Market Commentary – December 2018
The ASX200 index recorded a negative 9% this quarter closing at 5,646. This was the largest quarterly fall since September 2011. The DOW suffered the largest single month fall in December since 1931. The falls have derived from International events including trade war tremors, slowing growth in China and ongoing machinations of Brexit in Europe.
Notwithstanding the local share market movement the Australian economy remains in good shape and is expected to grow more than average this year. Unemployment continues to fall slowly pushing up Australian wages and inflation remains stable, slightly below target levels. The current area of concern in the Australian economy remains house prices with both Sydney and Melbourne house prices retreating to 2016 levels however, the Australian consumers appear to be spending more than ever with Christmas 2018 spending estimated at a record $51 billion.
The volatility in the quarter negatively affect several commonly held stocks across all the portfolios. Negative contributors to portfolio performance include (MOE) Moelis Australia Ltd -16%, (MQG) Macquarie Bank -13%, (PCG) Pengana Capital -33%, (PPT) Perpetual -45%, (PPS) Praemium Ltd -41% and (WOR) WorleyParsons Ltd -40%. Portfolios that have been diversified into investments which have a low correlation to the equity markets and are holding larger amounts of cash managed to still outperform the ASX 200 which returned -9% over the period. Pleasingly MQG, PPT and WOR have all rallied through the early weeks of January and recovered some of the losses in the previous quarter. We continue to hold these investments as they are quality companies with strong management and growth outlooks.
- The Reserve Bank of Australia (RBA) maintained the cash rate at 1.50% p.a.
Markets are indicating this is unlikely to change before 2020
Board Members of the RBA believe the next move is likely to be an increase
- The housing market softened further with Sydney and Melbourne auctions clearance rate below 50%
Banks continue to constrain credit growth through greater information disclosure and larger deposits requirements
House prices on average are equivalent to 2016
- In the labour market the unemployment rate has fallen to 5.1%
- Wage growth remains low and stable increasing 0.2% to 2.1% per year and the conditions are supportive in strengthening the trend
The Minimum Wage increased 3.5% in September and contributed a small boost to growth over the quarter
- The inflation rate fell marginally to 1.9% driven by a Global fall in oil price. RBA board members anticipate a gradual increase to around 2.5% over time
- The Australian dollar fluctuated over the quarter but finished unchanged at AUD$0.72
- US Stock markets recorded heavy falls this quarter with the DOW and S&P down 13% and 14% respectively
- US interest rates continue to increase, up another 0.25% in December to 2.5% p.a. members of the FED board will now take a more flexible approach to further interest rate changes
- A trade war between the US and The Rest of the World continues to destabilise markets with multiple countries increasing tariffs in retaliation to President Trump’s tariffs. The US and China have agreed a pause in tariff escalation until March to resolve the trade issues
- The Trump Presidency suffered a setback at the US mid term elections when the Democrats regained control of the House of Representatives
The Australian economy is performing reasonably well according to available statistics but not without risk. The risk is primarily based around the housing markets and the potential spill over effects particularly on the Australian consumer. The ASX200 has reassessed the economic outlook and Global events in recent weeks and repriced accordingly. However, the market is now trading on average long-term valuation metrics indicating the market is neither expensive or on sale. In the coming months our approach is to continue being selective with stocks we include in portfolios. We will be reviewing company reports and examining company cash flows, balance sheets, dividends and business prospects.