Weekly Market Update – 28th August 2015

• Share markets have gone from goodbye to good buy over the last week. The turmoil in global share markets continued into the past week, but signs of stabilisation and improvement gradually started to appear resulting in several share markets actually rising over the last week. Believe it or not, this started in Australian shares on Tuesday as buyers saw value around the 5000 mark on the ASX 200 and then continued as China eased monetary policy, Fed officials indicated that a September interest rate hike was looking less likely if global growth worries persist and global investors refocussed on good US and Eurozone economic data. Despite a strong turnaround Chinese shares still fell 6.9% over the week and Japanese shares lost 1.5%, but US and Australian shares gained 0.9% and Eurozone shares rose 1.2%. Commodities traced out a similar path, falling initially before rebounding sharply with metals and oil up over the week. The turn up in share markets also saw bond yields rise and the $A recover partially from a low of $US0.7050 early in the week.

• From this year’s highs to their lows in the past week major share markets have now had the following falls: Chinese shares -43%, Asian shares (ex Japan) -23%, emerging markets -22%, Eurozone shares -18%, Australian shares -16%, Japanese shares -15% and US shares -13%. While it’s too early to say we have seen the lows, there are several positive signs in that: shares have become quite cheap again, investor sentiment on some measures has fallen to bearish extremes that are often associated with market bottoms and the monetary easing in China along with signs that the Fed is prepared to delay (yet again) its planned rate hike have helped provide a circuit breaker to the falls.

• China moved into gear big time over the last week with a cut in both interest rates and required bank reserve ratios, liquidity injections, capital injections into some banks and an expansion of the program that allows local governments to swap their higher cost debt for cheaper debt. The interest rate and reserve ratio cuts were long overdue. China’s official interest rate of 4.85% was leading to borrowing rates for small and medium sized companies that were way too high at a time when producer prices are falling. China is the only major economy with lots of fire power to provide stimulus and also the only one that needs to. Further easing in China including fiscal stimulus is needed and likely because the last thing China wants is the sort of social unrest that will flow from a hard landing in its economy.

• Comments by Fed officials clearly indicate that they are aware of the risks to US growth and inflation from uncertainty regarding global growth and weak commodity prices. In fact the third most powerful official at the Fed, William Dudley indicated that an interest rate hike in September now “seems less compelling.” While Fed Vice Chairman Stanley Fischer was less committal he also indicated the Fed is watching how developments following China’s devaluation unfold. This is a good sign and consistent with the view that the Fed is not going to do anything that mucks up the global economic recovery and threatens US growth and inflation.

• The Australian June half profit reporting season is now complete, and although results have been a little disappointing they have not been disastrous. 43% of companies have beaten expectations and 59% 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. Reflecting the slightly disappointing results and soft guidance only 48% of companies saw their share price outperform the share market the day their results were released which is down on the experience of the last few years.

• While Australian listed company profits fell nearly 2% over the last financial year this was driven by a 28% slump in resources profits with the rest of the market seeing profit growth of around 7% driven in particular by general industrials, building materials, retail and health care stocks although the latter disappointed relative to expectations. Key themes have been constrained revenue growth, strength in companies connected to home building and NSW and solid growth in dividends with 57% of companies raising dividends. Weak guidance saw profit growth expectations for 2015-16 revised down to around 2%, but again with the strength coming from non-resources companies which should continue to benefit from low interest rates and the lower $A

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