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
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?
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 – 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.

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