Share Market Review
Global equity markets have been on the decline since April 2015. The key factors driving negativity have been; falling oil and commodity prices, changes to liquidity requirements within the banking sector, fears of slower growth in China, unrest in the Middle East and the timing of interest rate rises within the US. All of these factors have had their own negative impact and then combined together has seen the market drop over 16% over the last twelve months. While we expect volatility to continue we believe that that the market presents some good buying opportunities for long term investors.
The first quarter of the 2016 calendar year was negative with the ASX/200 closing at 5,082.80 points on 31st March 2016. This equates to a decrease of 213.1 points or 4.02% for the quarter.
Banking Sector Update
The Australian Banking sector has been copping a lot of negativity in the press over the last couple of weeks which has had an impact on share prices as well as the overall performance of the Stock Market. The banks and other financial companies make up about 40% of our stock market index. Hence, when they perform poorly so does our index.
Some of the key issues for the banking sector are summarised below:
- David Murray’s inquiry said the Banks were too exposed to home loans and needed to get more capital in, which they did through capital raisings.
- Overseas economists have reported that Australia has too much housing debt and that a bust is coming.
- International hedge funds have been shorting our banks on the back of some of these reports, including one who recently tried to create a ‘Big Short’ story for our housing market, which suggested that dodgy home loans would cripple our banks. However, a recent Bloomberg column showed that even our riskiest low doc loans have arrears under 5% and these make up only 1.2% of Australia’s total residential home loan mortgage book!
- In the US, they don’t understand that we pay back our home loans. Over there, they can drop off their keys to their mortgaged home at the bank and drive away with no personal guarantees involved. Therefore a very different home loan climate to ours.
- The weakness of the mining sector has led to ‘experts’ reporting that our banks are over-exposed to miners to whom they’ve lent money but the average exposure is under 2%!
On the positive front our big four banks were in the top 10 safest banks in the world during the GFC and they have been great dividend deliverers. Don’t believe everything you read or hear in the media.
Below is a chart detailing CBA’s dividend. This illustrates that the dividend has grown from just under 50 cents in 1996 to over $4 now while interest rates have steadily declined over the same period. Also note CBA’s share price has gone from $9.35 to over $73 today but has been as high as $95.27 over the past 12 months.
Note that for 2016 only one dividend has been paid to date with another dividend due to be paid in October 2016.
The Bloomberg graph below illustrates the dividend yield (dividend per share price) on a rising share price has faired much better than Australian Government Bonds.
Source: Bloomberg
Economic Update
The Reserve Bank of Australia (RBA) kept rates on hold for the 11th consecutive month since May 2015. At its most recent meeting Governor Glenn Stevens announced that “the global economy is continuing to grow, though at a slightly lower pace than expected”. This has become a bit of a mantra for the RBA and all forecasts show that this slow but persistent growth will continue.
In recent times commodity prices have increased a little, however not nearly enough to offset the losses we have seen over the past couple of years. The RBA believes that our economy is continuing to rebalance following the mining investment boom. Governor Stevens noted that there have been consistent developments in the labour market, GDP growth has gained momentum, inflation is close to target and the pace of lending to businesses has also picked up. These indicators are all very positive for our economic outlook.
The RBA has again indicated that it will continue to exercise accommodative monetary policy to complement the adjustment in the economy and smooth fluctuations. The field is divided on whether there will be further cuts or a continued prolonged period of rates on hold. We tend to believe that rates will remain steady for some time to come.
Our terms of trade remain to be quite a lot lower than in previous years. The December quarter saw a decade low, down more than 50% from the peak in 2011, and 30% below the long term average. This is a result of low commodity prices and decreased demand for key resource exports. Another factor is the rise in import prices and reducing Australian household disposable incomes.
Real net disposable income – a key measure of living standards – has fallen for 6 consecutive quarters and has put pressure on household budgets and consumer spending. Consumer confidence fell 2.2% in March after surging 4.2% in February. The index is 0.4% lower than this time last year and below the long term average. This is largely attributable to the continuing uncertainty of employment conditions as the non-mining sector continues to find its feet.
