Investment Week In Review - 9 May 2016

By Michelle Heffernan - May 9, 2016

Treasurer Scott Morrison’s first budget was really an election budget with the mantra of “jobs and growth” their slogan of choice.

News in Review

  • The RBA cut its official cash rate to 1.75% in response to the underlying inflation rate dropping to a weaker than expected 1.5% (an equal low record).  With this fall in inflation, real interest rates (nominal rates minus expected inflation) rise, undermining business investment and economic growth in Australia.  It is therefore likely that further rate cuts are on the horizon, especially since the RBA’s economic forecasts assume the bank’s target inflation range of 2-3% will not me bet until 2018.  In the meantime, the RBA will need to rely on a lower exchange rate to lift inflation.

  • Treasurer Scott Morrison handed down his first budget and after years of speculation, the government has finally produced a budget targeting superannuation.  The proposed changes are that, effective immediately, there will be a lifetime cap of $500,000 for non-concessional contributions. Effective from 1 July 2017, the concessional contributions cap will be reduced to $25,000.  Also, the government has placed a $1.6 million limit on superannuation that can be transferred into the tax free pension phase. The proposal is not grandfathered, meaning it will be applied to both current retirees and to individuals yet to start a pension.  Any member with over $1.6 million in pension mode has until 1 July 2017 to move the excess funds back to accumulation phase or withdraw them from superannuation.  

  • The Obama administration announced measures to crack down on the use of shell companies in the US that can be used for tax evasion and money laundering.  

  • The US services sector expanded in April as new orders and employment accelerated, bolstering views that economic growth would rebound after almost stalling in the first quarter of 2016.  The Non-manufacturing index rose 1.2% to 55.7 in April; a reading above 50 indicates expansion in the services sector, which accounts for approximately 70% of the US economy.

  • The IBD/TIPP Economic Optimism Index (which measures economic optimism in the United States) rose 2.4pts to 48.7 in May.  The economic outlook index rose to its best level since October 2015 and US consumers were feeling the most optimistic about their personal financial outlook since March 2007.  The higher levels of optimism are largely underpinned by low oil prices, the rebound in US share markets and solid employment data in 2016.

  • The China Caixin Services Purchasing Managers' index (PMI) was at 51.8 for April, showing expansion but marking a moderation from 52.2 in March. The continued expansion of the services sector comes off the back of China's policymakers efforts to bolster growth through a flurry of interest rate cuts and reserve requirement ratio (RRR) reductions for banks over the past year. 

  • Europe’s unemployment rate lowered to a better than expected 10.2% in March.  

Comment

Treasurer Scott Morrison’s first budget was really an election budget with the mantra of “jobs and growth” their slogan of choice.  Talk of the budget emergency from two years ago has largely been forgotten as the government continues to run budget deficits and pushes out the forecast surplus year to 2020/21.

The significant changes to superannuation are still being digested and we are awaiting more detail about how this will work in practice.  If the legislation is passed unchanged clients will have until 
1 July 2017 to transfer assets.  Clients affected by the proposed changes should discuss these with their advisor.

The Week Ahead

  • US: Labor Market Conditions Index (Apr), Monthly Budget Statement (Apr)
  • Australia: Home Loans (Mar), ANZ Job Advertisements (Apr)
  • Europe: Eurogroup meeting, Gross Domestic Product s.a. (YoY) (Q1)
  • China: New Loans (Apr), Consumer Price Index (YoY) (Apr)
  • Japan: Leading Economic Index (Mar) 

Company News:

  • Origin Energy is continuing its shift toward renewables by agreeing to buy the entire output of what should become Australia's most productive solar farm. Origin says it has agreed to purchase the output from the proposed 300-hectare Clare Solar Farm in northern Queensland, which is expected to start operation in 2017. The farm is owned by Spain's Fotowatio Renewable Ventures, which also owns the new Moree Solar Farm in northern NSW. Origin in March committed to purchasing its output.

  • NAB shares rose sharply after the bank lifted first-half earnings 6.5% to $3.31 billion. A previously flagged $4.22 billion hit from the demerger and float of the Clydesdale Bank dragged NAB to a statutory $1.74 billion loss for the six months to March 31, but cash earnings - the banks' preferred measure of profitability - were up strongly. Rival ANZ this week reported a drop in cash earnings and cut its dividend, but NAB has kept its interim dividend unchanged at a fully franked 99 cents per share after lifting its net interest margin one basis point to 1.93%.

  • BHP Billiton is facing a near 20-fold increase in compensation Brazilian authorities want for last year's deadly Samarco mine disaster. The iron ore miner on Wednesday said Brazil's federal public prosecutor had launched proceedings for $US43 billion ($A57.4 billion) in social, environmental and economic compensation for the disaster that killed at least 17 people. That's a huge increase on the $US2.3 billion settlement BHP and joint-venture partner Brazil's Vale agreed with authorities in March.

  • Nine Entertainment Company (NEC) and Southern Cross Austereo (SXL) have signed a five year regional television affiliation agreement. The deal will see Southern Cross broadcast Nine’s premium Australian and international content across its metropolitan and regional network. Southern Cross will pay Nine an affiliation fee of 50% of its television revenue.

  • XTD Limited, the Australian‐based operator of cross‐track digital media communications systems for transit environments, has renewed its partnership with leading outdoor media provider, APN Outdoor Group Limited. The agreement means that APN Outdoor will continue to provide XTD with advertising content for the digital screen systems that are owned and operated by XTD in the Melbourne and Brisbane metro rail networks.

     

Markets in review

 

 

 

Capital Return

 

 

 

Weekly

CYTD

FYTD

S&P ASX 200

0.8%

-0.1%

-3.1%

DOW JONES

-0.2%

1.8%

0.7%

S&P 500

-0.4%

0.6%

-0.3%

UK FTSE100

-1.9%

-1.9%

-6.1%

FRENCH CAC40

-2.9%

-7.2%

-10.2%

GERMAN DAX

-1.7%

-8.1%

-9.8%

JAPANESE NIKKEI

-3.4%

-15.4%

-20.4%

SHANGHAI COMPOSITE INDEX

-0.9%

-17.7%

-31.9%

 

$1 Australian buys you:

   $0.7373
£0.5097
¥4.7957
¥78.8755
€0.6461
$1.0766

Biggest winners and losers last week - by sector

 

Biggest winners and losers last week - by company

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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