In March 2016 we presented an update on the Australian and global economic situation and the current state of financial markets to our clients. We covered the market movements over the past 12 months, taking a look at how the underlying company fundamentals are generally better than stock prices are indicating. We also considered some of the major global issues, including the increase in debt levels in China and the prospect of higher interest rates in the United States.
2. Slide 2
General Advice Warning
This presentation and the associated discussion is
general in nature and does not take your individual
situation into account. You should not act on
anything contained herein, or discussed as a
consequence of the contents of this document,
without receiving personal financial advice from a
suitably qualified person such as a financial advisor.
3. Slide 3
What will be covered
The Stock Market
&
The State of the Australian Economy
&
Key Global Issues
5. Slide 5
A difficult year
ASX 200 Index – 10 Mar 2015 to 9 Mar 2016
Peak to trough: 21.50% decline
Greek debt crisis Part III
Chinese stock market crisis
6. Slide 6
Falls have been led by the leaders
ASX Small Ordinaries
ASX All Ordinaries
ASX Top 20
7. Slide 7
Some examples of this phenomenon
Company 12 Month Share Price Performance
BHP Billiton -44.21%
Commonwealth Bank -17.10%
National Australia Bank -29.28%
Telstra -18.62%
Wesfarmers -6.99%
Ramsay Healthcare -4.35%
8. Slide 8
Reasons for the large-cap falls
• High-yielding investments were attractive to overseas investors
(zero and negative percent interest rates in the US, Europe and Japan).
• The prospect of rising interest rates in the US has encouraged a flow of
money back to the US.
• Strong performance in previous years may have led to an element of profit-
taking.
13. Slide 13
The longer term view of the market
ASX All Ords Index – 1 Jan 1985 to 9 Mar 2016
1987 crash
End of ‘dot-
com’ bubble
& Iraq
invasion
The GFC
European
debt crisis
First Gulf
War
1994 bond
market crisis
14. Slide 14
A closer look at the past 10 years
Pre-GFC peak in late 2007
Market low in March 2009
Greek and European debt
crisis
Recent market peak in April 2015
15. Slide 15
The stock market - Summary
• Underlying company fundamentals are better than the stock market is
indicating.
• On a long term basis, the market appears to be somewhat undervalued
(though further falls are always possible).
• While the falls have been led by the larger ‘blue chip’ companies, their
ability to generate earnings and pay attractive dividends is still intact.
18. Slide 18
A few key charts: GDP growth
GDP growth
remains
robust, with
a most
recent
annual rate
of 3%
19. Slide 19
Household Saving Ratio
Although they remain cautious, households have shown a willingness to spend a
little more and save a little less
20. Slide 20
Property remains strong
New housing
approvals
remain strong,
though recent
weakness is
apparent.
The boom in
apartment-
building is of
some concern.
21. Slide 21
Household debt is a concern
Household debt
continues to rise
after a brief
slowdown during
the GFC.
Interest paid on
debt has been
kept low by an
ultra-low RBA
cash rate.
22. Slide 22
Much of the debt is in housing
House prices have
been supported
by increased debt
levels, particularly
in the Sydney and
Melbourne
markets.
Median house
price in Sydney is
now $1 million.
23. Slide 23
Mortgage credit growth is an issue
Mortgage credit growth in the last 30 years has been spectacular - can it continue?
24. Slide 24
Unemployment – holding steady
Despite a sluggish
economy,
unemployment has
held up well, even
falling in recent
months (though
doubts exist over the
accuracy of the ABS
figures).
25. Slide 25
Salary increases are rare
Despite the
relatively low
unemployment
growth, wages are
growing at a very
slow rate.
Workers are not
seeing significant
increases in
wages.
26. Slide 26
Falling commodity prices a problem
Falling prices for many of Australia’s exports – iron ore, coal, oil, rural commodities
27. Slide 27
Overall a mixed result
On the positive side,
• Economic growth is reasonably strong, although the two-speed economy has
returned (this time NSW and VIC are strong, QLD and WA are weak).
• Unemployment is steady, although household finances are a risk due to high
debt levels (principally linked to housing).
There are some concerns, particularly,
• Continued weakness in the prices of Australia’s major exports.
• The economy has been boosted by the property market, including new
construction activity, and this appears to be slowing.
• Any interest rate increases will be an issue due to high debt levels.
29. Slide 29
US Election in 2016
US Unemployment Rate Under Past Presidents
Trump or Clinton? From an economic perspective, does it matter?
30. Slide 30
The US Fed is more important
US Federal Reserve Funds Rate
After 7 years of zero
percent interest rates,
interest rates increased
by 0.25% in December
2015
31. Slide 31
US Fed ‘Dot Plots’
Expectations of
future interest rates
by members of the
Fed OMC are
significantly ahead
of market
expectations.
FED OMC Members Interest Rate Expectations Dec 2015
32. Slide 32
The impact of rising interest rates
The prospect of rising interest rates in the US matters for a number of reasons:
• As in Australia, an increase in interest rates will slow economic growth, with
particular emphasis on interest-rate sensitive sectors such as housing and
corporate borrowing.
• The US dollar can be expected to appreciate relative to other currencies –
this benefits Australian companies with extensive US operations (for
example CSL, QBE Insurance Group, Resmed).
• A stronger US dollar implies lower prices for US dollar-denominated
commodities. While this is bad for Australian miners and oil producers, a
weaker Australian dollar will offset this to some extent.
• The US has been a significant source of financial liquidity due to ZIRP – the
removal of this liquidity will cause a high level of financial volatility.
33. Slide 33
Emerging Markets are at risk
Emerging markets
were beneficiaries of
the ZIRP as funds
flowed to such
countries in search of
reasonable returns –
this process is now
reversing.
Flow of Funds to Emerging Markets - $bn 28 day moving avg.
34. Slide 34
UK ‘Brexit’ – June 26 Referendum
Potential implications
of a UK exit include:
- rise in financial
uncertainty
- blow to global
integration and
free trade
- possible worsening
of the general state
of the EU and UK
economies
35. Slide 35
Chinese Debt Levels
Debt by Borrower: As a Percentage of GDP
The past six years has
seen a significant rise
in debt levels in
China, largely driven
by the corporate
sector.
A slowing economy
poses considerable
risks to these
indebted corporates.
36. Slide 36
NPL’s are becoming an issue
Slowing economic growth in China has increased the level of bad loans
37. Slide 37
Looking ahead
Our thoughts on the year ahead.
• Elections in the United States and Australia are likely to be sources of concern and
volatility (elections tend to dampen economic growth due to uncertainty).
• Interest rate increases in the United States are likely to be slower than expected,
but when they do occur they will cause a high level of volatility (especially if
market expectations are wrong).
• We consider the Australian stock market to be attractively priced, although further
falls are possible as the market ignores the underlying fundamentals.
• An investment focus on well-capitalised, profitable and mature companies, which
offer the prospect of sustainable and reasonable dividends, is likely to be a
successful one.
