Welcome to our June market update.
The financial year drew to a fairly benign close, with Aussie shares flat for the month of June and global shares up slightly. The ASX did however have one of its best financial years since the GFC, driven by underlying earnings growth of 11%. This is the first time earnings have made a positive contribution since FY14 and the strongest contribution of earnings since FY10. This also means is that from a valuation perspective, the share market is pretty much where it was a year ago. So this means any further substantial rises will either need to be from paying more for companies worth the same (called P/E expansion), or earnings growth continuing to do well. At present, consensus expectations for earnings sits at around 3.6%. We see P/E expansion from here as unlikely so we expect local share returns to be lower than those just posted.
Look back at the year that was, the below chart summarises what was really a tale of two halves for a lot of different sectors within the Australian share market.
Early in the financial year, we saw banks and mining stocks perform very well, with healthcare, property and infrastructure stocks underperforming. Then in the second half of the year banks we sold off, resources flat and healthcare/infrastructure stocks become the better performers. This highlights the need to remain diversified within portfolios.
Elsewhere, the reality show that is Donald Trump’s presidency continues, with his son being at the centre of the latest scandal. The North Korea situation continues to cause concerns, particularly for South Koreans I would imagine. However, markets continue to brush aside these political risk factors and go on their merry way without a shred of volatility, quite remarkably really.
To central banks (which I am sure are at the forefront of your mind each morning), communications from the US Fed have taken a more ‘dovish’ tone. That is, the Fed has signalled that it expects interest rate rises to be cautious and gradual, which calmed markets concerned with rates rising too quickly and building recessionary risks. On the flipside, the Reserve Bank of Australia has decided to talk about where the ‘neutral cash rate’ should be, which is at 3.5%, well above today’s 1.5%. This signalling that the RBA is keen to join the rest of the world in starting the process of ‘normalising’ monetary policy settings from their current ‘stimulatory’ status. We do not expect this to happen anytime soon, and futures markets indicate 0.25% hike by the end of 2018. This does however reinforce our advice to clients to plan their personal debt positions around a higher interest rate environment.
The RBA comments, together with the US Fed’s, has seen a significant jump in the Aussie dollar which is now very close to $US0.80. This has detracted from ‘unhedged’ global share returns.
Back to home, auction clearance rates in Sydney plummeted to a miserly 66% and just 70% in the auction capital of Australia, Melbourne. The rest of the country remains lack lustre on volume as we take a well-earned breather on our property binge for Winter. It does look like we have seen the highs in property now in Sydney and Melbourne as markets react to higher levels of supply, slow economic growth and low wages growth. The feeding frenzy must come to an end at some point and markets appear to be tipping into the hands of buyers as fatigue sets in. For more on property, I will point you in the direction of a very accurate video summation provided by Domain – well worth a look! https://www.domain.com.au/news/a-red-flag-for-housing-market-as-price-growth-expectations-for-nsw-queensland-and-victoria-fall-20170713-gxa6sb/
Should you have any questions, please do not to hesitate to contact us.