some other big houses made similar dire predictions. Markets are comfortably up and selling wasn’t the answer.

Oil and iron ore prices dived in February 2016. Iron ore prices dipped below $40 but later climbed to $70. Oil was predicted by some to get down to $20, or even $10, when it was $26. Instead, prices have more or less doubled. Another ‘crisis’ averted!

And then there was ‘Brexit’, and the dire predictions that went with it. The ‘leave’ vote won, but consumer confidence jumped 3% in the UK in the first month following the referendum. Markets are stable and the pundits got it wrong again.

Of course, at some point, an event will come along that will have a medium-term adverse impact on our investments, but most of these stories are simply overblown in quiet news periods. At this point we feel that all of those ‘scare stories’ are fading into oblivion and there are no new major known issues brewing.

At home, our labour force data isn’t great, but the mid-year fall in full-time employment seems to have turned around. Unemployment is stable at 5.7%. Our Reserve Bank is expected to cut rates again – from 1.75% to 1.50% sometime this year – but that is more to align our rate with the rest of the world rather than a reaction to avert major issues at home.

News in August was dominated by the Olympics. Australia was disappointed but ‘Team GB’ beat all expectations. There are big lessons for economic management to be learnt from these results.

Australian Olympic success was at a low in Seoul, 1988. Government funding was pumped in with increasing success to match – until, that is, at Beijing and after.

Great Britain (GB) hit its nadir in 1996 at Atlanta, with only one gold medal being won. The national lottery was born with substantial taxes going to sports’ funding.

In both cases it took time for athletes to respond, but pumping money into a venture alone is not an investment. Just like with migrants, the expression “The first generation makes it, the second builds on it, and the third loses it” might apply to economies and sports alike. But our athletes might now be doing as well – it’s just that others are rapidly improving.

Importantly, Australia was reported to have concentrated funding on our traditional sports. GB, on the other hand, looked for opportunities in sports they had not previously been good at. GB’s plan seems to have thrown up many unexpected successes.

The reaction to the GFC was for governments to cut back on fiscal spending around the world. Now we need well-tailored programmes to start the next phases of growth. Not pink batts, but spending on considered infrastructure projects and the like could be what we need now. But with our government system living on minority leadership for too many years, it is difficult to see from where such a programme will come.

In the meantime, growth might be a little below par but good enough. A shot in the arm for infrastructure could well be the start for a return to our desired long-run growth path.

Asset Classes

Australian Equities

The ASX 200 did lose  2.3% in August, but that followed a massive +6.3% gain in July. Virtually all sectors lost ground in August but market volatility remains reasonably low.

After reporting season in August our view of the fundamentals remains strong, we expect the 2016/17 financial year to be strong. The calendar year-to-date for 2016 posted a gain of +5.6% including dividends.

The high-yield sectors of Financials, Property, Telcos and Utilities continued to seriously lag behind the other sectors in 2016 y-t-d including dividends. Indeed, capital losses in high-yield have more than wiped out dividend payouts. The total returns of the ‘other’ sectors have exceeded +14% y-t-d.

Foreign Equities

Wall Street hit some new all-time highs in August. The VIX fear index reached quite low levels suggesting markets are quite settled even if August was not a strong month for markets.

With a rate hike in the US unlikely before December, only the Presidential election seems likely to interfere with a smooth finish into the end of 2016.

Bonds and Interest Rates

The RBA kept rates on hold again in Australia. The Fed Reserve’s second-in-command caused some volatility with his comments, shortly after Chair Yellen made her views known. While Yellen saw the chance of a hike strengthening with good economic data, Fischer went further putting September back on the table. December is still our call for the first hike.

Other Assets 

Oil prices have seemingly stabilised on talks between OPEC and Russia. At current prices, oil is too cheap to warrant shale oil to come back on stream in the US and too high to cause major concerns going forward.

The VIX volatility – or fear – index reached a low for 2016 during August. Our dollar did vary somewhat over the month but the change on the month was relatively small.

