29 JANUARY 2016
negative January going on to a negative year has been 33%
since 1980.
Investment markets and key developments over the
past week
The past week has been rather messy. On the one hand
global growth fears remain with US and Eurozone shares falling
back, Chinese shares still seeing significant selling pressure
and bond yields continuing to fall. On the other hand a more
dovish Fed has taken pressure off the $US, the Chinese
Renminbi has remained relatively stable, commodity prices
including oil have seen further gains and shares in Japan and
Australia rose. The Australian dollar also rose.
The March towards more dovish central banks continued
over the last week. Quite clearly they are concerned that
the latest bout of global growth worries and commodity
price falls will further delay the return of inflation to their
targeted levels. This renewed dovish tilt started with the ECB
which is now expected to ease at its March meeting and
became clear from the Fed following its January meeting where
it was less positive on the growth outlook and indicated it was
monitoring recent economic and financial developments. The
probability of a March Fed hike is now just 14% and rather than
four Fed rate hikes this year as the Fed has been projecting in
its “dot plot” I see only one or none. This should further help
reduce the upwards pressure on the $US which in turn should
help oil and other commodity prices. The Reserve Bank of NZ
has also turned more dovish and I expect the RBA to do the
same next week. An upbeat RBA and a dovish Fed would not
be a good combination in terms of getting (and keeping) the $A
down.
January has seen a terrible start to the year in share
markets with the US S&P 500 down 7.4% and the Australian
share market down 6.4% (at the time of writing). It’s not the
worst ever – ie we have seen it all before. But for US shares it
has been the worst January since January 2009 (when shares
lost 8.6%) and for Australian shares it’s the worst January
decline since January 2008 (when shares lost 11.3%).
Obviously this will lead many to fear the old saying “as goes
January so goes the year”, ie the so-called January barometer.
But it’s worth noting that the track record of the January
barometer is very mixed. For US shares the track record of a
negative January going on to a negative year has been 43%
since 1980. Similarly for Australian shares the track record of a
Interestingly Australian shares have been a relative
outperformer so far this year falling 6.4% in local currency
terms versus the US -7.4%, Eurozone shares -8.5% and
Japanese shares -10.5%. This could just be noise. Then again
given the usual tendency of Australian shares to underperform
when there are global growth worries, falling commodity prices
and when the $A is falling it may be telling us
something…perhaps that the Australian economy is in relatively
better shape? and/or that a lot of bad news has already been
factored in?
Our high level view remains that if there is to be a
US/global recession then share markets have much further
to fall (eg another 20% plus), but if recession is avoided
and global growth continues to muddle along around 3%
pa then further downside in markets is likely to be limited
and they are likely to stage a decent recovery by year end.
We see a recession as being unlikely because we have not
seen the normal excesses – massive debt growth, over
investment or inflation – along with aggressive monetary
tightening that invariably precede them.
Major global economic events and implications
US economic data over the past week was mixed with solid
gains in home prices, a sharp rise in new home sales, an
unexpected rise in consumer confidence and a fall in jobless
claims but against this the Markit services sector PMI fell in
January albeit it remains reasonably solid at 53.7 and
December durable goods orders were much weaker than
expected. The fall in durable goods orders is a bit concerning
as it was broad based and may be warning of weaker business
investment generally. It could just reflect month to month
volatility but its work keeping an eye on. So far the US
December quarter earnings reporting season is about 28%
complete. While 79% of results have beat on earnings, its only
49% for sales and earnings are still down 7% year on year.
Eurozone confidence readings slipped in January,
presumably on the back of all the news around global growth
worries and share market turbulence, but remain at levels
consistent with okay growth.
The Japanese labour market remained strong in December
but household spending and industrial production were
very weak and core inflation fell slightly to 0.8% year on year. It
all adds up to ongoing pressure on the Bank of Japan to do
more.
Chinese industrial profits fell over the year to December, but
consumer confidence rose in January.
