Market Update
Written and accurate as at: Jan 18, 2016 Current Stats & Facts
Global equity markets closed sharply lower last week, adding to the sell-off we saw in the first week of the New Year. The prospect of a slowing China has cast a long shadow over markets at the start of 2016, sending commodity prices into a tailspin and leading to a broad based slump across stocks. Compounding investor concerns was a raft of weaker than expected economic data out of the US on Friday night, which put back into question the health of the economy. Domestically, our local stocks haven’t been able to avoid the pain as the commodity complex overshadowed another solid report regarding our labour market, together with an unexpected bounce in home loan approvals. While there continue to be legitimate concerns facing the market – China, the property market, regulatory changes, and potentially divergent monetary policies – we believe that equity markets have potentially overreacted and now is the time to take a deep breath and re-focus on the longer term fundamentals with the Australian stock market trading on a relatively cheap one-year forward price to earnings multiple while still offering an attractive dividend yield.
Australia
The Australia equity market closed lower for the second consecutive week to kick start 2016, with the S&P/ASX 200 declining 1.96% to finish at 4,892.80. The benchmark index is now down 7.61% for the month to date, which is the worst start to a new calendar year since the global financial crisis in 2008 when prices fell 10.88% in the month of January. While the sell-off has been broad based, the Energy (-5.43%) and Materials (-5.25%) sectors bore the brunt of most of the selling last week as Brent crude fell below the US$30 a barrel market with a decline of 14.71% and iron ore lost 2.40%. The Financial sector (-1.53%) also closed the week lower, despite stronger than expected home loans data. The official home loans data for November delivered a surprise that runs contrary to other evidence that the housing market is cooling. The number of new loans issued to owner occupiers unexpectedly bounced 1.8%m/m over the month, against expectations for another small fall. Investor activity was also unexpectedly firm in November, with the value of new loans issued to investors rising 0.7%m/m, but this comes after a near 6% plunge in October.
In other economic news, even after the very strong results of October and November (a combined 130,000 jobs added on net), there was no real payback in Australia’s December ABS labour force data. Employment was close to flat (-1,000), versus consensus expectations of -10,000, and the prior month’s very strong result was revised up a few thousand to +74,900. More importantly, given the noise inherent in a household survey employment headcount, unemployment was steady at 5.8%. The unemployment rate continued to come in below where the RBA had last year been forecasting it would get to, which was closer to 6.5%. In other details, the employment to population ratio dipped slightly, driven by weaker participation (down from 65.3% to 65.1%). Hours worked were flat, both in total and per worker, but are up 3.4% annualised in aggregate, accelerating from an average pace of 1.5% annualised earlier in the year.
On the stock front, the major news last week came from BHP Billion, with the company announcing on Friday a US$7.2bn pre-tax (US$4.9bn post tax) impairment against the carrying value of its US onshore assets. This takes the total impairments registered by BHP against its US onshore assets to ~US$13bn, however the write down should materially lower depreciation which will result in higher underlying earnings which helped BHP’s share price rally almost 6% intraday on Friday, although the stock still closed the week down 7.83%.
China
In China last week, the Shanghai Stock Price Index tumbled 8.96 as volatility continued to soar amid confusion over policies, from the central bank’s exchange rate strategy to a failed experiment with share circuit breakers. Economic data was a little more promising however, with China’s December trade report showing a notable uptick in exports, rising 5.2%m/m, led by consumer goods exports. Imports also showed decent gains, rising 2.7%m/m, with a notable uptick in major commodity imports, reinforcing the outlook for some further near term improvement in infrastructure investment.
United States
US equity markets closed lower last week, with the Dow Jones Industrials Average, S&P 500 and NASDAQ losing 2.19%, 2.17% and 3.34% respectively. There was a raft of economic data out towards the end of the week, while fourth quarter earnings season also kicked off with the likes of Alcoa, JPMorgan and Citigroup all posting better than expected results. In economic news, a weaker than expected retail sales report and further deterioration in manufacturing data rekindled concern about the health of the economy. Reports showed retail sales decreased in December to cap the weakest year since 2009 with the headline gauge dropping 0.1% in the month. The two manufacturing reports released this morning were below expectations, extending the weak run for the manufacturing data. Overall industrial production declined 0.4% in December. In a separate report, the Empire State manufacturing survey’s headline fell from -6.2 in December to -19.4 in January.
Europe
European equity markets also lost ground with the Euro Stoxx 600 declining 3.37%. The DAX, CAC and FTSE 100 fell 3.09%, 2.85% and 1.83% respectively. During the week, the German statistics office published its early estimate of GDP in 2015. As part of this, it has indicated that the economy likely grew around 0.25%q/q in 4Q15, which is 1% in annualised terms.