Investment Week in Review - 5 June 2017

By Marcus Damen - June 5, 2017

Pitcher Partners' wrap up of issues impacting the markets over the last week.

News in Review

  • US nonfarm payrolls rose by 138,000 in May, well below the expectations and the recent rate of growth.  Further, the figures for March and April were revised downwards by a combined 66,000 jobs.  
  • The US unemployment rate, however, reduced marginally to 4.3% in May, the lowest level since 2001, as the participation rate fell from 62.9% to 62.7%.
  • Donald Trump announced his intention to pull the US out of the Paris Climate Accord citing that it was not good for the American people and would only work to hurt the American manufacturing industry.
  • Australian retail sales picked up by 1.0% during April after a relatively flat data series for the industry. The pickup was led by food sales at cafés and restaurants as well as department store sales.
  • Canada’s economy grew by an annualised rate of 3.7% in the March quarter, with almost all major industries contributing to growth, particularly manufacturing and retail trade.
  • China’s general manufacturing deteriorated for the first time in nearly a year with a CAIXIN manufacturing PMI of 49.6 in May, under the 50.0 neutral point. While production increased marginally, employment continues to fall which is now the third consecutive month of the trend.
  • Great Britain’s construction rebounded to a 17 month high based on the latest construction PMI of 56.0 in May. This is a sharp rise up from last month’s result of 53.1. This was led by increases in housing construction which had its largest increase since December 2015.

Comment

With several economists now predicting a negative print for Australia’s March quarter GDP, it will be interesting to see if we can limp across the line to beat the Dutch record of 103 quarters (almost 26 years) without a recession (1982-2008).  Even more interesting, though, is to stop and reflect on what has driven this long run of prosperity.  Was it good luck, good management or something else?

While Australia is often referred to as the ‘lucky country’, it is not likely that luck alone could last for such an extensive period of time.  We’ll come back to the question of good management after exploring another possible explanation…household debt. 

The Netherlands’ record run of economic growth featured an excessive rise in household debt (from approximately 60% of GDP in 1982 to over 160% of GDP in 2008) and a tax system which encouraged people to take on mortgages and discouraged paying them down.  Following closely in their footsteps, Australia’s household debt has increased dramatically (from approximately 40% of GDP in 1990 to over 120% of GDP at present) with much of that debt piling into property which has also benefited from a favourable tax system.  Whether or not this can be called good management will ultimately depend on how it plays out. 

While it was the GFC that put the kibosh on the Netherlands run, what could stop ours?  Rising interest rates and policies that remove some of the incentives for investors to take out mortgages certainly wouldn’t help, so it should be of no surprise that our economy is starting to appear shaky as banks lift mortgage rates independently of the RBA and restrict credit by cutting back on interest-only loans.   

The Week Ahead

  • US: ISM non-manufacturing PMI
  • Australia: RBA Cash Rate decision, GDP q/q, Trade balance
  • Europe: German Trade Balance
  • UK:  Manufacturing Production m/m
  • China: Trade Balance

Company News

  • Wesfarmers’ discount department stores Kmart and Target will be vulnerable to Amazon entering into the marketplace, according to an analyst suggesting that Wesfarmers could lose $400 million in earnings to the e-commerce giant by the 2026 financial year.  Shares in Wesfarmers fell on the report, slipping 3.7% for the day to $41.13 at the close of trading on Thursday.
  • Lottery provider Tatts Group was granted an exclusive public license for the next 10 years over Victoria’s valuable games-of-luck including scratchies and Powerball. Tatts Group will pay $120 million to the Victorian government – four times what the state got for two lottery licenses issued in 2007. The new deal will start on July 1, 2018.
  • Poultry giant Inghams will continue to be Woolworths’ main chicken meat supplier after the pair extended their national agreement. Inghams says that the agreement has been extended to mid-2021, which will take the companies’ supply partnership to more than 60 years. Mick McMahon, Chief Executive at Inghams, said the extension was part of Ingham's ongoing strategy of formalising long-term supply relationships with major customers. Inghams’ shares gained 2c to $3.35, up from its $3.15 listing price at the close of trading on Tuesday.
  • Sydney Airport chairman said that the company can benefit from information gathered during its analysis for plans for the new Western Sydney Airport, even though it turned down the chance to operate it. The federal government will instead build the airport after Sydney Airport walked away over concerns that the venture was too risky. On-site works at the Western Sydney site are expected to start in 2018. The airport is expected to deliver 9000 new jobs to Western Sydney by the early 2030’s and 60,000 in the long term.

Markets in Review

 

Capital Return

   
 

Weekly

CYTD

FYTD

S&P ASX 200

0.6%

2.2%

10.6%

DOW JONES

0.6%

7.3%

18.3%

S&P 500

1.0%

8.9%

16.2%

UK FTSE100

0.0%

5.7%

16.0%

FRENCH CAC40

0.1%

9.9%

26.1%

GERMAN DAX

1.8%

11.7%

32.5%

JAPANESE NIKKEI

2.5%

5.6%

29.5%

SHANGHAI COMPOSITE INDEX

-0.1%

0.1%

6.0%

ASX200 Biggest Movers for the Week

$1 Australian buys you:

Security

LastPrice

AUDUSD

0.7390

AUDGBP

0.5740

AUDCNY

5.0380

AUDJPY

82.4845

AUDEUR

0.6588

AUDNZD

1.0442


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