Regional Analysis

Australia 

On the face of it our employment data grew strongly, but full-time employment fell while part-time employment did the work. The unemployment rate was steady at 5.7%.

Trend full-time employment – the official preferred method – has started to pick up – possibly because of the earlier rate cut.

China

The month started reasonably well with the Purchasing Managers Index (PMI) at 49.5 for manufacturing – which is just below the break-even 50 level. The services version of the PMI continues to be well above 50 as the domestic economy takes over from infrastructure expenditure.Mid-month retail sales and industrial production did miss forecasts by a fraction but not enough to worry markets.

U.S.A. 

Janet Yellen talked up the strengthening US economy at the annual Central Bankers’ conference in Jackson Hole. There is no doubt that employment data has bounced back strongly from the earlier mini-slump. But two good numbers are not enough to eradicate all discomfort.

Europe 

The Brexit vote won at the end of July. August Retail Sales surged at +1.4% against an expected +0.1%. UK confidence also surged from a three year low to 109.8 from 106.6. With Olympic success as well, it seems the UK has side-stepped the issues that some worried about earlier in the year.The Bank of England did cut its rate at the start of August and also pumped in some unexpected monetary stimulus.

Germany’s GDP came in at +0.4% for the quarter smashing expectations. There are also other pockets of mild success. Brexit will happen slowly so trade deals can be renegotiated far before trade becomes an issue.

Rest of the World 

Japan can’t win a trick, as they just recorded another month of deflation. Japan is pledging to continue to stimulate the economy as required.Japan’s problem is its falling population. Many countries, such as ours, would also look a little glum if populations were not growing!

*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 – August 2016

The Big Picture

Our stock market just posted the best month since October 2011! The ASX 200 rose +6.3% in July and we were near the head of the pack of the major world indexes. Since +6.3% is about the average for a year, this turnaround story shows how easy it is to miss out for investors who keep jumping in and out of markets.

But there was no really good news to spark this world-wide rally. Rather, it was the settling of the dust on a number of key issues that had been on the back burner. All the fuss about Brexit turned out to be nothing more than a distraction.

The United States (US) jobs data ended a very poor run for 2016 with a bumper number for June. The US Federal Reserve was at least seen as probably not hiking rates for the remainder of 2016.

But the best bit must have been the China data. GDP growth, Industrial Production and Retail Sales all did quite well – but Bloomberg released its new China index. The China Premier – before he took office – often spoke about how to make China data more transparent. He wanted to focus on things like electricity demand – which is easily measured.

It turns out that the new Bloomberg index does just what the Premier wished for and suggests that the China data agency, if anything, has probably been understating growth in its GDP releases.

If it hadn’t been for the Bastille Day massacre in Nice, this would have been time to pop the corks of some chilled bubbly. And, sadly, Nice wasn’t the only tragedy in July.

Turkey nearly sent markets alight with a mid-month military coup. It started after the market closed in the US on a Friday and was all over in time for Sunday lunch. Markets opened just fine on the Monday.

Of course this does not mean bad news will never recur. But with markets gaining strength, the VIX ‘fear index’ is at a very low level indeed; the US Q2 company reporting season has been quite good and ours starts in a few days.

We have the market fundamentals quite strong and much of the recent rally merely eroded underpricing from undue pessimism. We are now back on track for the forecasts we posted at the start of 2016.

There has been lots of talk about rate changes and stimulus around the world but it seems central banks are moving slowly in measured steps. There is a good chance that the RBA will cut in August – but if it doesn’t, it will probably cut soon. Our unemployment rate of 5.8% is neither good nor bad. It is more a problem, of who would prefer full-time to part-time employment.

Our full-time employment situation stopped deteriorating this month. The next number should tell us whether the May cut by the RBA had some impact.

And, of course, we had a general election with no clear decision. But neither was there daylight in the Brexit vote and it seems close between Trump and Clinton. Perhaps it’s time for a real set of leaders to step into the ring.