Australian economic events and implications
Australian December quarter inflation data indicate that
pricing power and inflationary pressures remain very weak,
but probably not weak enough to trigger another RBA rate
cut just yet. But with underlying inflation running at the bottom
of the 2-3% inflation target it leaves plenty of room for another
rate cut and helps reinforce the RBA’s easing bias. Meanwhile
another sharp slump in December quarter export prices means
that the hit to national income is continuing, but that net export
volumes will have continued to help real GDP growth. The NAB
business survey indicated that business conditions and
confidence slipped in December, but remain above average,
albeit this was before the intensification of global growth worries
seen so far this year. Finally, credit data for December shows
continued moderate growth overall with an ongoing slowing in
lending to property investors relative to owner occupiers – no
doubt APRA will be happy!
35
Growth in housing related debt
Annual % change
30
25
will cut the cash rate again in the months ahead. The RBA’s
Statement on Monetary Policy (Friday) is likely to show a further
delay in the return of Australian economic growth to around 3%
from end 2016 into 2017.
On the data front in Australia expect to see continued softness
in the January Core Logic RP Data home price indexes and
ongoing benign inflation in the TD Securities Inflation Gauge for
January (both Monday), the December trade deficit come in
around $3bn and a 7% rebound in December building
approvals (both Wednesday) and solid retail sales data
(Friday). AIG business conditions PMIs will also be released.
The December half profit reporting season will start to get
underway in the week ahead but with only a handful of
companies reporting (including Tabcorp and Downer). Key
themes for this reporting season are likely to be: ongoing
horrific conditions for resources companies (where 2015-16
earnings are expected to fall another 52%); continued
reasonable profit growth for the rest of the market (of around
6%) led by healthcare, building materials, general industrials
and discretionary retail; and an ongoing focus on cost control.
Given the significant downwards revision to earnings growth
expectations (-5% over the last 3 months) and the fall in the
share market so far this year which has taken it to a slightly
below average PE there is some chance we will see upside
surprise.
20
Outlook for markets
15
With global growth worries remaining it’s still premature to
say that shares have bottomed. However, with shares
having become technically oversold, sentiment readings
pushing down to bearish extremes and central banks
becoming more dovish there is a good chance that the
short term bounce that has recently got underway has
further to go. Beyond the near term uncertainties we still see
shares trending higher this year helped by a combination of
relatively attractive valuations compared to bonds, continuing
easy global monetary conditions and continuing moderate
economic growth. But expect volatility to remain high.
Investors
10
5
Owner occupiers
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: RBA, AMP Capital
What to watch over the next week?
In the US, expect a slight improvement in the ISM
manufacturing conditions index (Monday) to around 48.5
but a slowing in jobs growth (Friday) to around 190,000
consistent with a slight rise in jobless claims lately with
unemployment remaining unchanged at 5%. Wages growth is
likely to remain relatively subdued but with a slight rising trend.
The non-manufacturing conditions ISM (Wednesday) is likely to
remain solid.
In China, the official and Caixin manufacturing conditions PMIs
for January (Monday) are likely to remain subdued but services
conditions PMIs should remain a bit stronger.
In Australia, the RBA on Tuesday is expected to leave
interest rates on hold but it’s likely to strengthen its easing
bias. December quarter inflation was low but in line with RBA
expectations, recent Australian economic data has been okay
and it’s doubtful that the latest bout of financial and commodity
market turmoil has been enough to move the RBA out of its
“chilled out” state just yet. However, the latest round of worries
about global growth coming at a time when domestic growth
remains sluggish, national income is being hit by the continuing
slump in commodity prices, the housing sector is losing
momentum and inflation is low are likely to see the RBA
strengthen its easing bias. We remain of the view that the RBA
Very low bond yields point to a soft medium term return
potential from sovereign bonds, but it’s hard to get bearish in a
world of fragile growth, spare capacity, weak commodity prices
and low inflation.
Commercial property and infrastructure are likely to continue
benefitting from the ongoing search by investors for yield.
National capital city residential property price gains are
expected to slow to around 3% this year, as the heat comes out
of Sydney and Melbourne. Prices are likely to continue to fall in
Perth and Darwin, but growth is likely to pick up in Brisbane.
Cash and bank deposits are likely to continue to provide poor
returns, with term deposit rates running around 2.5% and the
RBA expected to cut the cash rate to 1.75%.
The downtrend in the $A is likely to continue as the interest rate
differential in favour of Australia narrows, commodity prices
remain weak and the $A undertakes it’s usual undershoot of fair
value. Expect a fall to around $US0.60 by year end.
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds
Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation,
any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account
of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this
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