Investment Insightz: Market Update - as at July 2014
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
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
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
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%.
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.