Market Commentary – December 2016

by Chris Limberg on Dec 31, 2016

Market Commentary – December 2016

The Australian market has proven very resilient despite the political turmoil over the last 12 months. With the S&P ASX 200 shrugging off the election of Donald Trump to achieve a 4.6% increase for the quarter.  Market conditions continue to be fractious, but not without opportunities. The ASX 200 benefitted strongly from price surges of the biggest 20 companies on the back of improving commodity prices. Looking ahead the political turmoil is set to continue with Elections in Germany and France of particular note.


  • Newly appointed Governor Philip Lowe replaced outgoing Chairman Glen Stevens. Mr Lowe was previously the deputy governor under Stevens since 2012. Therefore RBA policy is likely to remain consistent
  • The Reserve Bank of Australia (RBA) cut the cash rate to 1.50% p.a.
    • Economists are still predicting further rate cuts to encourage inflation although with less certainty
  • The labour market has steadied with the unemployment rate at 5.6%
    • However, wage growth remains soft, a leading indicator for inflation
    • 2016 employment growth was dominated by part time jobs
    • RBA attention is turning to measures of utilisation, that is, hours worked vs hours desired
  • The strong housing market of recent years is coming to an end with lower housing loan approvals although house prices continue to creep higher. The RBA noted:
    • Melbourne and Sydney markets remain significantly stronger than the rest of the country
    • Rental markets were subdued overall
  • The Australian dollar remains relatively stable on a trade weighted basis despite falling against the USD to A$0.72. The RBA now appears to be happy with the level of the USD
  • The inflation rate has risen over the quarter from 1.0% to 1.3% and remains below the RBA target range of 2-3% p.a. in theory providing scope for further interest rate cuts. However, the RBA is content to watch the implications of previous cuts work though the system and look for directional signals from international markets


  • The US voted Donald Trump President on a platform of cutting taxes and infrastructure spending
  • On the back of the Election the US S&P 500 recorded gains of 3.3% with the market reacting positively to lower taxes and higher spending on infrastructure
  • The US FED (Federal Reserve System – The US Central Bank) has increased interest rates from 0.5% to 0.75% in December with markets expecting 3 more interest rate increase this year should the economic trends continue to improve


  • Brexit process continues with new Prime Minister Theresa May largely ostracized by the rest of Europe
  • European economy struggles and growth as a whole remains difficult in an uncertain environment
  • Recent Russian political issues have been overshadowed by its off shore actions most recently allegedly tampering in the US Election
  • European Political situation remains in a state of flux in many countries in Europe with:
    • UK voting to leave the EU – likely to trigger Article 50 by end of March 2017
    • Spain has now formed a minority Government after 10 months and 2 elections
    • In France the far right party of le National Front is gaining momentum heading into a General Election in late April
    • German General Election in October


  • The Chinese Economy has a 5 year plan which favours growth over economic rebalancing albeit at a lower target of 6%
    • The next Communist Party congress is in October this year tipped to refocus Chinese efforts on economic reform
  • The Chinese Government spending on infrastructure projects continues
  • The property issues continue however the picture seems to resemble the Australian market with some cities performing strongly while others are in decline
  • China’s capital flight continues. The Chinese Government continue to ratchet up capital controls to dampen the exodus of money overseas as more and more Chinese attempt to find ways to move their wealth off-shore to escape devaluation of the Yuan
  • The Chinese continue to crack down on corruption

Recent Activity

This quarter we have been content to let portfolios run as the market surged post the US Elections. However, as the market runs the risk/reward balance changes and re-evaluation is necessary, we now look forward to the February half yearly reporting period for clarification on company positions. We believe more than ever that patience is fundamental to our investment process and a keen focus on strengthening company fundaments will over time be the trigger for improving share prices.