The Australian stock market fell 120 points on the 31st December 2019, reducing the increase in the ASX/S&P 200 index to less than 1% for the 6 months from 1 July (6648) to 31 December (6684). The first three weeks of January then saw the Australian stock market go on a fear-of-missing-out (FOMO) rally, rising 448 points to 7132 on 22nd January i.e. by 6.7%. This illustrates the old adage of time in the market versus timing the market. If one misses the 10 best days in the year, returns are materially poorer than market averages.
January was an eventful month. Some highlights include:
- The theme of a weaker Australian economy continued with private sector credit growth the weakest in a decade, having fallen for 13 consecutive months.
- Australia became the world’s largest LNG exporter with 77.5mt exported at $11.41 per gigajoule (GJ) average. Prices for gas on the east coast fell to $5/GJ in January 2020, a material decline.
- The tragic fires of late December/early January caused much damage.
- Burrell spent considerable time coming to the conclusion that rain patterns are likely to return to normal with the central probability being normal late Summer and Autumn rains. The ENSO or El Nino largely returned to normal with only a hint of additional heat in the Western Pacific; the equivalent Indian Ocean Dipole which has delivered severe rains to the east coast of Africa and the hot air over the Kimberley down through central Australia to New South Wales and Victoria causing the extremely dry conditions also returned to normal in an amazingly short 3-4 week period during December. The delayed monsoon firstly came to Jakarta with a vengeance with flooding reported and has now arrived in Australia. Moreover there is a patch of higher rain monsoon which rotates around the equator called the Madden-Julian oscillation and that is currently strengthening over northern Australia. This return to more normal weather has seen most of the east of Australia receive encouraging rainfalls over the past fortnight. This bodes well for some recovery in agricultural stocks.
- There was encouraging news for zinc producers with London Metal Exchange (LME) stocks low which should flow through to higher zinc prices. Similarly the LNG Asia demand is forecast to resume resulting in higher prices as new capacity in the years 2021-2023 falls to only 10mt pa.
- There have been a number of warnings from different experienced investors cautioning against the current bull market. For example Geoff Wilson - fund manager, on the 10th January warned the end to the bull market was near, telling investors to remain cautious. These warnings stand in stark contrast to the FOMO rally, caused in part by the view that interest rates are to remain lower for longer. On the 16th January Saxo said a correction in US equities was imminent, although this seemed based on technical charting.
- China GDP growth was announced at 6.1%. Those reviewing the China/US Phase One trade goals which also supported the early January rally cautioned that the purchases of US goods set out in that agreement by China seemed insurmountable.
- On the 21st January, the IMF said that it saw the end to the global downturn as confidence returned from the US/China Phase One trade agreement. The Coronavirus in the 10 days since may temper that optimism.
- On the 21st January the leading Australian private economic consultants said the “Reserve Bank of Australia has the communication skills of a teaspoon”. Deloitte Access Economics said the reductions in interest rates, particularly the cash rate, had spooked investors as they associated such cuts with reduced economic performance for the Australian economy. This in turn has reduced consumer confidence. Instead of spending the tax cuts, they’ve been saved and there’s been little evidence of any uptick in Australian GDP, quite contrary to what would usually be predicted from such tax cuts.
- In the last 10 days, the impact of Coronavirus on tourism has begun to be analysed and the announcements of the cessation of flights to and from China will impact on Australian GDP in the short term.
- On the 28th January the US national debt hit $US23 Trillion, with a forecast that by 2030 the US national debt will be 100% of GDP, up from 81% currently.
- A number of US companies have reported well including IBM, Apple and Amazon. In contrast, Deutsche Bank have announced a 2019 loss of $5.3B Euro. You diarist remains concerned that a failure of Deutsche Bank could be an X Factor.
- The NBN announced it would share enterprise cable, addressing the wasteful duplication which has seen Brisbane city CBD streets dug up to install NBN cable when there are sufficient services from incumbent providers.
- BREXIT confirmed on 31st January. Whilst a long year in negotiating with Europe lies ahead, the fact they have finally made a decision is positive for markets.
Paul Bloxom – HSBC Chief Economist
Paul presented at the Brisbane Convention Centre on Friday 31st January. The summary of key points is as follows:
- Global growth slowed from 3% to 2.5% in 2019. Expecting the same in the current year. The major cause of the slowing in GDP was the trade war, which has impacted manufacturing particularly for exporting countries such as Germany.
- Global consumer spending is being supportive. In developed countries consumer spending has slowed, but is being more than made up by the growth in emerging economies such as Russia.
- Europe is expected to slow further from 1.3% currently to 0.7%. China is expected to slow to 5.8%.
- HSBC have the view that interest rates will be lower for longer. They see the US Ten Year at 2.5% through to 2025.
- The globally low fixed interest rates are impacting on Australian fixed interest rates. Last year at this time the Reserve Bank of Australia was saying we were different and was talking of increasing rates. That broke down and subsequently the cash rate was cut to 0.75%.
- The lower interest rate outlook reframes how we should see things. The RBA has only two further cuts in its armoury to 0.25%, which it views as the bottom bound to its policy settings. This empowers fiscal policy which has the fire power to make a difference to GDP. Businesses should lower their hurdle rates for investment based on the lower cost of capital.
- Australian GDP 1.6% for 2019 due to the consumer spending slowdown reinforced by softer property prices. HSBC forecast 2020 Australian GDP at 1.9% increasing to 2.3%. Behind this forecast are factors such as mining investment turning positive, more infrastructure, lower fixed interest rates causing some stimulation in consumer spending, but not enough and seeing the Reserve Bank cutting by a further 0.25% in the second quarter. Bushfires are seen to have a modest negative GDP impact on a net basis. Tourism impact is unclear to March and it’s early days with respect to the China Coronavirus. In 2003 SARS caused a fall in the short term but there was then a strong bounce back.
- The Queensland economy is looking a little better. Mining and education more positive and there is high public spending.
- Housing prices picked up nationally 5-9% led by Sydney and Melbourne, after a +50%/-10 -15% rollercoaster.
- Australia has not had a recession in 29 years, but this has caused complacency and no reform and no increase in productivity; no tax reform, particularly moving more towards GST and the removal of stamp duties. There’s been no reform of competition policy and no climate and energy policy certainty to encourage investment.
- The Lendlease representative on the panel was excited at the growth in South East Queensland including the RNA Showgrounds redevelopment. Both sides of politics are positive on infrastructure.
- The ANZ representative on the panel saw South East Queensland business as positive. Retail was tight but not a train wreck. Recent rain was positive for agriculture. In terms of stressed assets, there was no industry concentration, there was more about the
adaptability of businesses to changing conditions. Queensland business lending was up 30% over the past 6 months. However the Royal Commission has impacted on the borrowing processes and ANZ see like for like borrowing capacity as 20-30% less than before the Royal Commission.
- The Bank of Queensland representative saw the post Royal Commission lending as a negative experience, but there is a recognition that banks have to keep lending.
- The Yin & Yang effect in the Australian stock market continues as a central theme. The FOMO rally in the first three weeks of January was spurred by the Phase One US/China Trade War Agreement and the realisation that lower interest rates were here for longer. Low interest rates make fully franked dividends from Australian companies attractive and support their stock prices.
- On the negative side, there are sectors in both the Australian and overseas markets which look overvalued. We’re anticipating US earnings to be more robust than Australian earnings. For example Macquarie have forecast earnings per share growth for industrial companies for the 2020 year at a mere 0.6%. Some Burrell advisors see the Coronavirus and a flat February earnings season as a possible catalyst to correct the run up in the first three weeks of January.
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