Quarterly Review April 2017

Posted in Wealth
26/04/2017 Level One

Share Market Review

The ASX200 posted a positive return for the first quarter of 2017, closing at 5,864.90 – up 199.10 points or 3.51% for the three month period 1 January 2017 to 31 March 2017.

The ASX200 has now moved up 641.5 points or 12.28% for the 2016/2017 financial year with a quarter still to go.

The end of the quarter also saw the ASX200 push through the 5,900 barrier to reach a high of 5,901.50, its highest since late April 2015. 

The quarter was dominated by company reporting season, which overall was very solid. Areas that were expected to deliver strong results such as housing related exposures and resources, did deliver on those expectations. The Banking and Insurance sectors delivered better growth than the previous period.

Weaker sectors included telecommunications, gaming and traditional media companies.

Dividends were strong across the board with payout ratios increasing across the market.

Whilst the overall message from the reporting period was strong, this hasn’t led to upgrades on forecasts for the full financial year.

In the US, the first quarter earnings season gets underway in the coming week and this will be an important test for the stock market rally. If US companies deliver or under-deliver, Wall Street will react and our market will likely follow.

It is looking more likely that the ASX200 will get through the 6,000 point barrier – a place it hasn’t been since January 2008.

For the market to continue rising for the remainder of 2017 we will require the following:

  • Strong US earnings.
  • That the US Fed doesn’t raise interest rates too fast.
  • US economic data remains strong.
  • China’s economy to remain positive.
  • The French election doesn’t have a bad result and raise question marks over the longevity of the EU.
  • Syria doesn’t get out of hand.
  • Donald Trump’s ability to deliver on promises in particular the tax reform package.

As we saw in 2016 with Brexit and the US election, uncertainty can cause a big ripple in markets and volatility is expected to continue. Any of the above factors could cause a dip in the market which could very well present a buying opportunity for long term investors.

Economic Update

GDP grew by 1.1% to be 2.4% higher through-the-year (December 2016 quarter over December 2015 quarter). This is a welcome outcome but we should not get too carried away. The non-mining economy continues to suffer from weak growth in demand, which continues to see weakness in employment. On a positive note, private consumption expenditure grew by 0.9% in December (adding 0.5% to GDP) and is forecast to return to more sustainable growth rates between 0.5% to 0.7% per quarter over the next two years. This will moderate quarterly GDP growth.

The Reserve Bank of Australia held the cash rate steady at 1.50% throughout the first quarter of 2017, continuing to defend their stance on monetary policy. In his speech on 7 March 2017, Governor Phillip Lowe confirmed that business and consumer confidence was improving although there were still concerns around China’s consumption of our commodities going forward. Governor Lowe also advised that exports have risen strongly and non-mining business has also increased over the past year. All-in-all Australia’s economy is growing and is being supported by the low interest rate environment.

Retail sales fell 0.1% in February, much weaker than consensus, stifling expectations that last month’s solid 0.4% was the start of a better trend. The year on year eased to just 2.7%, from 3.1%, its slowest in 3½ years. Sales at larger retailers were also soft, flat after 0.8%. Weakness was broad-based, with declines in clothing and household goods, while ‘eating out’ was flat, with food up modestly.

Residential building approvals beat expectations again, jumping 8.3% in February. With January revised up from 1.5% to 2.2%, this is broadly consistent with expectations for a correction, but not a collapse. The value of renovations (i.e. alterations and additions) jumped 14%, after last month’s 19% fall, but remain on a relatively flat trend.

The Australian Prudential Regulatory Authority (APRA) announced additional macroprudential policy tightening for housing in March. The most binding constraint was a new cap on the flow of interest-only home loans to only a 30% share, which is well below the decade average share of ~40%. This is likely to be partly indirectly aimed at investors where interest only has been a very high ~60%+ share for many years; albeit owner-occupiers have also lifted to a significant ~23% share.

APRA also told financial institutions to “place strict internal limits” on interest only loans with a loan to value ratio (LVR) greater than 80%, and ensure strong justification for loans greater than 90% LVR.

We believe that the actions taken by APRA will keep the RBA from hiking interest rates prematurely. Nevertheless, the rate of household debt growth is concerning and will continue to be the focus of the regulators.

Treasurer Morrison brings down the 2017/2018 Commonwealth Budget on 9 May. The combination of a stronger underlying economy, higher received corporate taxes, higher than expected commodity prices, which conservatively must boost figuring for the next year or so, and a current year budget tracking better than forecast suggest this should be the first budget in a number of years showing modest improvement from the mid-year economic and fiscal outlook (MYEFO).

While election timing argues against overly optimistic budget projections, we believe any underlying improvement in the budget will be used to fund 1) a moderately higher 2020/2021 surplus that makes it less ‘wafer thin’, 2) paying away long-standing ‘unpassed’ saving measures that have attracted criticism and 3) a higher contingency reserve (‘rainyday saving’) for future policy. In contrast to prior years, this should all be within the context of a slightly faster reduction in the budget deficit to a 2020/2021 surplus.

The budget will focus on recent flagship policies of lower company tax rates and higher childcare rebates. New policy likely targets infrastructure and revenue protection (from the cash economy, to welfare and multinationals). There is some potential for measures aiding housing affordability (reduced tax benefits), and some risk of new resource taxes.

Property Update

The Illawarra region has delivered the highest value growth for property owners according to the latest CoreLogic Regional Report released for the December quarter.

The Illawarra region recorded the largest annual increase in values for both houses at 15.2%, and units at 14.8%.

Growth was more moderate across the Richmond-Tweed and Newcastle & Lake Macquarie regions, with home values rising by less than 10%.

Sales volumes data shows that the Richmond-Tweed region saw an increase in transaction activity, up 5.3% over the year to November, while Illawarra and Newcastle & Lake Macquarie both saw a decrease in sales volumes.

Across Queensland, Townsville recorded the largest decrease in dwelling sales over the year to November 2016, down -14.4% to 3,119 sales, followed by the Gold Coast, which saw dwelling sales fall -9.5% to 19,046 sales.

Looking at home values in regional Queensland, the Gold Coast saw the biggest increase over the year to December, up 6.9% for houses and 5.5% for units, followed by the Sunshine Coast, up 4.5% for houses and 3%. House and unit values across Townsville fell -3.2% and -3.8% respectively, while values across Cairns rose moderately for houses (up 0.9%) and were unchanged for units. The Wide Bay region saw house values increase slightly (0.6%) while unit values fell -2.0% over the same period.

Moving to regional Victoria, across Geelong and Latrobe–Gippsland, sales activity was down 2%  over the year; however median values rose over the year to December. Geelong recorded the strongest performance in regional Victoria, with house values rising by 5% and unit values up 3.1%, while Latrobe-Gippsland house and unit values increased by 2.1% and 2% respectively.

In Western Australia’s Bunbury region, house values increased by 5.7% over the 12 months to December 2016, while unit values fell -3.5%. Sales volumes across Bunbury over the year to November were -7.9% lower than they were in November 2015.

In capital cities Sydney experienced the greatest increase jumping 15.5% and Melbourne was not far behind increasing 13.7% over 2016.

Source: RP Data


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