Wealth Managed – 6 December 2016

By David Lane - December 6, 2016

In its final meeting of the calendar year, the RBA decided to leave official interest rates unchanged at 1.5%. This was a predictable outcome, particularly in light of the potential for the US Federal Reserve to raise rates next week.

This month’s Monetary Policy Decision Statement by RBA Governor Philip Lowe provides an excellent summary of the current state of Australia’s economy, and its place in the global economy.  Mr Lowe’s statement follows:

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year. Economic conditions in China have steadied, supported by growth in infrastructure and property construction, although medium-term risks to growth remain. Inflation remains below most central banks’ targets, although headline inflation rates have increased recently. Globally, the outlook for inflation is more balanced than it has been for some time.

Commodity prices have risen over the course of this year, reflecting both stronger demand and cut-backs in supply in some countries. The higher commodity prices have supported a rise in Australia’s terms of trade, although they remain much lower than they have been in recent years. The higher prices are providing a boost to national income.

Financial markets are functioning effectively. Government bond yields have risen further with the adjustment having been orderly. Funding costs for some borrowers have also risen, but remain low. Globally, monetary policy remains remarkably accommodative.

In Australia, the economy is continuing its transition following the mining investment boom. Some slowing in the year-ended growth rate is likely, before it picks up again. Further increases in exports of resources are expected as completed projects come on line. The outlook for business investment remains subdued, although measures of business sentiment remain above average.

Labour market indicators continue to be somewhat mixed. The unemployment rate has declined this year, although some measures of labour underutilisation are little changed. There continues to be considerable variation in employment outcomes across the country. Part-time employment has been growing strongly, but employment growth overall has slowed. The forward-looking indicators point to continued expansion in employment in the near term.

Inflation remains quite low. The continuing subdued growth in labour costs means that inflation is expected to remain low for some time, before returning to more normal levels.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments, though an appreciating exchange rate could complicate this.

Conditions in the housing market have strengthened overall, although they vary considerably around the country. In some markets, prices are rising briskly, while in others they are declining. Housing credit has picked up a little, although turnover of established dwellings is lower than it was a year ago. Supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades.

Taking account of the available information, and having eased monetary policy earlier in the year, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Economic News

  • Italy voted ‘No’ in a referendum which was aimed at enhancing the efficiency of the government and reducing the size and power of its Senate.  Prime Minister Mateo Renzi, who had championed the changes, resigned immediately following the result, throwing open the question of who will govern going forward and potentially opening a window of opportunity for the anti-EU 5 Star Party.
  • Austria voted in their Presidential Election and voted in former head of the Green Party - Alexander Van der Bellen.  European leaders breathed a sigh of relief as the far right candidate Norbert Hofer was defeated.  Van der Bellen is considered pro-EU and hence this vote did not go the same way as the Brexit vote.
  • Eurozone’s annual inflation was estimated to be 0.6% in November 2016, up from 0.5% in October 2016.  The most notable increase being that of services which increased 1.1% and the most notable decrease being energy which decreased 1.1%.
  • UK’s manufacturing PMI dipped slightly for the month down to 53.4 down from the 54.3 of the previous month.  While the index has dropped for two consecutive months it remains above its long run average of 51.5.
  • Australian private sector credit growth grew by 0.5% in October – driven mostly by housing and business credit (up 0.6% and 0.5% respectively).  Personal credit did not grow at all for the month and is down 1.1% for the year to 30 October.
  • New home sales in Australia were down 8.5% in October to the lowest since July 2014.  Building approvals also dropped a further 12.6% after last month’s 8.7% decline.
  • Australian retail sales rose 0.5% in October, seasonally adjusted. This follows a 0.6% rise in September 2016.
  • US non-farm payrolls data showed an increase of 178,000 jobs in November and a drop in the unemployment rate from 4.9% to 4.6%.  The participation rate softened from 62.8% to 62.7% and average hourly earnings dropped by 0.1% for the month.
  • The second estimate of the US real GDP showed an annualised growth rate of 3.2% for the September quarter, up from the first estimate of 2.9%.  Actual year on year growth in real GDP to 30 September was more modest at approximately 1.6%.
  • US Consumer Confidence index increased to 107.2 through November, following weaker results in October.
  • US unemployment claims rose to 263,000 up by 17,000 in the week, extending the run of weeks with claims under 300,000 to 91 straight, which is the longest streak since 1970.
  • Beijing’s official manufacturing Purchasing Managers Index (PMI) rose to 51.7 in November, following 51.2 the previous month. Readings above 50 indicated expansion and the November reading was the highest since mid-2014.
  • Organisation of Petroleum Exporting Countries (OPEC) on Wednesday committed its fractious members to their first oil production limits in eight years.  The agreement means a cut to production by about 1.2 million barrels per day, or about 4.5% of current production, to 32.5 million barrels per day.