Our electoral problems probably contributed to Stand & Poor’s putting our nation – and our big four banks – on negative credit watch. It’s not a big issue if we lose our AAA status. Remember the USA lost its AAA rating a few years ago.

Asset Classes

Australian Equities

No sector on the ASX 200 went backwards in July and we would have had an impressive five-month run had the ‘Brexit month’ of June not turned out to be  2.7%, but folded into the impressive +6.3% for July. We have had +14% growth in the ASX 200 since February.

The banking sector has been holding the market back for some time. Those in search of yield seem to be flocking into Property and Utilities stocks – plus a bit in the low-yield, but highly defensive, Heath-care sector.

Foreign Equities

All of the major world indexes had a great July. The S&P 500 and the Dow recorded several all-time highs on Wall Street.

Wall Street was helped by some good company reports in July. A few of the banks did particularly well and Amazon blasted out of the blocks.

With the S&P 500 at 2,174, Citi’s forecasts for End-of-Year 2016 of 2,150 is already behind the 8-ball – but they are sticking to it!

Bonds and Interest Rates

The RBA was on hold again in July at 1.75%. The market was pricing in a 70% chance of a cut on August 2nd but that probability fell to 55% straight after the low – but on expectations – inflation figure of 1.0% for the year.

The US Fed claims September is a ‘live’ meeting for a possible rate hike. Most analysts are thinking December to June 2017 is far more likely.

European Union debt was downgraded to AA- from AA by Standard & Poor’s.

Japan under-delivered on its expected stimulus package this month.

Other Assets

After a terrible start to the year, iron ore prices recovered to sustainable levels and up +12% in July. Oil prices too recovered but lost over  14% in July.

Oil rigs in Alberta are coming back on line after being closed in the big fires of 2016. That should keep a lid on oil price increases.

Gold (+2.1%) was up on the month.

Regional Analysis

Australia

First quarter inflation came in at a negative rate, so it was with some relief that a modest +1.0% for the year was posted in Q2. Since the RBA ‘target band’ is 2% to 3% ‘over the cycle’, they have a reason to cut rates – particularly since the employment data is stubbornly very ordinary.

China

The chatter about China facing a hard landing has faded into the background. China has room to move but economic growth is strong.

U.S.A

While the jobs data were stellar last month, they are still not enough to soak up the slack for the weak start to 2016. These key data need to be watched particularly as US growth disappointed in Q2.

Analysts were expecting 2.5% (annualised) but got only +1.2%. To make matters worse, Q1 growth was revised downwards from +1.1% to +0.8%.

But the fundamentals of the US economy are not bad. They are just not great.

Europe

The European Union economies continue to be sluggish and the impact of terrorism on prospects is hard to ignore.

People on both sides seem to be handling the Brexit solution well. There is no reason to expect a sudden fracture in their relations.

And if Britain needed a dose of confidence, in one weekend they won two Wimbledon titles (Murray and Watson), the British Grand Prix (Hamilton), and 1-2-3 in the Tour de France (Froome, Yates, Martin). General Classification and Mark Cavendish had already won three stages and wore yellow. Who said a country couldn’t come back from the brink? All they need now is a football team.

Rest of the World

Japan Prime Minister Abe scored a landslide victory in his Upper House. That enabled him to pass through a massive fiscal stimulus package – but the Bank of Japan didn’t do as much as expected on the monetary stimulus side.

Brazil’s economy is in real trouble and Olympic success seems far from being a done deal. Venezuela is putting forced labour to work on farms. While we focus on some parts of the world, South America and Africa – as well as parts of the Middle East – are faring far short of what they would hope for.

Economic Update – July 2016

The Big Picture

Brexit – or the referendum to decide Britain’s future in the EU – dominated news up until the vote on June 23rd and then swamped it. The polls were always close – and there were only two possible outcomes – ‘exit’ or ‘remain’. But for some reason, markets and the British people were stunned when the ‘exit’ vote got up.

