Welcome to our February market update.
After some early turbulence, the Australian share market managed to finish up, gaining 0.36% for the month of February and outperforming most major global markets. This was led by the healthcare sector (+7%), driven by CSL (+11.4%) on the back of record half-year profit and a lift in full-year guidance.
Amidst the shadows of a month where share markets dominated the headlines, the US Federal Reserve ushered in Jerome Powell as the new Chair of the Fed. His message was clear – market volatility will not hinder the Fed’s plans to raise interest rates three or even four times this year. This means that by the end of 2018, the Australian cash rate is set to be 63 basis points below the US Federal Funds rate. A lot has been said about the impact that this will have on markets and so I will not dwell on it further.
Elsewhere in the US, Trump announced protectionist policies and his intention to impose tariffs on imported aluminium and steel. On the back of this, Trump’s top economic adviser Gary Cohn resigned, being one of the main opponents against the tariffs. This leaves Trump surrounded by advisers with strong protectionist views. None more so than Peter Navarro who authored a book called “Death by China”. Needless to say, it will be very interesting indeed to see how these ‘trade wars’ develop. This, in our view, is a negative for free trade and equity markets generally. A review of the 2002 US steel tariffs imposed by President Bush concluded that the costs significantly outweighed the benefits, and that was before China’s growth to the superpower it is today. The latest news is that we have seen some exemptions put in place, including Australian companies which we can only thank Greg Norman for (he co-signed a plea to the US administration for an exemption).
However, quickly overshadowing the trade war news was actual war news…….and the potential truce between the US and North Korea. North Korea also agreed to halt missile tests pending a meeting between Trump and Kim Jong-un. The potential for outright conflict had been an overhang for quite a while so this news is an overwhelming positive for equity markets, particularly Japan, and we saw a sharp rally on Friday night as news came through.
Back on home soil, we can reflect on the December reporting season that is now done. On the whole, it looks good, with 46% of results having exceeded expectations. On top of that, 74% of companies have seen profits rise from a year ago, which is the strongest since the GFC. Where income is concerned, 66% of companies have increased dividends from a year ago, with 26% keeping them flat, which is a sign of ongoing confidence in the outlook.
Consensus profit growth expectations for this financial year remain around 7%, and for 2018-19 have been upgraded to 6.6% (from 4%) thanks to resources. This is good news and will underpin a rising trend in the Australian share market. However, while a little better than ‘normal’, Australian company earnings per share (EPS) expectations continue to lag global peers.
Whilst resources can continue to outperform, our market is being held back by the other heavyweight sector, banks. Until a case for outperformance can be made around this sector, it is hard to see how Australia reverses this lag. Post reporting season, we anticipate a rise in volatility will continue as global and local markets adjust to higher bond yields and interest rates, and as such we remain vigilant and ready to take opportunities when they present.
All the best for the month ahead!
