Quarterly Review July 2017

Posted in Wealth
17/07/2017 Level One

Share Market Update

The ASX200 index posted a strong return of 9.3% for the twelve month period 1 July 2016 to 30 June 2017. The total return including dividends was 14.1% for the twelve month period.

The return was driven by increases in earnings during the period which is a very positive sign. This is the strongest contribution of earnings since the 2009 / 2010 financial year.

The Mining & Metals sector performed best over the 2016/2017 financial year (+27.60%), though it was a “tale of two halves” for the sector, with its performance heavily loaded into the first 6 months.

Other Financials (+26.8%), Insurance (+22%) and Materials ex Mining (+17.6%) also performed well throughout the financial year, while Telcos (-21.7%) and REITs (-6.3%) underperformed.

In stark contrast to the 2015/2016 financial year, small caps underperformed during the 2016/2017 financial year.  However, in a repetition of 2015/2016 financial year, mid -caps outperformed.

Another notable difference to the 2015/2016 financial year was that “Yield” sectors underperformed during the 2016/2017 financial year. The 2016/2017 financial year was the year in which the “Growth” trade came unstuck and “Value” finally had its day in the sun.

While we don’t expect a repeat of last financial year’s return for the ASX200 we are positive on the sector. With a circa 5% dividend yield and term deposit, cash rates and bond yields still looking unattractive, equities still look like a superior relative option in our view.


Economic Update

Happy New Financial Year!!

The 2016/2017 financial year began ablaze with volatility, uncertainty and confusion (Brexit being a significant contributor), with the effects of these elements continuing throughout the year.

2017/2018 was born during slightly calmer times, albeit with similar conditions we saw last year – central banks slow and reluctant to tighten monetary policy, market volatility present but somewhat subdued compared to 12 months ago, and global political uncertainties keeping journalists in employment.

The Reserve Bank of Australia (RBA) only reduced the cash rate once in the last financial year by 25 basis points to 1.50%. We remain on hold here again this month, 11 months and counting. The minutes from the recent RBA meeting read very much the same as the preceding months – economic growth slow but continuing, still keeping a close watch on China, the housing boom has helped ease the decline in mining investment income and that the increase in commodity prices have boosted our national income.

Governor Philip Lowe commented that household debt has outpaced household incomes and indicated that their stance on keeping the cash rate on hold again was largely centred around this factor. The continued and rapid increase in household debt, irrespective of the strong growth in property prices, bears a huge amount of risk when wage growth continues to be sluggish and real estate prices in some areas of the country have started to decline.

The US Fed began increasing interest rates late last year and June saw the third increase in six months. The US funds rate now sits at a modest 1.25%, though further rate increases are to be expected over the next 12 months.

There have been some signs that other central banks may move to increase their rates as well. The UK and Canadian central banks have been talking about a rate rise and the European Central Bank (ECB) has also spoken of possibly reducing its quantitative easing program. The common theme of these nations, as well as ours, over the past 12 months has been to wait and watch but, the times are a changin’…

Australian GDP rose 0.3% in the March 2017 quarter – 0.8% lower than the previous quarter but positive nonetheless. Consumer confidence has been the primary drag on economic growth, with consumers weighed down by job concerns, rising debt levels and low wage growth. Strong business confidence of late is leading to better jobs growth, which should help tip the scales in the right direction.

The unemployment rate declined to 5.5% in June 2017 – the lowest since mid-2014. This is another important indicator for the RBA when deciding when it is the right time to raise our cash rate, however we expect the RBA would like to see this decline further before taking action.

As with all new beginnings, opportunities can be found for those who seek them, and we believe the 2017/2018 financial year will not disappoint. We do remind investors to be patient however and not make knee-jerk decisions.


Property Market Update

Latest quarterly statistics from RP Data CoreLogic indicate that Sydney and Melbourne might be slowing down.  Recent auction clearance rates have also softened, so when you put these two indicators together, we either have a seasonal glitch or perhaps the first sign that the boom is over in these two cities.

Price growth continued in Sydney for the 2016/17 financial year at a rate of 13% for houses and 8.6% for apartments. Melbourne price growth was 15% for houses and 1.5% for apartments.

What is more notable though is the change between the March and June quarter results for both cities. Overall dwelling values in Sydney went from 5% growth in March to 0.8% growth in June. Melbourne dwelling values went from 4.2% in March to 1.5% in June.

The biggest elements that will end the boom is affordability and lending restrictions to investors.

Affordability is always a factor at the end of booms – prices get too high and people exit the market, with many giving up and deciding to stay put and renovate instead of trading up.

The other big influence is investor activity. Investors tend to start and end booms. They get in when they see opportunity and they get out when that opportunity has eroded.

Investors are after two things – capital gains and rental yields. Both Sydney and Melbourne are likely to have several years ahead with far more moderate gains. Yields are also low, which makes it harder for investors to cover their mortgage. Average yields for Sydney houses are 2.8% and apartments 3.7%. In Melbourne, it’s 2.6% and 4.2% respectively.

On top of this, lenders are making it harder to borrow money. So even if there were still many investors out there keen to buy, a significant proportion will find it too difficult due to stricter serviceability, a crackdown on interest-only lending and higher mortgage rates on investment loans.

Looking at the national picture, here’s what happened across the capital cities in the 2016 /2017 financial year.

House prices

  • Sydney – house prices up 13% to a median $1.050 million
  • Melbourne – house prices up 15% to a median $755,000
  • Brisbane/Gold Coast – house prices up 3.3% to a median $555,000
  • Canberra – house prices up 9.7% to a median $693,000
  • Adelaide – house prices up 2.7% to a median $465,000
  • Perth – house prices down -1.9% to a median $500,000
  • Hobart – house prices up 7.4% to a median $375,000
  • Darwin – house prices down -6.2% to a median $500,000

Apartment prices

  • Sydney – apartment prices up 8.6% to a median $750,000
  • Melbourne – apartment prices up 1.5% to a median $542,800
  • Brisbane/Gold Coast – apartment prices up 1.2% to a median $400,000
  • Canberra – apartment prices up 7.6% to a median $439,500
  • Adelaide – apartment prices down -1.3% to a median $380,000
  • Perth – apartment prices up 0.5% to a median $400,000
  • Hobart – apartment prices up 1.5% to a median $313,800
  • Darwin – apartment prices down -10.5% to a median $440,000

Source RP Data & BIS Shrapnel


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