Investment Week In Review - 5 December 2016

By Marcus Damen - December 5, 2016

Pitcher Partners Investment Services' wrap up of news and current affairs impacting the markets.

News in Review

  • Italy voted ‘No’ to a referendum which was aimed at enhancing the efficiency of the government and reducing the size and power of its Senate. Prime Minister Mateo Renzi, who had championed the changes, resigned immediately following the result, throwing open the question of who will govern going forward and potentially opening a window of opportunity for the anti-EU 5 Star Party.
  • Austria voted in their Presidential Election and voted in former head of the Green Party - Alexander Van der Bellen. European leaders breathed a sigh of relief as the far right candidate Norbert Hofer was defeated. Van der Bellen is considered pro-EU and hence this vote did not go the same way as the Brexit vote.
  • The Eurozone’s annual inflation was estimated to be 0.6% in November 2016, up from 0.5% in October 2016. The most notable increase being that of services which increased 1.1% and the most notable decrease being energy which decreased 1.1%.
  • The UK’s manufacturing PMI dipped slightly for the month down to 53.4 down from the 54.3 of the previous month. While the index has dropped for two consecutive months it remains above its long run average of 51.5.
  • Australian private sector credit growth grew by 0.5% in October – driven mostly by housing and business credit (up 0.6% and 0.5% respectively). Personal credit did not grow at all for the month and is down 1.1% for the year to 30 October.
  • New home sales in Australia were down 8.5% in October to the lowest since July 2014.  Building approvals also dropped a further 12.6% after last month’s 8.7% decline.
  • Australian retail sales rose 0.5% in October, seasonally adjusted. This follows a 0.6% rise in September 2016.
  • US non-farm payrolls data showed an increase of 178,000 jobs in November and a drop in the unemployment rate from 4.9% to 4.6%. The participation rate softened from 62.8% to 62.7% and average hourly earnings dropped by 0.1% for the month.
  • The second estimate of the US real GDP showed an annualised growth rate of 3.2% for the September quarter, up from the first estimate of 2.9%. Actual year on year growth in real GDP to 30 September was more modest at approximately 1.6%.
  • The US Consumer Confidence index increased to 107.2 through November, following weaker results in October.
  • US unemployment claims rose to 263,000 up by 17,000 in the week, extending the run of weeks with claims under 300,000 to 91 straight, which is the longest streak since 1970.
  • Beijing’s official manufacturing purchasing managers index (PMI) rose to 51.7 in November, following 51.2 the previous month. Readings above 50 indicated expansion and the November reading was the highest since mid-2014.
  • The Organisation of Petroleum Exporting Countries (OPEC) on Wednesday committed its fractious members to their first oil production limits in eight years. The agreement means a cut to production by about 1.2 million barrels per day, or about 4.5% of current production, to 32.5 million barrels per day.

Comment

The strong headline unemployment rate for the US announced Friday is consistent with an increase in interest rates, which is now highly likely to occur when the US Federal Reserve next meets on December 13/14. However, some of the detail of the jobs report, along with other key economic indicators, suggest that the economy may not be as strong as the headline unemployment rate suggests.

Firstly, the relatively low (currently 2.5%) and decelerating wages growth is not consistent with a tight labour market or ‘full capacity’. John Williams from Shadow Stats www.shadowstats.com suggests that the US employment market has significantly more slack in it than officially reported, due to a change in the definition of ‘discouraged worker’ and hence a change in the method of calculating the ‘underemployment’ rate back in 1994. Interestingly, he alleges that the methodology was altered in order to soften the reported impact of the North American Free Trade Agreement (NAFTA). According to Shadow Stats, if the methodology had not been altered, the underemployment rate would still be at record highs, given the number of people who became permanently discouraged from the workforce during the GFC:

While we cannot attest to the accuracy of the claims by Shadow Stats, their analysis could help explain why wages growth remains so weak. It could also help explain the ill-feeling towards globalisation, free trade and NAFTA in particular that Donald Trump capitalised on in his recent campaign.  

Secondly, inflation and GDP growth are much lower now than at the start of previous rate-rising cycles and debt levels are higher, as per the table below, making the current task for the Federal Reserve all the more challenging: 

 

The Week Ahead

  • All eyes will be on Italy and the fallout from its referendum.
  • Australia: Business Confidence, Employment Figures.
  • US: Housing starts, Retail Sales.
  • Europe: UK CPI, UK Retail Sales, Bank of England Bank Rate.

Company News

  • Aristocrat Leisure surprised the market with solid earnings for the year ending 30 September. Aristocrat Leisure is now in full ownership of Video Gaming Technologies which was a driver for this growth. Management has stated their expectation that earnings growth will continue through 2017.
  • Vocus held their AGM this week in which they noted disappointing results from their NextGen brand. Geoff Horth Vocus’s chief executive noted that the poor results were due to a large number of customer cancellations between their due diligence and their acquisition of the company.
  • Bellamy’s reported stagnant sales in infant formula in China for the year. This came in well below the markets expectations which has resulted in a market to sell off at a dramatic rate causing the share price to plummet.
  • After uncertain times Ardent Leisure has announced that it will re-open Dreamworld and Whitewater World on 10 December. Whitewater World will reopen in full capacity and Dreamworld in a limited state as safety reviews are done on rides. Ardent Leisure has noted that the closure will amount to an approximate $4m loss in November alone with further large expenses expected to effect the parks.

Markets in Review

 

Capital Return

   
 

Weekly

FYTD

CYTD

S&P ASX 200

-1.2%

4.0%

2.8%

DOW JONES

0.1%

6.9%

10.0%

S&P 500

-1.0%

4.4%

7.2%

UK FTSE100

-1.6%

3.5%

7.8%

FRENCH CAC40

-0.5%

6.9%

-2.3%

GERMAN DAX

-1.7%

8.6%

-2.1%

JAPANESE NIKKEI

0.2%

18.3%

-3.2%

SHANGHAI COMPOSITE INDEX

%

10.7%

-8.3%

ASX200 Sector Performance for the Week

ASX200 Biggest Movers for the Week

$1 Australian buys you:

   $0.7403
£0.5866
¥5.1003
¥84.4325
€0.6930
$1.0435

 

 

 

 

 

 

 
Disclaimer
This material is intended for the use of the clients of Pitcher Partners Investment Services only. It is current at the date of preparation, but may be subject to change. This document does not constitute financial product advice. It is of a general nature and has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on the information you should consider the appropriateness of it having regard to your objectives, financial situation or needs and seek independent advice. You should obtain and consider a Product Disclosure Statement in relation to any financial product before making any decision about acquiring the product. To the maximum extent permitted by law, Pitcher Partners Investment Services Pty Ltd and its representatives will not be liable for any loss or damage incurred by any person directly or indirectly for any use or reliance on this document.

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