If we allow for the 72% turnout (voting was not compulsory) ‘exit’ scored 37% of the vote, ‘remain’ 35% and the ‘no vote’ was 28% – so it was a close run race. But Boris Johnson – the lead MP for ‘Brexiting’ – looked a bit like a frightened rabbit when he won. Indeed, he has now dropped out of the race to be the next PM!

Current British PM, David Cameron, went into hiding after announcing he would stand down by October and the leader of the opposition, Jeremy Corbyn is in trouble with half of his shadow ministry resigning because they claim he didn’t lobby hard enough to ‘remain’. And then 80% of his party gave him a vote of no confidence – but he won’t stand down, yet. There are now rumours of replacing the Governor of the Bank of England because of his views on Europe. The England soccer coach got sacked a couple of days after Brexit because his team lost to Iceland in Euro 2016! Nobody seems to have won! But leadership issues are not confined to Britain.

There is a chance that Parliament, who must sanction the vote for an exit to be enacted, might not take that next step and Germany is even looking like it might try to woo Britain back in.

The main downside for Britain is that London might lose its status as a major financial centre. In time, Europeans, who now freely work in Britain, might have to go home and vice versa. But it will take years for the whole process to unravel – perhaps a decade.

In the meantime stock markets have taken big hits but our ASX 200 seems to have done relatively well. Losses have largely been erased.

Of course, at home, we not only have Brexit to deal with. We have our own election on July 2nd, a possible rate cut on July 5th and the US jobs report on July 8th.

The US Fed seems to have walked away from a rate hike anytime soon – as we have been predicting for months. One cut in December is a far cry from the Fed’s four this year that they predicted last December – but it makes sense to wait.

Brexit may play a role in the Fed’s thinking but the last jobs number of +38,000, when +160,000 was expected, demonstrates a hike now would not be prudent.

Our jobs data were quite well received but we still see some weakness in full-time employment. Yes, there were +17,900 new jobs, but all were part-time. There were zero new full-time jobs, making January the last increased trend in full-time jobs!

But there are some good points. The European Central Bank did raise its growth forecast for 2016 – from 1.3% to 1.4%, and the Spanish general election the Sunday after Brexit, resulted in an increased majority for the ruling People’s party. This has been taken as a statement of conservatism after Brexit. That is, there was no swing to more radical parties that might want to follow Britain out of the EU.

By the way, Brexit is nothing like Lehman Brothers and the GFC. It’s not even as bad as the Greek debt crisis. Maybe more like the Blues losing the State of Origin series again (for those south of the border)!

Asset Classes

Australian Equities

After three consecutive months of strong gains, the ASX 200 had a negative month in June largely owing to the ‘Brexit’ referendum.

The losses were largely across-the-board with only Property and Utilities – two very defensive sectors – making gains in June. Stocks with possible exposure to Britain were hit particularly hard. The likes of BT Funds Management, Clydesdale Bank (a NAB offshoot) and Macquarie Bank were savaged.

The financial year (FY16) that just ended finished up +0.6% when dividends are included. However, that doesn’t tell the whole story. In FY16, the Industrials, Consumer Discretionary, Health, Property and Utilities sectors were all up between +20% and +25%. It’s just that Energy (???21.7%) and Financials (???8.7%) were hit hard.

We have the market slightly underpriced and the fundamentals look strong for FY17. It’s just a case of what temporary shocks buffet us along the way.

Foreign Equities

Market carnage hit most countries. The German DAX lost over ???6% on the day following Brexit. But a couple of days later most markets rebounded. Wall Street finished flat on the month and the London FTSE was up +4.4%. The German DAX was down ???5.7% showing that Germany might miss Britain more than the other way round!

The VIX ‘fear index’ jumped up sharply following Brexit but it has already settled down to below average.

Bonds and Interest Rates

The RBA was on hold again in June at 1.75%. Brexit may have changed the RBA’s thinking but we believe either way, one or two cuts would help us a lot.

