Weekly Market Update – 21st August 2015

• The global share market correction continued over the last week as worries intensified regarding emerging countries, their currency rout and the impact on global growth along with the ongoing fall in commodity prices. Even Greece and tensions between North and South Korea got a look in. Messy profit results also didn’t help Australian shares. For the week, US shares fell 5.8%, Eurozone shares lost 6.7%, Japanese shares fell 5.3%, Australian shares fell 2.7%, and Chinese shares lost 11.5%. Reflecting investor nervousness, oil and metal prices remained under pressure and bonds benefited from safe-haven demand. Emerging market currencies fell further and weak Chinese economic data put renewed pressure on the Australian dollar.

• Is this 1997-98 all over again? The past week has seen a further intensification of concerns regarding the emerging world with a range of general and country-specific factors coming together. These include: the ongoing plunge in commodity prices, more falls in emerging market currencies (with Vietnam devaluing and Kazakhstan abandoning its currency fix) as China’s 3% devaluation continues to reverberate, the bombing in Thailand, a reference by the US Federal Reserve to global weakness presumably mainly in emerging countries, and worries about China with the explosion in Tianjin not helping. Fears of a re-run of the 1997-98 Asian-emerging market crisis are building again. Such fears are of course not new – we saw similar worries early last year with talk of the fragile five – and emerging market currencies have been plunging since 2011 (now down 36% on average) and their share markets underperforming over the same period. The emerging market world is arguably much stronger than it was is 1997-98 with stronger current account balances, higher foreign exchange reserves and mostly floating as opposed to fixed exchange rates (which mean they don’t have to be defended from speculative attacks). However, some of the emerging world is suffering from a return to populist policies and a reversal of economic reforms so the emerging market crisis could go on for a while yet. What may be needed to end the negative feedback feeding through global currency and share markets at the moment though is a policy easing. This came in 1998 with US Federal Reserve monetary easing. While it’s now looking unlikely the US Federal Reserve will tighten in September, a circuit breaker policy easing this time around ideally needs to come from China so keep an eye out for further Chinese stimulus measures. Expect China to cut its benchmark interest rate below 4% from 4.85% currently and step up fiscal stimulus.

• Greece worries back again, but maybe not really. With Greece’s third bailout program now in place, Greek Prime Minister Tsipras has called a new election, likely for 20 September. Such a move was expected. With the bailout locked in, Tsipras wants to take advantage of his popularity and purge Syriza of far left members of parliament who didn’t support the bailout. Most recent polls indicate he remains popular and that Syriza would be the first placed party with a comfortable margin. While it would likely need to form a coalition with other centre left parties, it would be committed to the bailout. Alternatively the main opposition party is committed to the bailout anyway. So expect some more noise regarding Greece, but it’s unlikely to be a major threat.

• The Australian June half profit reporting season is now almost two thirds done and overall the results have been a little disappointing. 43% of results have beaten expectations and 60% have seen their profits rise from a year ago which is okay, but it’s well down on what we have been seeing in the last few reporting seasons. Resources companies have remained under pressure, industrial profit margins have been weaker than expected and the banks have been mixed and guidance for the current financial year has been a bit downbeat. As a result, profits now look to have fallen by around 2% over the last financial year and expectations for the current financial year have been downgraded to around 2%. However, it’s not all doom and gloom. Profits are still growing outside the resources sector by around 7% with companies exposed to housing and New South Wales and Victoria generally doing well, the lower Australian dollar should provide and dividends are continuing to rise solidly. So there is a bit of light at the end of the tunnel.

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