Wealth Managed - 31 October 2016

By David Lane - October 31, 2016

With Halloween today and Melbourne Cup tomorrow, it would be easy to be diverted from some of the important events occurring in the world this week. While many are preparing their costumes and studying the form guide, Central Bankers around the world will be determining if they will ‘spook’ the markets.

The Reserve Bank of Australia meets tomorrow, just before the horses jump.  While the tipsters are anticipating that rates will be left unchanged, there was some ‘late mail’ last week with a stronger than expected inflation number which could give Phillip Lowe and his board enough to cut rates further, but this is an outside chance.  Our tip is that there will be no change.

Also meeting this week will be the US Federal Reserve, Bank of England and Bank of Japan.  While there is sufficient economic data to provide the Fed with support for an increase in rates, it is unlikely that they will make the move ahead of the Election.  Most Fed watchers have their money on a December rate rise.

Last week was a poor week for the Australian share market, with a number of severe sell-offs of specific stocks and sectors.  The S&P/ASX 200 Index dropped 2.7% last week, to now be down 0.2% over the calendar year and 5.4% below the 12 month high.  The Healthcare sector, which has for a long time been a market darling, was impacted by a softer outlook from HealthScope (which has fallen 25%).  Bega Cheese fell 23.5% following their AGM.  Ardent Leisure was punished for management’s handling (and the potential brand damage) from the tragedy at Dreamworld last week.

The Consumer Staples sector was the worst performing last week, led by Wesfarmers (-8.9%) after the group reported softer sales at Target and disappointing growth at Coles for the first quarter of the new financial year.  Woolworths shares also fell 6.2% in anticipation of softer sales, which were announced on Friday.  While there was an improvement in food sales, the sales from Big-W confirmed that the mid-market department store sector is struggling.

The declines in the market over recent weeks have uncovered a number of attractively priced investments.  However, we are still cautious about the increasing volatility that we expect will continue for the balance of 2016.

News in Review

  • The US economy grew at its fastest pace in two years in the September quarter as a surge in exports and a rebound in inventory investment offset a slowdown in consumer spending. The annual GDP growth rate now stands at 2.9%, beating economists’ expectations of a 2.5% expansion rate.
  • Australia’s consumer price inflation (CPI) rose by 0.7% for the September quarter, leaving the year-on-year increase at 1.3%. The probability of the RBA cutting rates at its Melbourne Cup day meeting now sits at just 5% according to the futures market, down from 14% prior to the report’s release.
  • In China, new home prices in the 70 major cities rose 2.1% in September to be 11.2% higher over the past 12 months. Prices in the key commercial hubs of Beijing, Shanghai and Shenzhen increased by 27.8%, 32.7% and 34.1% respectively over the year, exemplifying widespread concerns of a rising property bubble.
  • Consumer confidence fell in the US in October after having soared in the previous two months. Americans lowered their assessments of both the economy’s present state and future amid jitters about the looming presidential election and a moderating labour market.
  • The Eurozone’s economic recovery showed continued signs of resilience in October with the Purchasing Managers’ Index rising to 53.7, up from 52.6 in September. The figure represents the fastest expansion in the year to date and is well above the crucial 50 level that separates an expansion in activity from a contraction. The region’s largest economy, Germany, was the strongest performer thanks to a pick-up in factory activity.
  • The UK’s first official growth figures since the Brexit vote defied the UK government’s warnings of an immediate recession if Britain voted to leave the EU. Gross domestic product for the UK rose 0.5% in the three months to September, easily outpacing consensus estimates of 0.1% growth.
  • Japan's consumer prices fell in September for the seventh straight month, placing further pressure on the Bank of Japan to continue monetary easing as needed until inflation reaches and stabilises at the 2% target set by Prime Minister Shinzo Abe in 2013. The disappointing data came as the world's third largest economy struggles to revitalise growth and conquer a long battle against deflation.

Company News

  • Woolworths' reported that its underlying food sales grew for the first time in almost two years after the supermarket giant spent $1 billion in lowering prices. New Chief executive Brad Banducci described the growth as modest and claimed that the revamped customer loyalty program has yet to materially affect sales.
  • Ardent Leisure saw approximately a quarter of its market capitalisation wiped after four people were tragically killed at its popular Gold Coast tourist destination Dreamworld due to a malfunction with the 'Thunder River Rapids' ride.
  • Wealth management and insurance giant AMP will take a hit to profit of at least $565 million after conditions deteriorated in its life insurance business. AMP said losses in its life insurance business of $44 million in the third quarter of 2016 forced the company to review long-term trends in the sector. The company said that the deteriorating environment had been caused by a "by a range of factors in a period of unprecedented external scrutiny".
  • US tech powerhouse Apple reported its first decline in profit and revenue since 2001. Chief executive Tim Cook remained upbeat, saying there has been a positive response to the new iPhone 7 which he expects will result in strong sales growth in the December quarter.

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