Market Commentary – September 2019
The ASX200 index closed 1% higher at 6,688 in a volatile quarter.
The Reserve Bank of Australia (RBA) cut the official interest rate for a third time in recent months. Official interest rates are now at a historic low of 0.75% per year. Reserve Bank Board Members judge the lower interest rate would assist economic growth and believe an extended period of low interest rates will be required to support the Australian economy.
The Global economic trends continue with trade wars and Brexit recurring themes weighing on market confidence. However, economic indicators for the Chinese economy are showing signs of stabilising in response to policy stimulus. Notably for the Australian economy Chinese imports of iron ore and coal increased driven by ongoing infrastructure investment.
- The RBA cut the cash rate to 0.75% from 1.0% p.a. to boost economic activity
- Following the rate cuts property prices particularly in Sydney and Melbourne have improved. A leading indicator of house prices is the auction clearance rates which is hovering around 80% but low volumes. However, residential construction remains subdued and apartment building approvals have reached 7-year lows
- In the labour market the unemployment rate remains steady at 5.2% with Reserve Bank target estimate 4.5% indicates interest rates will stay “lower for longer” and we may see further rate cuts. Underemployment tightened from 8.5% to 8.3%. Underemployment is a measure of how much a person wants to work against how much the person does work.
- Wage growth remains constrained at 2.3% p.a. and is unlikely to result in inflation pressure until the labour market tightens creating competition for talent among companies driving up wages to secure employees.
- The inflation rate rose to 1.6% p.a. on an annual basis but remains well below the RBA medium term target rate of 2-3% p.a.
Australian dollar finished down $0.03 cents at $0.67 US cents per dollar
- While a declining AUD makes international travel and products more expensive it also insulates the Australian Economy through lower prices for foreign consumers and inbound travellers
- US stock market finished another positive quarter with the DOW and S&P500 both up 1.9%
- The US economic outlook has weakened with FED Chairman Jerome Powell effecting two interest rate cuts of 0.25% leaving official US interest rates at 2% p.a.
- The trade war between the US and China continues to increase risks in the global economy
- The US Democrats have initiated an impeachment inquiry against US President Donald Trump for allegedly abusing the power of the Presidency for personal gain
In a market environment where quality yield is increasingly hard to find we remain cognisant of portfolio exposures. The scarcity of quality yield in the market has presented an interesting opportunity to manage portfolio exposures while generating reasonable returns focusing on the listed fixed interest market. The listed fixed interest market is comprised of stock codes such as PGG, MXT, NBI that you may have seen in your portfolio and the upcoming KKC among others. Such stocks typically generate income in the range of 4-6%. With official interest rates at 0.75% p.a. and the best available rate on a Term Deposit is 2% p.a. these funds have been in high demand. This demand creates a unique opportunity to limit market exposure while generating a reasonable return due to the stocks trading at a premium to underlying value of assets. With markets pushing higher in a slowing domestic economy we continue to look for smart opportunities to generate reasonable returns.