The US Fed removed the phrase, “in the coming months” regarding the next hike in its press releases. Almost everyone takes that to mean there will be no hike soon. We think December is the earliest.

Bond yields have fallen in post-Brexit times. The German government yields are now on average negative!

The Bank of England has flagged the possibility of increasing stimulus – either by a rate cut or asset purchases – in the remainder of this year.

Russia cut its prime rate from 11% to 10.5%. And Japanese PM, Shinzo Abe, has urged his central bank to do what it takes to get through this bout of volatility.

S&P cut its rating of UK government debt to AA (negative watch) from AAA. It also cut the EU debt to AA from AA???. But remember the US lost its AAA rating a few years ago with no lasting backlash.

Other Assets

Iron ore prices have been amazingly stable given the global events but oil prices took a bit of a hit after Brexit. However, prices have now more or less recovered. Of course, oil is a far more speculative market than iron ore.

Our dollar has moved around a lot in June finishing the month up +2.5% against the US dollar. Normally we focus on the $A against the $US but, with Brexit around, the $A against sterling moved up well over 10% in the day or two following.

Gold rose strongly over the month, up +8.8%.

Regional Analysis

Australia

News on the economy has taken a back seat while we try to work out what the political adversaries are offering us. A big ticket item is superannuation and both sides have been less than forthcoming about the details of what they are proposing. Serious analysis we have done shows that politicians and public servants will be much better off than those in the private sector – whichever side wins. Nests have been feathered!

In a disturbing run of labour force data, the unemployment rate has held at a moderate rate of 5.7% but that is because an increasing numbers of ‘workers’ are part-time rather than full-time. Of course it is better to have some sort of job – maybe 10 hours – than no job at all, but that is not the basis of a growing economy. Full-time employment has fallen in each of the last four months in trend terms!

China

For a change, China is off the radar. All the doomsayers are in hiding or gainfully employed following Europe instead. It is clear that all of the data from China is consistent with it being an economy we don’t have to worry about.

BHP just announced a +29% increase in expenditure on mining exploration – up to $900m for 2017. It is also rumoured that they are thinking of bidding for the second largest fertilizer mine in the world – which happens to be in Canada. Of course BHP had been cutting back in previous years but this is a very positive sign for the resources sector.

U.S.A

Watching Trump v Clinton, Turnbull v Shorten and ‘Exit v Remain’ it is clear that the political order has changed. We can’t imagine enough people being content after the November presidential elections that there won’t be another bout of volatility then, if not before.

But the fundamentals of the US economy are not bad. They are just not great.

Europe

Britain is still in the continent of Europe if not the EU – at least not soon. Britain’s economy is one of the stronger in the region but it is not clear what will unfold in coming months.

There has been talk that France might also want a referendum to see whether it should stay in the EU. Spain voted conservatively in its election this week just gone. Frankly it is too soon to form a confident view of the world order. But the chances are there is more bluster than substance.

Rest of the World

Iceland deservedly bundled England out of Euro 2016 (soccer competition like a world cup for Europe). England left Europe twice in a few days! But Brexit could mean a lot of European footballers in the prestigious English Premier League have to go back home and be replaced by English players. The EPL football might not be then as good but the national team might do better (they couldn’t do worse).

The main Turkey airport in Istanbul was the subject of a major terrorist attack. It has been argued that the fear of Turkey joining the EU with the free movement of people was a major factor in people voting for Brexit.

Breaking up is hard to do – the Brexit

By Ron Bewley*. Brought to you by Infocus

History and the vote

When Neil Sedaka had his 1962 hit “Breaking up is hard to do” it was only four years after the signing of the Treaty of Rome – from where the European Union (EU) was born. France strongly objected to Britain joining for many years which was the catalyst for many boys in secondary schools across England (including moi) to question why they had to learn French.