Company News

  • DUET Group (DUE) have received an "unsolicited, indicative, incomplete, non-binding and conditional proposal" from Cheung Kong Infrastructure to buy all of the stapled securities of DUET for $3.00 cash per security.  Cheong Kong Infrastructure is a Hong Kong listed infrastructure business with a market capitalisation of HK$170.8 billion.  It is part of the CK Hutchison empire, and currently has investments in China, UK, New Zealand, Australia and Canada.
  • Aristocrat Leisure (ALL) surprised the market with solid earnings for the year ending 30 September. Aristocrat Leisure is now in full ownership of Video Gaming Technologies which was a driver for this growth. Management has stated their expectation that earnings growth will continue through 2017.
  • Vocus Communications (VOC) held their AGM this week in which they noted disappointing results from their NextGen brand.  Geoff Horth, Vocus’ chief executive, noted that the poor results were due to a large number of customer cancellations between their due diligence and their acquisition of the company.
  • Bellamy’s (BAL) reported stagnant sales in infant formula in China for the year. This came in well below the markets expectations which has resulted in a market to sell off at a dramatic rate causing the share price to plummet.
  • After uncertain times Ardent Leisure (AAD) has announced that it will re-open Dreamworld and Whitewater World on 10 December. Whitewater World will reopen in full capacity and Dreamworld in a limited state as safety reviews are done on rides. Ardent Leisure has noted that the closure will amount to an approximate $4m loss in November alone with further large expenses expected to effect the parks.
  • Tabcorp (TAH) announced that it has entered into a cash-settled equity swap with an investment bank in respect of 147 million shares in Tatts (TTS), representing 10% of Tatts shares on issue. The transaction is intended to help facilitate the proposed combination of Tabcorp and Tatts and provide shareholders with improved financial outcomes.
  • A2 Milk Company’s (A2M) rapid earnings and market transformation in the past year has been “considerably in excess of management expectations” says Chairman David Hearn, with pre-tax profits continuing to soar in 2016-17. A2’s infant formula sales in China helped lift pre-tax profits by 536% in the September quarter following a $29.1 million full-year net profit and 100% revenue rise in 2015-16.
  • Insurance Australia Group (IAG) announced an offer of Capital Notes to raise $300m with the ability to raise more or less. The Capital Notes are scheduled to pay quarterly, floating rate, discretionary distributions which are expected to be fully franked. The Capital Notes have an Optional Exchange Date on 15 June 2023 and, subject to certain conditions, will Mandatorily Convert into the Company's ordinary shares on 16 June 2025.
  • ANZ and Macquarie (MQG) agreed to pay $15 million in fines for trying to manipulate the benchmark rate of the Malaysian Ringgit. The Australian Competition and Consumer Commission (ACCC) said both banks had cooperated with their investigation.

Christmas Closure Period

Please note that the Brisbane office of Pitcher Partners will be closed from the close of business Thursday 22 December 2016 and re-open on Tuesday 3 January 2017.

The ASX will close at 1.30pm Brisbane time on Friday 23 and Friday 30 December. It will re-open on Wednesday 28 December and Tuesday 3 January 2017 (28 & 29 December will be regular trading days).

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