Quarterly Review April 2015

Posted in Wealth
10/04/2015 Level One

Market Update

The first quarter for the Australian Share market for the 2015 calendar year was very positive with the ASX/200 closing at 5,891.50 on 31 March 2015. The ASX/200 finished the previous quarter (31/12/2014) at 5,411.80 which is a rather large jump of 480.5 points or 8.88% over the three month period.

February was the best performing month of the quarter up 6.9% following the RBA’s decision to cut the official cash rate from 2.5% to 2.25% – the first interest rate move since August 2013.

The market has continued to edge closer to the 6,000 point mark however we are yet to break through at this point.

High yielding sectors and US Dollar exposed stocks have been the best performers. Resources have continued to underperform and prove very volatile.

The US Federal Reserve has opened the door further for an interest rate hike as early as June, ending its pledge to be “patient” in normalising monetary policy. However the US central bank signalled a more cautious outlook for US economic growth and slashed its projected interest rate path, in a sign that it remains concerned about the health of the recovery.

In its statement following a two-day meeting, the Fed’s policy-setting committee repeated its view that job market conditions had improved and gave its strongest signal to date that it was nearing its first rate hike since 2006. The statement put a June rate increase on the table, though it also allowed the Fed enough flexibility to move later in the year, stressing that any decision would depend on incoming data.

“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium-term,” the Fed said in its statement.

For the 2015 calendar year to date the Australian dollar has dropped US$5.44 or 6.65% falling from US$81.84 on 31st December 2014 to close the quarter at US$76.40 on 31st March 2015. While the drop in our dollar isn’t good for people travelling overseas it is good for many Australian companies and the Reserve Bank of Australia has publically stated that it would like to see the Australian dollar weaker still. A lower Australian dollar would improve the competitiveness of Australian manufacturers and should provide a boost to the tourism market from international travellers.

Iron ore completed the biggest quarterly loss since at least 2009 as surging low-cost supplies from Australia and Brazil swamp the global market, spurring a glut as demand from China slows. The commodity capped a fifth quarterly retreat on Tuesday after Rio Tinto Group and BHP Billiton expanded supply, betting increased volumes would offset lower prices and force higher-cost miners to close.


Economic Update

The Reserve Bank of Australia (RBA) reduced the cash rate in February by 25 basis points to 2.25%. Another rate decrease is expected in the coming months; however this month the RBA kept the cash rate on hold. The RBA stated at its latest meeting “Moderate growth in the global economy is expected in 2015, with the US economy continuing to strengthen, even as China’s growth slows a little from last year’s outcome.” The RBA has assured us that they will be watching the economic data closely over the coming months and take action where required to spur growth.

The falling Australian dollar has brought a smile to many faces throughout Australia. It is presently the single most important driver of rebalancing an economy tilted towards servicing the mining boom over the last 10 years to non-mining led growth. With the Australian dollar now lower, there has already been an initial recovery in tourism, both inbound and domestic. That will be joined by education, agriculture, business services and even mining and manufacturing. The recent fall in the dollar has helped, but more is required.

It is believed that allowing for the rise in the US dollar, the Australian dollar needs to be below US 70 cents for our export and import-competing industries to be competitive on average. The view is that it will get there — but it will take time. In the interim, the economy remains in a holding pattern, waiting for business investment in the non-mining sectors to pick up and push the economy towards long-run trend growth.

Non-mining business investment, particularly in equipment, computer software and research & development, remains weak, weighed down by soft demand and weak profits, with businesses focussed on cutting cost and deferring investment — a legacy of the GFC. When demand finally picks up, a recovery in growth will absorb excess capacity allowing firms to shift from cost-cutting to one of increased appetite for investment. We think that is at least a year away, possibly more.

Overall, this is not a business-as-usual economy. We are on a threshold of structural change, switching from a mining investment-driven economy back towards balanced growth. The quicker the dollar falls to below US 70 cents, the faster we transition to a balanced economy. Growth in the interim is being supported by an upswing in dwellings building, solid private consumption expenditure and strong resource exports.

The slow pace of employment growth over the past three years has not kept pace with the growth in the labour force (the number of people working or available and actually looking for work). This has resulted in the unemployment rate rising from 5 per cent in May 2011 to 6.4 per cent in January 2015 (seasonally adjusted).

Weak growth and cost containment logic implies that employment growth will remain weak over the next 18 months. Even stronger businesses are cutting, governments are also cutting. Miners are cutting costs including labour to preserve profitability in the face of lower commodity prices.

The unemployment rate will increase a little, and stay stubbornly high until stronger growth and employment growth start to claw it back.

We expect the economy to remain weak for another 18 months before strengthening non-mining business investment (underwritten by a lower dollar and tightening capacity) pushes the economy closer to its potential. But it will be a ‘soft cycle’ as the potential growth rate of 3.25 per cent is unlikely to be realised on average. The next round of infrastructure and mining projects, plus another cycle in dwellings building (we will still have a deficiency of housing stock at the end of the current cycle), is expected to drive stronger growth towards the end of the decade.

Australia’s GDP growth for 2014/15 and 2015/16 is forecast to be 2.6 and 2.9 per cent respectively. This is a reasonable expectation considering the calendar year growth for 2014 was 2.7.

The chart below shows the GDP growth over the last 20 years:


Property Market Update

The rate of value growth is slowing across all cities except for Sydney

Home values rose by 1.4% in March, increasing in all cities except Brisbane and remaining unchanged in Adelaide

Home values have increased by 3.0% over the first quarter of 2015 however, Sydney, Melbourne, Hobart, Darwin and Canberra are the only cities in which values have increased

The value growth performance has been extremely varied over the past year. Sydney (13.9%) has been much stronger than other capital cities while Melbourne (5.6%) has recorded moderate growth while increases have been minimal in Brisbane (2.7%), Adelaide (2.2%) and Canberra (1.5%). Home values have fallen over the past year in Perth (-0.1%), Hobart (-0.3%) and Darwin (-0.8%).

Sales activity across the country is slightly higher than at the same time last year

Over the 12 months to January 2015 there were 351,187 houses and 135,540 units sold across the country

House sales are 3.0% higher over the year compared to a -5.3% fall in unit sales

Vendor metrics indicate quite strong housing market conditions

Auction volumes have surged since the RBA cut interest rate in February and clearance rates have also recorded a sharp rise and are at their highest level since 2009

Discounting levels remain low while time on market is recording its usual seasonal spike albeit the spike is lower than a year ago

New and total listings are lower than at the same time last year

New listings are -10.4% lower than a year ago nationally and -13.3% lower across the capital cities

Mortgage demand has rebounded strongly following the Christmas / New Year period

The RP Data Mortgage Index (RMI) shows that mortgage demand rebounded strongly in March 2015

ABS housing finance data to January shows the market growth is largely being driven by investors and owner occupier refinances

Economic data flows remains mixed

Population growth is winding down but remains high on an historic basis

Dwelling construction approvals hit a record monthly high in January and recorded their second highest ever month in February and remain at a record high on an annual basis

With population growth slowing and building approvals remaining high (despite the recent fall) we may see a better relationship between approvals and population growth over the coming years

Consumer sentiment has been weak since the 2014 Federal Budget and after rebounding into positive territory in February fell to negative in March

The unemployment rate eased slightly over the month but remains at levels not previously seen in more than a decade

Source: RP Data


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