Weekly Market Update – 24th April 2015

• Shares had a good week helped by reasonable economic data, better than feared US earnings, some slightly better news on Greece and further monetary easing in China. US shares rose 1.8%, Eurozone shares gained 1.2%, Japanese shares gained 1.9%, Chinese shares rose 2.5% and Australian shares rose 0.9%. While gold and metal prices fell, oil and iron ore prices rose with the latter helped by news that BHP will slow its iron ore expansion. Bond yields generally rose, except in peripheral Eurozone countries where yields fell. The Australian dollar rose slightly as the $US fell.

• The tech heavy Nasdaq finally reached a record high but it took 15 years to surpass its tech boom peak, highlighting the importance of starting point valuations in driving long term returns. And for those worried about a return to the tech bubble, the price earnings multiple on Nasdaq at around 30 times is a fraction of the 190 times seen at the March 2000 tech boom peak levels.

• Chinese shares continue to excel despite soft data and tougher margin restrictions. A move by the Chinese security regulator to tighten restrictions around leveraged share trading via trusts and allowing more short-selling had many worried about the Chinese share market a week ago. Continuing soft data are also a drag. However, it’s clear that the regulator is trying to promote a healthy share market and not trying to derail it. More importantly any negative effect was more than offset by an aggressive move by the PBOC to cut bank required reserve ratios. With the reserve ratio remaining high historically and monetary conditions remaining too tight several more reserve ratio and benchmark interest rate cuts are likely. Expect the later to fall to 4% from 5.35% currently. For Chinese shares we continue to see more upside, albeit a correction would be healthy. Chinese H shares remain very cheap, Chinese mainland shares remain cheap historically and Chinese institutional funds have relatively low exposures to shares and are likely to want to boost them which could ensure that any correction will be shallow.

• The Greek mess is dragging on but is still unlikely to drive a return to the Eurozone crisis. While the Eurozone finance ministers’ meeting on Friday did not announce a break through on Greece none was expected and at least there are some signs of progress. Agreement on a funding release though looks like it will drag into May and possibly June. Meanwhile, the risk of a “Graccident” (Greece defaulting on either debt or social security payments) sometime in May is clearly on the rise. This will not mean that a “Grexit” (Greek exit from the Euro) will be inevitable and in fact it could help focus the mind of the inexperienced and unstable Greek Government on the tenuous situation they are in forcing them into an agreement. But it could result in a bit of market volatility. The good news is that the rest of Europe remains far stronger than it was a few years ago with significant budget repair and economic reforms in peripheral countries and the ECB’s quantitative easing program. So a Graccident or even a Grexit is unlikely to derail the Eurozone economic recovery, but news around Greece has the potential to cause a few bumps in the months ahead.

• More RBA easing is likely on the way but uncertainty remains around the timing. The message from the minutes from the RBA’s last meeting was if anything a little more dovish, particularly in regards to the weaker outlook for business investment and exports. A speech by Governor Glenn Steven’s was clearly dovish highlighting that the question of another rate cut has to be on the table, that the $A remains too strong and that commentary on house prices remains too focussed on Sydney. Meanwhile, March quarter inflation data was clearly benign and leaves plenty of scope for the RBA to cut again, but it was not low enough to make a cut in May a slam dunk. We think another cut is justified on the back of the weak investment outlook, the greater than expected fall in commodity prices and the upside risks to the $A at a time when it remains too high, but a May move is a very close call.

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