So with Brexit winning the referendum on Thursday, did Britain get what it wanted or needs? We thought the bookies would have got it right with a ‘Remain’ win. Even Boris Johnson (Tory MP and former Lord Mayor of London) and Nigel Farage (MP and Leader of the UKIP party) – the two most prominent “Brexiteers” – didn’t think they would make it on the morning of the referendum – but they did. With the vote at about 48% : 52% and a total casting vote of about 70% (voting is not compulsory in Britain), the people who didn’t vote came in a very close third in the race: 33.6% = 70% x 48% for ‘Remain’; 36.4 = 70% x 52% for ‘Brexit’; and 30% = 100% – 70% didn’t vote)!!

This was not a resounding victory but it was enough to start the exiting process.

Many of us were glued to the telly all day on that Friday, June 24th. Our reaction changed markedly as the results flowed in. Our first reaction was unrest because the consequences of leaving hadn’t really been discussed in the media. But we felt calmer as the day progressed. The shock subsided.

So why did Europe want Britain to stay as much as they implored? They must be getting a better deal than Britain! If they trade with Britain now, why wouldn’t they want British goods when they are ‘sans Europe’?

Changes ahead

Of course Britain may stop making Airbus wings in North Wales which then have to navigate canals, the River Dee, the Irish Sea and the English Channel and more canals to be delivered to Toulouse and stuck on the bodies of planes. But Britain won’t have to subsidise all of those small farmers any longer in France, Greece and elsewhere. Britain won’t have to pay for our euro MPs to live on the gravy train in Brussels. It is a nontrivial problem to solve and the answer is not known by anyone – yet!

The Bank of England and the European Central Bank have stated they will pour oil on any troubled financial waters. This is certainly not a Lehman Brothers or GFC type event. It is also clear that it will take up to two years for Britain just to exit Europe – it doesn’t change straight away. Indeed, the full transition to renegotiate trade deals could take up to a decade.

So what are the pros and cons? On the downside, the biggest risk is what will happen to London as a financial centre. That could be a big down-side and it could also affect Australian banks in their funding (yes – we borrow from the world and not the RBA for home loans so that’s why mortgage rates shouldn’t simply shadow the RBA rate).

But Britain will no longer be told how to regulate its economy by Europe. A Cornish pasty can once again be ‘crimped’ on the top and not just the side to be properly classified as a “Cornish” pasty. And they can again grow any variety of apples they want! They can even take control of the style of sausages they make and sell!

Continental Europeans freely working in Britain may have to go home. Economic refugees in Britain would not as easily get government benefits. Britain can regain control of its borders. People will have to show their passports to travel and get visas to work – just as young Australians do who work in Britain now and vice versa.

Australia has recently made important bilateral trade deals with the likes of China. It can now make some with Britain without having to convince the other 27 counties that the same rules should apply to them. For example, one deal with Europe was recently scuppered because the Italians didn’t like our proposed anti-dumping laws for their tinned tomatoes.

Domino effect

But who will be the next cab off the rank? Britain joined the then European Economic Community (EEC) when there were just a handful of countries “in Europe” – then some peripheral countries joined – then the far eastern, poorer European countries such as Bulgaria and Romania joined in 2007.

We don’t think Britain would ever have joined if there was a common currency and 27 other countries. The current EU is so different from its forerunners and is largely led by Germany – and to some extent France – and Brussels.

The EU has a common currency, the euro, across 19 of the 28 countries but no common fiscal policy. That is, unlike in Australia where Canberra controls much of taxing and spending across the separate states, 28 governments in the EU have no strict common goals. Hence, we got problems with Greece and its debt problems. Greece couldn’t devalue, as it used to without leaving the euro and the EU subsidies it gets.

Scotland is now talking about having a second bite at being a separate nation after Brexit. Scotland largely voted to ‘Remain’ in Europe – as did the south east of England – but the more working class north of England swamped the ‘Remain’ votes in the single aggregated British vote.

And there has been talk of a referendum to decide where, if anywhere, should be the border between the Republic of Ireland and Northern Ireland (in the UK).

Denmark and others who are not in the common currency but in the EU might be watching closely. If Britain starts to look better off, why wouldn’t they follow suit?

