Wealth Managed - 30 May 2016

By David Lane - May 31, 2016

Australian company profits declined 4.7% in the first quarter of 2016, an annual decline of 8.4%. The majority of the declines came from three sectors: mining, manufacturing and financial & insurance services. The other nine sectors recorded positive profitability.

Wages and salaries were positive, and above market expectations.  Wages grew by 0.6% in the first quarter, with above average growth coming from arts & recreation (+3%); professional, scientific & technical services (+2.8%); education& training (+1.0%).  Consistent with the significant decline in mining profitability, wages in this sector fell by 4.9%.  Wages in WA fell by 1% as the mining downturn has had a further impact on the West.

Yesterday’s economic data is consistent with the fact that the Australian economy is experiencing a divergence of fortune across different sectors and different regions of the country.  There are some parts of the economy that continue to perform well, and others that are benefitting from a lower AUD and picking up some of the slack from the downturn in mining activity.  However, it is difficult to identify sustained long term trends of growth across all sectors.

Australia’s first quarter GDP data will be released on Wednesday, with most economists anticipating a modest rise of 0.5 – 0.7% for the quarter.

News in Review 

  • Global Purchasing Managers Indices (PMI) have indicated a slow-down in the industrial activity of major economies.  The PMI is a measure of activity, where a number above 50 indicates expansion (below 50 contraction).  The US manufacturing PMI slipped 0.3pts to a new cyclical low of 50.5, the lowest level seen since September 2009, while Europe’s PMI edged down to 51.1 despite modestly firmer readings from Germany and France, indicating some weakness from the peripheral economies.  Japan’s Nikkei manufacturing PMI edged down to 47.6 in May, which is the lowest reading since December 2012.
  • In China, the Westpac-MNI consumer confidence index fell to 114.2 in May, though optimists continue to outweigh pessimists (a reading of 100 is deemed neutral, meaning the number of optimists and pessimists are equal), with all of the survey’s five subindices weakened during the month.  Perhaps of greatest concern was the deterioration in sentiment towards the housing market, particularly as policymakers appear to be relying upon higher house prices to generate greater levels of household spending and increased construction activity to spur economic growth.
  • Australia’s building data revealed that construction work had fallen 2.6% over the first quarter of calendar 2016. Private residential construction rose 1.4% in that period, though this was offset by weakening in both private non-residential building (down 7.6%) and private engineering construction (down 6.8%).  Total construction work done in the public sector rose 2.5% in the first quarter and was up 5.4% for the 12 months to 31 March, a turnaround after almost five years of negative growth.
  • US durable goods orders rose a much larger than expected 3.4% in April thanks to a 39% jump in aircraft and parts orders.  Non-defence capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 0.8% after an upwardly revised 0.1% drop the prior month. These core capital goods orders have now declined for three consecutive months. 
  • It was confirmed in the UK that GDP grew 0.4% in the first quarter of calendar 2016, although annual GDP growth was slightly revised down to 2.0% YoY. The detail showed a 0.7% quarterly increase in household and total domestic expenditure, net exports however subtracted from growth during the quarter.
  • Australia’s CAPEX survey revealed a larger than expected 5.2% decline in spending in the first quarter of calendar 2016, with the March figure also revealing a persistent pessimistic outlook, although projections are not as depressed as they were at the end of the December quarter.

Company News

  • Southern Cross Media (SXL)’s Austereo will be the official commercial FM radio broadcaster of the Rio Olympics in August. The broadcaster will stream the action through its Triple M network in Australia and a new `7 Rio Live' digital channel as part of a partnership with long-time Olympic rights holder Seven Network.
  • The ACCC is preparing to examine a possible takeover of domestic appliances chain The Good Guys by rival JB Hi-Fi (JBH).  The Good Guys is also considering a float on the share market in an IPO that would value the business at about $800m.
  • Bluescope Steel (BSL) has lifted its second-half earnings guidance following cost cutting and an increase in steel and iron ore prices. The Melbourne-based company says it expects underlying earnings before interest and tax of about $270 million, a big increase on its previous estimate of $209 million for the six months to June 30.
  • Australia's big four banks have all been ranked among the largest 100 companies in the world according to Forbes’ annual ‘Global 2000 List’.  Commonwealth Bank (CBA) is the top-ranked Australian company at No.58 with a market value of $137.71 billion.  Rivals Westpac (WBC) (72), ANZ (84) and NAB (88) are also in the top 100, with telco giant Telstra (TLS) the next highest ranked Australian company at No.262.
  • Amid milk price cuts from southern Australia’s largest processors, Murray Goulburn and Fonterra, Parmalat and A2 Milk  were keen to emphasise they would not be cutting their prices.  A2 Milk’s chief executive Peter Nathan said his company’s suppliers were protected by long-term fixed price contracts and there were no plans for prices to change

The Week Ahead

  • US: ISM Manufacturing (MAY), Consumer Confidence (MAY), Change in Non-farm Payrolls (MAY)
  • Australia: HIA New Home Sales (MoM) (APR), Private Sector Credit (YoY) (APR) 
  • Europe: European Central Bank Rate Decision (JUN 2)
  • China: CNY Manufacturing PMI (MAY)
  • Japan: Retail Trade (YoY) (APR), Jobless Rate (APR)

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