Wealth Managed - 8 February 2016

By David Lane - February 8, 2016

News in Review

  • The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2%, with the accompanying statement continuing to insinuate a slight easing bias.  The statement highlighted recent improvement in the labour market but also recent financial turbulence that could foreshadow weaker global and domestic demand.  

  • While the RBA left GDP forecasts for 2016 unchanged, their forecast for Australia’s growth at the end of 2017 was trimmed to 3.0% from November’s forecast of 3.5%.  Inflation is now forecast to be 1.5% by mid-2016, down from November’s forecast of 2.0%.  The RBA expects unemployment to remain 6% in 2016.

  • Unemployment in the US improved to 4.9%, with 151,000 jobs added for the month of December.  There was a slight increase in the length of a typical work week in January, resulting in higher income levels. 

  • China’s Central Bank foreign reserves held has been falling for the past 12-18 months.  Reserves fell by almost $100 billion in January, as the bank increased outflows to combat the yuan devaluation and the slowing pace of economic growth.  

  • Australia's trade deficit widened unexpectedly to $3.5 billion in December after a sharp fall in the value of iron ore exports, which were down 5% for the month.  The deficit represents a 30% rise from the $2.7 billion deficit in November and comes as the fourth highest in history.

  • Australia’s December retail sales were flat despite expectations of a slight rise.  While some of the weakness may be attributable to mortgage rate increases late last year, the weakness of discretionary segments (restaurants, café, and takeaway food) suggests there may also have been a loss of consumer confidence.  

  • Building approvals were higher than expected in December, rising 9.2% for the month. A rebound in private other dwelling approvals (+ 12.8%) was the main driver of the growth.  Private house approvals were also robust (+ 5.4%) following three consecutive months of declines. 

  • Japan joined the European Central Bank in moving to negative interest rates.  This was initially well received by markets but was partially reversed by soft data from the manufacturing sector. 

  • China’s official Purchasing Manufacturers Index (PMI) recorded a weaker than expected 49.4 in January, remaining below the 50 mark for a fifth consecutive month.  

  • China and Japan both recorded positive increases in activity in their private service sectors.

  • The Bank of England left its official cash rate unchanged at 0.5%, the decision being largely expected although this time the Monetary Policy Committee’s vote was unanimous.

  • Europe’s annual growth rate of credit extended to residents slowed to 2.3% in December (down from 2.6% in November). Credit granted to general government was unchanged at 7.8% YoY in December. The annual growth rate of credit to the private sector slowed to 0.8% in December (versus 1.2%yoy in November).  

  • European services PMI remained resilient, with the final January reading confirmed at 53.6.


Volatility in the markets continues, with wild swings in the index last week.  The ASX200 index traded across a 3.3% range, yet only lost 0.58% by the end of the week.  Wednesday and Thursday saw movements of over 100 points per day, culminating in sharp recoveries from BHP and RIO.  While the daily movements make for interesting fodder to sell newspapers, long term investors are best concentrating on the long term outlook and not getting too caught up in the short term swings.

It is likely that the next month will continue to be volatile for individual shares, as we enter the main part of the Australian reporting season.  Going into the reporting season, it is fair to say that the market is not expecting much.  With the ASX200 already down over 7% since the start of the year, the local market has been gripped by negativity.  

Analyst forecasts have fallen, with consensus forecasts anticipating a fall in Earnings Per Share (EPS) of 6.1% across the ASX200.  While this sounds terrible, across the bulk of the companies it is not as dire as the headline suggests.  Forecasts are for earnings for the Energy sector to decline by 45% and Materials by 38.5%.  The only other sector expected to report declining earnings is Consumer Staples, mainly due to Woolworths.  

Both the Utilities and Industrials sectors are forecast to report double digit growth in EPS, while Consumer Discretionary and Health Care are expected to report healthy growth.

We are likely to see improved margins from those companies that are benefiting from the lower Australian dollar, and from the lower oil price.  While obviously the fall in the oil price is a negative for oil producers, for most of the rest of the economy it should actually be viewed as a positive.

Energy costs are a major input cost to manufacturers, transport, logistics, retailers, tourism, construction, property, and infrastructure.  Companies in these sectors are likely to report improved margins due to lower energy prices.

Consumers also benefit from lower oil prices, although the price we pay at the bowser - at least in Brisbane - seems more volatile than the share market!  Lower petrol costs, particularly around holiday periods, can act as a 'consumer tax cut', where we feel that we have more money in our pockets, and then spend it.

In further evidence of an improving US economy, the unemployment rate dropped to 4.9% with 151,000 new jobs created in December.  Improvements such as this place pressure on Federal Reserve Chairman, Janet Yellen to raise rates at the next Federal Reserve meeting.  Some economists are predicting four rate rises this year in the US.  

We question if the US economy can in fact sustain further rate rises as the global economy becomes more volatile?  Ratings agency S&P follows a similar line of thinking.  S&P has cut its expectations for US rate hikes down to two rate rises this year (from four) saying low inflation and global market volatility is likely to hold the Fed back.  The agency does not expect a cut in the upcoming meeting in March.

Company News:

  • National Australia Bank (NAB) delayed the listing of Clydesdale Bank (CYB) by 24 hours to allow institutional investors to digest the impact of a potential downgrade to one of Clydesdale's credit ratings. Clydesdale Bank shares are now trading on the ASX under the code CYB.

  • BHP Billiton (BHP) had its credit rating downgraded one notch by Standard & Poor's.  S&P has warned BHP to cut its dividend by a sufficient degree to ensure the company does not face a second credit rating downgrade.

  • Woolworths (WOW) have announced the appointment of Holly Kramer (former Best & Less CEO) and Siobhan McKenna (Ten Network director and former NBN Chair) as directors.  Jayne Hrdlicka has resigned from the board after 5 and a half years on the retailer’s board, to focus on her role as Jetstar CEO.  The company has yet to announce a replacement for outgoing CEO, Grant O’Brien.

  • JB Hi-Fi (JBH) has announced a 7.5% lift in net profit to $95.2 million.  Sales revenues rose 7.7% to $2.12 billion, while comparable same-store sales were up 5.2%.  CEO Richard Murray said that the important November and December periods were particularly strong.  The company confirmed it was on-track to achieve a net profit of $143 - $147 million, in line with market expectations.  While still only representing 3% in overall sales, the company’s online offering, - JB Hi-Fi Solutions - grew by nearly 30% over the last 6 months.

  • Ansell (ANN) announced a decline of 21% in first half profits, on revenues of US$784.8 million (-7.4%).  The global company cited weakness in Russia and Brazil, economic headwinds and currency fluctuations as reasons for the disappointing result.  The company had pre-announced a reduction of 10% to its full-year guidance last week, ahead to the announcement of the first half results.  The shares slumped 21% last week after the guidance from the company.  Management are hoping for an improved second half through an increased focus on logistics.

  • Alphabet (Google): Google’s parent company, Alphabet, has overtaken Apple as the largest company in the world.  Alphabet has a market cap of $547 billion whilst apple has slipped to $529 billion after falling over 20% since November. 

  • BP Plc: US listed company, BP reported a 91% decline in profit after oil prices dropped to the lowest level in a decade. 

  • LinkedIn’s share price plunged over 40% on Friday, wiping out nearly $US11 billion ($15.56 billion) of market value, after the social network company shocked Wall Street with a revenue forecast that fell far short of expectations.

  • Tableau Software, which creates software to help business customers see and understand data, lost almost half of its market value after the company cited “some softness in spending” as the reason for a 2% adjustment to its forecast.



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