The EU morphed into a grab-bag of unlikely bedfellows. The initial reason for making the union was almost certainly to give Germany and France a voice on the world stage. But they needed to add some chums to make it seem like a real union. Shades of 1989 and the falling of the Berlin Wall are now so close.

Stock markets

Markets usually over-react and they probably have done so this time. It looks like there will be big buying opportunities ahead but not in our banks until we better know what will happen in that space.

We couldn’t help but notice that the falls on the ASX 200, the London FTSE and the S&P 500 on Friday were all around ???3.5%. But over the week the ASX 200 was only down ???1.0%. We got a bit ahead of ourselves in predicting a ‘Remain’ and then unravelling some positive momentum.

The London FTSE was actually up +2.0% for the week even after Friday’s big sell-off! The S&P 500 on Wall Street was down only ???1.6% for the week.

The Frankfurt Dax was only down ???0.8% for the week after tumbling over ???6% on Friday night.

With our SPI futures (an indicator of how the ASX 200 is likely to open on Monday as it is traded overnight) up +3 pts for Monday, it is possible order could quickly return to markets.

Football (soccer)

England lives to fight another day in the Euro 2016 football competition. England faces the mighty Iceland at 5am on Tuesday in the last 16. England has only played them once before and England won 6-1. But has Iceland improved or did the other teams just capitulate in the group stage matches? We hadn’t really thought of Iceland as being in Europe. Are they in the EU? No! And Australia entered Eurovision and we are certainly not in Europe.

But if England gets through, it will probably meet France in the quarters – and in the unlikely event England progresses to the semis, it then faces its arch-rival in football, Germany. For England to possibly face France and Germany only days after Brexit, the mettle of these footballers will surely be tested.

What to watch for

Simply watching the finance news on TV might not give you the information you really need. The media has a seeming predisposition to focus on bad news and draw a long bow when connecting some events.

The end of the financial year on June 30th usually brings with it some extra temporary volatility on our stock market as fund managers ‘window dress’ their portfolios to look as good as possible for reporting purposes.

Our general election on July 2nd could cause some volatility in its own right depending on how the voting goes. A hung parliament is the worst result. Our government – of whichever political flavour – needs the power to enact good economic policy.

The Reserve Bank of Australia deliberates on interest rate settings on July 5th. It might cut rates. It might change its interpretation of how the economy is travelling. So more volatility is possible!

On July 14th (Bastille Day!), our June Labour Force data will be released by the Australian Bureau of Statistics. The recent trend in full-time employment has been falling to the extent that changes in f/t employment have been negative for four consecutive months.

No one really seems to be talking about this – except us at Infocus for the last few months – so if we get another fall and it gets picked up? You’ve guessed it – more volatility.

And in August most listed companies on the stock exchange report their final or half-year results. Since companies must give guidance about changes in performance, many companies upgrade their prospects in July – the so-called ‘confession season’.

Conclusions

Even without Brexit we would expect a few weeks of heightened uncertainty in our markets. The fundamentals are quite strong – but not brilliant. We anticipate looking back on June and July later in the year as another blip but no more.

The UK Prime Minister has flagged he will leave office in a couple of months and Boris Johnson (aka BoJo), the enigmatic former Mayor of London with a hair style akin to Donald Trump, will probably succeed. He is a very smart, charismatic man (BoJo not Trump) who is likely to steer Britain through change as good as anyone could.

We need to watch for any of the big international banks, like Morgan Stanley and Deutsche, to see if they feel a need to relocate some of their offices, etc.

And at home, the only likely downside to the Brexit seems to be an impact of funding for our banks. Perhaps we can strengthen our relationship with Britain. That should not stop us continuing to have good relations with continental Europe.

Of course, dual citizens (Australian and Continental European) might be less able to go and work in Britain. But plenty of Americans holiday in Britain each year without being EU members.

So it’s time to take a deep breath, put the kettle on and have a cuppa to settle the nerves – just as they are probably doing across Britain right now.

*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.

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