Wealth Managed – 12 September 2016

By David Lane - September 12, 2016

Friday’s severe decline on the US and European markets came at the end of three weeks of declines on the Australian share market.

The severity of the sell-off in the US market came swiftly, and was somewhat of a shock to the market participants, whom had become somewhat lulled into a false sense of security from low volatility over the last couple of months.

The Australian market will no doubt begin the week in negative territory, following leads from the overnight markets. However, given the S&P/ASX200 index is now 4.4% below its high of 5,587.4 reached on 1 August, we anticipate that the sell-off will encourage buyers to seek opportunities in the market.

The reported reasoning for the dramatic sell-off was that nothing had changed.  The European Central Bank failed to pledge further stimulus, and the Federal Reserve gave some indication that they may need to raise rates at some point. Nothing new.  In spite of some of the Federal Reserve members indicating that they are unlikely to leave rates too low for too long, economic data released last week reduced the odds of a rate hike happening at the September meeting.  Bond markets will be on “Fed watch” for the next few months, attempting to anticipate the next move of the Fed, which at this stage is most likely to be in December.

Some of the largest falls in the US share market last week, and in Australia over the last few weeks, have been in the interest rate sensitive high yield stocks, particularly the infrastructure, telecommunications and utilities stocks. Given the global search for yield, these securities have had a solid run for most of the year, and have prompted many to take some profits due to the prices running ahead of valuations.  We have also seen some softening in the prices of a number of listed REITs.

We believe that this week will present a number of opportunities for long term investors to add to their portfolios at reasonable levels. Portfolios have recently been receiving cash inflows in the form of dividends and distributions, and cautious investors have been waiting for prices to soften. It is likely that we will begin to see some of this cash returning to the markets, which could provide support for the share prices towards the end of the week.

We are now more comfortable adding to portfolios at current prices. While it is difficult to predict what may happen to the prices of individual securities – or the markets in general – on a short term basis, successful long term investors take advantage of short term moves to add to quality assets at reasonable prices.

News in Review 

  • The European Central Bank left its €1.7 trillion stimulus package unchanged despite expectations of an extension of the Quantitative Easing program which ends in March 2017. While President Mario Draghi expressed concerns about persistently low inflation in the Eurozone, the governor claimed that there weren’t any discussions about a potential extension.
  • The European Central Bank left interest rates at zero for another month.
  • As widely expected, the RBA left its policy rate unchanged at 1.5%. As is normal in the month following a rate cut, the statement from the RBA contained no explicit policy bias. This is not to say that an easing bias does not exist given that the RBA’s inflation forecast remains below its target of 2-3%.
  • Australia’s trade deficit narrowed slightly in July driven largely by a surge in gold exports which rose by $912 million, or 62% over the month. 
  • GDP growth in the second quarter of 2016 came in slightly below expectations with 0.5% growth for the quarter and 3.3% over the year, which is still above average levels. Australia has now achieved 100 quarters without a recession, approaching the Netherlands' record for longest expansion at 103 quarters. 
  • German exports fell sharply in July after a sharp drop in global demand for their goods. 
  • The US non-manufacturing ISM index tumbled 4.1 points to 51.4, which is the weakest reading since February 2010 and suggests that slower payrolls growth lies ahead. 
  • The growth of China’s service sector accelerated in August as the Caixin General Services Purchasing Managers’ Index (PMI) rose to 52.1 from 51.7 in July. A reading above 50 indicates an expanding economy, while anything under 50 indicates a contraction. Chinese Service providers also saw their costs increase in August by the slowest pace since January 2015 while the prices they charged customers increased.

Company News

  • Apple unveiled its latest iPhone as the company seeks to reignite sales of the smartphone that has propelled much of the company's extraordinary growth over the past decade. Investor reaction was relatively muted.
  • CBA and British bank Barclays have partnered to simplify, streamline and speed up money transfers between Australia and the United Kingdom. The two financial institutions have bridged their individual payment apps so that people can move money between the two countries more rapidly, using only a mobile number.
  • AMP chief executive Craig Meller claimed that China will be a “very material contributor” to the group’s result in a few years as the country opens up its pensions system to deal with a rapidly ageing population.
  • JB HI-FI rejected renewed media speculation that it is on the cusp of making a multi-million dollar tilt for whitegoods retailer The Good Guys, but issued a statement to the ASX saying it "remains in the sale process and is continuing discussions”.
  • Sigma Pharmaceuticals CEO Mark Hooper was upbeat in the company’s presentation of the half year results to 31 July.  With Net Profit up 14.5% to $31.7 million, a higher dividend and a 24.2% growth in earnings from non-PBS sources, the company is positive on the future outlook.  With future growth expected to come from hospital pharmacy and expansion into China, Sigma upgraded their FY17 forecast to 10% EBIT growth, and anticipate 5% growth in FY18.


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