Share Market Review
The market shook off the post Brexit shock to finish the September quarter at 5,435.90, up 202.50 points on the 30 June 2016 close of 5,233.40. This represents a gain of 3.87% for the September quarter.
Following this strong recovery in the September quarter the ASX200 is now up 2.64% or 140 points for the 2016 calendar year.
Companies with a 30 June financial year reported during this latest quarter and results were mixed.
The ‘very large cap’ universe – the top 20 or so stocks – are still struggling for earnings growth and on average produced somewhat disappointing results this reporting season. The top 20 stocks delivered earnings per share (EPS) contraction of almost 13%. If you take the top 20 out of the equation, EPS growth came in at a positive 6.7%
The best results were typically in the mid cap area (ASX 25-100), while small cap (ASX 101 -200) results were better than the very large caps, albeit quite mixed.
Looking to the sectors of the Australian market, there was generally stronger performance from the cyclicals, led by Materials (+13.9%), Information Technology (+10.2%), Consumer Discretionary (+8.7%) and Financials ex-REITs (+5.2%). Consumer Staples (+12.4%) also performed well. The worst performing sectors were Telecommunications (-6.4%), Utilities (-2.3%) and REITs (-1.9%).
In resources, cost improvements were a big theme, although top line profits were hit by impairments and high depreciation charges from the boom years. Cash flows are much better and the top end miners (South 32, BHP Billiton and Rio Tinto) are repairing balance sheets and even talking about spending cash again. Results within this sector were positively received by the market, which has seen stock prices turn around as a result.
Growth stocks have outperformed over the past year with the ‘rush to yield’ trend reversing. With interest rates falling investors have been happy to pay for stocks with good and growing cash flow.
The timing of US Interest rate increases are continuing to have an effect on the market with a December rate rise still looking uncertain.
The US market has run significantly and is trading above pre-Global Financial Crisis (GFC) levels while our market is still 20.79% below the market high from 1st November 2007 of 6,873.20, which is now over eight years ago.
Economic Update
June saw Australia achieve 100 quarters of GDP growth. This is worth a “Happy 25th birthday without a recession” mention we think. The only country to have exceeded the unbroken growth record is The Netherlands, which achieved a 26-year run before the global financial crisis.
After allowing for inflation, living standards have risen by 66% since Australia’s last recession ended in June 1991.
Our national economy grew 3.3% on the year to June, which was in line with economists’ forecasts and put GDP slightly above average levels. Economic growth is overwhelmingly focused in NSW and Victoria, both of which are enjoying a lift in demand in excess of 3%, and the ACT, with 6% growth. Growth was below 2% in the other states. Western Australia’s domestic demand fell 2.5%, spurring some analysts to believe that the state was in recession.
Overall, analysts remain cautious on the outlook for our economy in spite of the optimistic result. Due to the ‘NSW boom versus the WA bust’ the watch-this-space approach is continued as we transition out of the mining boom.
National unemployment is currently 5.6% – unexpectedly down from the previous month. This is the lowest national unemployment has been since 2013. Western Australia and South Australia jobless rates are 6.3% and 6.4% respectively however, again feeling the effects of the bust. For the last decade the east coast of Australia was green with envy of our westernmost state’s success but that has now very much come to an end.
The Reserve Bank of Australia (RBA) lowered the cash rate to 1.50% in August 2016. Concerns over China’s moderating growth and the subsequent impact on our economy, low inflation, low terms of trade, as well as still soft commodity prices were the primary drivers here. Governor Glenn Stevens reported “Recent data confirm that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.”
Governor Stevens also stated “Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.”
Going forward, economists are split on further rate cuts this year. Our view is that the cash rate will likely hold stable throughout the remainder of 2016. We also expect the low inflation, slow growth state of play to continue for the months to come.
Property Market Update
An oversupply of new homes (particularly units), weaker investor demand and lower population growth will see prices decline in most capital cities over the next three years. The declines are not expected to be dramatic however the forces that pushed prices up now appear to be plateauing.
This expected decline follows four years of consecutive positive growth.
All states except New South Wales are expected to move into oversupply or face growing oversupply. In Sydney supply will not catch up to demand for another couple of years due to a chronic undersupply.
BIS Shrapnel anticipates a record 220,000 new dwellings started construction in 2015-16, translating to a peak in new completions this financial year. A record 49% are expected to be multi-unit dwellings, with many larger apartment projects – with longer construction time frames – set to lead to a high volume of completions in 2017-18.
Investor demand was a key driver of demand in the Sydney and Melbourne markets, but moves by the Australian Prudential Regulatory Authority to curb lending has slowed investor activity.
Nearly all capital cities are building apartments at record rates on the back of the recent strength in investor demand. As these projects are progressively completed, it is likely that there will not be enough tenants in a number of cities to support rents and consequently values upon completion.
The high level of apartment development going on in places like Brisbane, for example, is something to watch out for, as it means you can expect a flood of new developments coming to market at similar times.
The other ugly part of the market to watch is the inner city apartment market in Melbourne. There is a lot of nervousness at the moment with a number of off-the-plan blocks coming up for settlement.
A lot of those foreign and local investors are finding it difficult to get finance and some valuations are coming in below cost. If one of these blocks has trouble completing a reasonable settlement level, then the ripple effect on the market’s confidence could be severe.
With expectations of capital gains reduced, investor demand is expected to weaken further and create more downward pressure on prices. After accounting for inflation, median house and unit prices in all capital city markets are forecast to be lower in real terms by 2019.
Demand is still expected to grow, but at a lessor rate than what it has been over the past two years. Supply is expected to outnumber demand hence the potential for lower prices. Other than slower population growth and lower yield, there is also a possibility that foreign demand – particularly from China – could be constrained.
As always, the key with property is to take a long-term approach, borrow within your means and do your research carefully before committing to buy.
Source RP Data & BIS Shrapnel