From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
Beyond the rather heavy Wednesday night sell-off in U.S equity markets, it was a pretty ho-hum week.
In fact, Australian shares are likely to end the week only down around -2%.
Though there seems to be good reason for further investigation into the interactions between President Trump and the former FBI Director James Coney, the odds of impeachment are long.
Credit Suisse this week pointed out that it was highly unlikely we would see impeachment ahead of the U.S mid-term elections in late 2018 since most House Republicans will be more pre-occupied with re-election than voting out their elected President.
More broadly however, when markets have had the extended run they have had, and when valuations become as full as they have, it doesn’t take much to trigger profit-taking.
Investors go looking for excuses to take a profit, and buyers become far more reticent in mood.
As it stands now there is good reason for circumspection. Globally the share-market has had a good run year-to-date in 2017.
Emerging market shares are +15% even after last night’s -9% fall in Brazil, NASDAQ is +12%, European stocks are +10%, the S&P500 is +5% and Australian indices are up a less impressive, but still positive +1.5%.
But though global growth remains sound, market expectations have now caught up with the momentum, and if anything at all, recent economic data is missing newly elevated expectations.
Even in the technology space, where gains have been most pronounced, the news-flow is starting to turn.
On Thursday night CISCO Systems (CSCO) fell -7% after reporting total product orders were -4% year-on-year. CSCO is widely seen as a barometer of global economic activity given its business touches virtually every government and large enterprise around the world.
Facebook.com (FB) a fortnight ago directly warned the market that its break-neck advertising growth would ease in the quarters ahead, and Apple (AAPL) too has been the subject of rumours it could look to make acquisitions – a proposition sure to cause investors to pause for thought.
I’m no expert on technology by any stretch, and in fact the one person I trust on technology remains hugely constructive on global semi-conductor shares even after their +15% gain year-to-date.
However, I would simply note that the market moves on incremental news-flow, and after the large gains made in recent months it is undeniably becoming harder to surprise positively.
Where technology goes, so too does the market.
It is right to be turning a little cautious, if not more so.
Australia – pretty dull
In Australian shares this week we continued to lag.
On the positive tack, the global rating agency S&P affirmed its AAA rating for Australian government debt, albeit with the same negative slant.
S&P took aim at the same optimistic assumptions underlying the path to surplus that I and a myriad of other commentators have pointed out (accelerating wage growth), and put the government on notice that if these assumptions were missed Australia’s rating would be cut.
In my head it seems a foregone conclusion that Australia loses its AAA rating at some point in the next 18 months, and this is one of several reasons why we continue to believe the Australian Dollar is headed lower. We repeat our view that investors will be well-served to escalate their holdings of international assets.
On the local economic front the data remains inconclusive, albeit the same mixed trends continue.
On the one hand, headline employment continues to improve, but again this month part-time workers contributed all of the growth. Underemployment in Australia remains at record highs (9.4% of all workers want to work more hours than they can), and hence wage growth is virtually non-existent.
Unsurprisingly consumer confidence remains in a hole.
This week’s weekly ANZ Consumer Confidence fell to a 2-year low. In fact, in the monthly Westpac Consumer Confidence survey released on Wednesday, respondents decreed now was the least attractive time to buy a house since 2010. Wow.
On the share-markets, Fairfax (FXJ) share-holders took heart from a surprise counter-bid by US private equity group Hellman & Friedman.
Miners rebounded a shade as Chinese iron ore prices rebounded moderately. Some easing in Chinese liquidity over the week helped the bounce, but in reality we see continued room for caution given still record stockpiles of iron ore.
Healthscope (HSO) saw some surprising weakness in spite of press talk confirming the group had kicked off the sale process for its $100m+ portfolio of medical centres.
The stock is down around -5% this week, and still in the throes of supposed sector pessimism relating to patient volumes, but to our mind looks infinitely less risky than its much higher rated rival Ramsay Healthcare (RHC).
We are sticking to our guns here and feel very strongly this is a great stock for the medium term.
International Opportunity next week
As long as I can remember we have been shouting the virtues of foreign shares for domestic Australian investors, and year-to-date (as above) that call is bearing fruit.
Next week we are hopeful of discussing a potential new opportunity for clients seeking to broaden out their international equity holdings.
Contango Global Growth (CGG) is a soon-to-be-listed investment company that will run a global growth mandate for Australian investors, and will be managed by the impressively performing fund manager WCM Investment Management.
Whilst as a general rule we aren’t typically a fan of the listed investment company structure (LIC), we do think that some investors will find this offering of interest given the track record and investment philosophy of the underlying fund manager (WCM).
We are hopeful of putting this to you early next week.
Short and sweet it is.
I made mention of Wednesday night’s sell-off and the CISCO Systems disappointing profit report earlier.
Though it might seem like the Trump/Comey situation was the pick of the political news-flow this week, arguably the Brazilian political scandal tops that.
On Thursday night the Brazilian share-market lost -9% and its currency the Real collapsed a further -9% on press reports its new President (Temer) was involved in the cover up of a payment to the currently imprisoned former speaker of Brazil’s lower house.
The news was a huge shock to investment markets and comes only a year after the removal of the previous President Dilma Rouseff under similarly questionable behavior.
Investors fear the new bout of political turmoil will switch the focus away from much-needed economic reforms.
Friday 1030am Values
|S&P / ASX 200||5726||-143||-2.4%|
|Property Trust Index||1369||-36||-2.6%|
Thursday Closing Values
|U.S. S&P 500||2365||-29||-1.2%|
Key Dates: Australian Companies
|Mon 22nd May||Div Pay-Date – WBCHB, SUNPD|
|Tue 23rd May||Div Pay-Date – WBCHA
|Wed 24th May||Div Ex-Date – Ausnet (AST), Dulux (DLX)|
|Thu 25th May||AGM – Adelaide Brighton (ABC)
Div Pay-Date – CGFPA
|Fri 26th May
For more information on the above please contact Bentleys Wealth Advisors directly or on 02 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.