A recent highlight is the boost in business confidence. This indicator has doubled since February and its current level of 6 is the highest reading since September 2015. Economists believe that this lift is a result of lower risks of contagion from global uncertainty and some degree of assurance that gains in conditions will be sustainable. The average for business confidence from 1997 to 2016 was 5.75%.
Another positive indicator for our economy was the fall in the unemployment rate from 6% to 5.8% in February 2016. As mentioned in our last update, this is an important indicator for stability and economic growth. Keeping the rate at or below 5.8% will see strong positive change in the economy and we are on the right track to achieve this. Wage growth is still sluggish however, with wages increasing only 0.5% last quarter compared with 0.6% the previous one.
GDP was higher than expected in the December quarter, expanding 0.6%. This result was a pleasant surprise for economists and the RBA and a considerably positive outcome following the biggest slump in the mining sector of our lifetimes. The financial and insurance sectors, construction, public administration, safety, health care and social assistance were all big growth sectors, with a residential building boom and the aging population stoking demand.
Treasurer Scott Morrison said the GDP data explains a string of strong employment figures late last year and highlights the successful transition from the mining boom to broader growth. “We are growing faster than every economy in the G-7, we are growing faster than the United States and United Kingdom, and more than twice the pace of comparable resource-based economies like Canada,” he said.
The weak commodity prices and persistent volatility in the Australian share market has Australian’s feeling that the economy is weaker than the headline GDP figures and key indicators imply. The quarterly declines in per capita income are nowhere near as large as those recorded during the 1990s recession or global financial crisis, but have been much more sustained – a slow grind down, rather than a sharp drop. Nonetheless we will undoubtedly need to continue to ride this economic adjustment for some time yet.
Property Market Update
Source CoreLogic RP Data
Weekly rents increased by a mere 0.2% at a combined capital city level in March. Despite the monthly increase in rents, rental rates across the combined capital cities are -0.2% lower over the past year.
Over the year, Melbourne recorded the biggest increase in rental rates at 2.0% followed by Sydney at 1.4%, Canberra 1.2% and Hobart 0.3%. On the flipside, the cities to see a drop in rents included Darwin -11.5%, Perth -8.4%, Adelaide -1.0%, and Brisbane with a -0.7% drop.
In its March Rental Review, CoreLogic RP Data confirmed that the combined capital city house rents were recorded at $489 per week in March 2016 while unit rents were $469 per week. Over the past month, house rents have increased by 0.1% and unit rents by 0.4% over the past three months, house rents rose 0.5% compared to a 0.9% rise in unit rents.
The March results show that recent rental increases are likely to be seasonal which is further highlighted by the fact rents are lower over the year. Over the past 12 months, house rents were -0.5% lower and unit rents increased by 1.5%. It is important to note that a much higher proportion of total unit stock is rented compared to housing stock.
The annual change in capital city rents has been tracked by RP Data since 1996 and this is the first time they have seen rental rates falling. The extra accommodation supply, as a result of the current building boom, along with the recent record high levels of investment purchasing is adding substantial new dwelling supply to the rental market at a time when the rate of population growth is slowing from quarter to quarter. Furthermore, wages are increasing at their slowest annual pace.
These results also highlight a swift easing in rental market conditions over the past year. The ease has been attributed to a variety of influences such as falling real wages, excess rental supply in certain areas and lower rates of population growth which have impacted on demand for rental accommodation.
With new dwelling approvals recently at record highs, construction activity set to peak over the next 24 months and many new properties still to settle, the rental demand weakness is expected to persist. In all probability, there won’t be much scope for landlords to lift rental rates given current conditions.
While rental rates remain at record highs in Sydney and Melbourne, rents are lower than their previous peaks in all remaining capital cities. Declines from their peaks are recorded at: -0.9% in Brisbane, -1.2% in Adelaide, -12.8% in Perth, -0.1% in Hobart, -15.6% in Darwin and -7.4% in Canberra.