Monday, 28 July 2014

Market Wrap 28.07.14

Investment Insightz: Market Update - as at July 2014 
 
Global Equities
 
Global equity markets broke fresh highs over the month and took returns over the past financial year to 20.4%. A feature of equities has been the rise in M&A announcements. With $1.9 trillion of activity over the first six months of 2014, that is some 90% higher than the same period last year and the highest level since 2007. Momentum in M&A activity is likely to continue in the second half and could be a further positive for equities. However equities are not cheap and the more cautious may point to historically elevated levels of M&A and IPO activity as signs of market tops. 
 
USA: The final revision to Q1 GDP data in the US was rather dismal, with growth down 2.9% QoQ annualised, a huge downward revision of 1.9%. The first quarter was blighted by singular factors such as extreme weather conditions, distorting the underlying state of the US economy. Of more importance, the growth trajectory in Q2 has been clearly positive. Both the ISM manufacturing and non-manufacturing series are robust, with the former rising to 55.4 and the latter even stronger, at 56.3. Industrial production and capacity utilisation are picking up and the unemployment rate has continued to fall though the underemployment gauge remains elevated at 12.1% Overall, the economy appears to be growing at a satisfactory pace and Fed policy is expected to remain accommodative. 
 
With upcoming earnings expectations muted by the weak GDP print, positive profit announcements over the next reporting season could lift equities further. 
 
China: The Chinese economy is regaining momentum after the lull at the beginning of the year, with the HSBC manufacturing PMI rising to 50.8 in June. Retail sales were up by 12.5% over the year to May and exports have also risen. The Chinese authorities have reiterated that the growth target for this year is 7.5% and we think growth will come in above 7%, avoiding a hard landing. 
 
One area which looks less rosy is the housing market as home prices fell in May for the first time in two years. In Hong Kong, tensions rose as the pro-democracy movement 'Occupy Central' organised a sit-in in Hong Kong's Central district.  
 
Japan: The Abe government in Japan released the draft of its new growth strategy. Areas such as corporate taxation, the labour market and public pensions are being tackled. Macro data have been mixed but the manufacturing PMI rose to 51.1 in June. Capex plans for this fiscal year have been revised upwards substantially to +7.4%, driven by the manufacturing sector. Inflation is also higher, though the effects of the VAT hike have to be considered. Employment conditions remain tight, particularly in the non-manufacturing segments of the economy, which should help to raise wages. 
 
The Japanese market has risen recently and without the help of further Yen depreciation while the Japanese Government Pension Investment Fund has been selling bonds. Any move into domestic stocks could be positive for the Japanese stock market. 
 
Europe: The ECB has outlined the functioning of the Targeted Longer-Term Refinancing Operations. The conditions that need to be met for banks to access the portion of funds available in 2015 are not very onerous. However, concern remains that despite these measures, inflation will not reach the target easily or quickly, particularly as there are such large output gaps in the periphery. It is likely that further credit easing will be forthcoming with ABS purchases the ECB's preferred vehicle. 
 
Australian Equities
 
Despite falling over June the Australian equity market turned in another strong financial year, finishing up over 17%. 
 
There was some rebound in iron ore, gold and coal prices, however resources once again dragged the market lower over June. In the consumer discretionary space, media and retail were also weak on a number of profit downgrades. In mining services, Downer shares came under pressure following the termination of its BMA Goonyella contract. 
 
Ongoing positive earnings expectations for the year ahead still provides some scope for further appreciation in the domestic equity market. However we remain neutral on local equities for the time being as domestic valuations look stretched and will look for opportunities to buy on any dips. 
 
Cash and Fixed Interest
 
In Australia the cash rate remains at an all time low of 2.5%. Consumer sentiment remains subdued following the May budget though the RBA is yet to show any concern and recently noted the economy is responding to low interest rates. But with the transition from the mining boom still taking place, Governor Stevens has emphasised a “period of stability” on policy settings. 
 
Property – AREITs
 
The AREIT market was up 3.3% in June outperforming the broader equity market by 4.8%. For the year to June, AREITs turned in a solid 11.1%.
Weekly Indices: 
 
The Australian All Ordinaries Index has moved up increasing by +0.9% since closing last Friday to 3:55 pm today. 
 
The rest of the world as measured by the MSCI index increased +1.8% in A$ from closing last Friday to end of trade Thursday.
 
We hope you enjoyed your weekend,
 
The Team at IPS




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