Wealth Managed - 13 April 2016

By David Lane - April 14, 2016

Global growth expectations have once again been downgraded in the IMF April 2016 World Economic Outlook.

Although the growth outlook for Australia has been cut by 0.4% to 2.5%, our GDP growth is still one of highest of the advanced nations outside of Asia.  In spite of the recent concern over China’s growth, IMF has increased the expectation for Chinese growth

In the Outlook report, IMF stated:

“Global recovery continues, but at an ever-slowing and increasingly fragile pace. The months since the last World Economic Outlook have seen a renewed episode of global asset market volatility, some loss of growth momentum in the advanced economies, and continuing headwinds for emerging market economies and lower-income countries. In addition, several stresses of non-economic origin threaten economic activity. Not only do these developments lead us to a further broad-based reduction in our baseline projections for economic growth in 2016 and 2017; they also suggest that possible non-baseline outcomes are at the same time less favorable and more likely.”

The IMF also cited the threat that persistent slow growth has on the global economy, warning that it has the potential to further reduce output, consumption and investment.  They warned that consecutive downgrades of future economic prospects “carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation.”

In spite of the sanguine commentary, IMF expects that the global economy will grow at 3.2% in 2016, with India leading the way with GDP growth of 7.5%.  Interestingly, the growth expectation for China has increased by 0.2% to 6.5% in 2016 and 6.2% in 2017.

The IMF’s latest views are more negative than the consensus view of the world economic growth, as sourced from Bloomberg consensus data:

Economic News

  • The largest data leak in history of 11.5 million files from the database of the world’s fourth largest offshore legal firm, Mossack Fonseca, was duly christened the Panama Papers.  
  • In the US the non-manufacturing ISM beat market expectations, rising 1.1pts to 54.5 in March – the best reading since December.  Any reading over 50 is expansionary.  Less positively, the employment index only managed a 0.6pt improvement to 50.3, leaving it well below the levels seen in the closing months of 2015 and suggestive of an impending slowdown in employment growth (albeit still growing).
  • The RBA announced its decision to retain its cash rate at 2%. Of noteworthy in the accompanying statement, “Over the period ahead, new information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing. Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand". This reinforces the message conveyed in the March meeting; the evolution of the RBA’s policy will be centred on the performance of the labour market. 
  • Australia's trade deficit unexpectedly widened to $3.4 billion in February, continuing a trend of deterioration that has been in place for two years. Whilst iron ore exports rose in the month (consistent with higher spot prices) there was relatively broad weakness among other export categories.  According to the Australian Bureau of Statistics (ABS), goods and services exports fell by 1% to $25 billion.
  • According to the Housing Industry Association’s (HIA) New Home Sales Report, Australian residential real estate sales tumbled 5.3% in February 2016. In a state-by-state breakdown, detached house sales declined the most, down 12.1% in Queensland, followed by a 7.4% decline in NSW. Detached house sales dropped 3.5% in South Australia, 1.8% in WA and 1.7% in Victoria.
  • German industrial orders declined 1.2% in February, the largest monthly fall in six months and well below expectations of a 0.2% rise in Europe’s largest economy.  In more positive news for the Eurozone, retail sales increased unexpectedly in February. Growing demand in France and Spain helped offset a fall in Germany.
  • Japan’s Labour Survey (for establishments with five or more employees) revealed a 0.9% year on year rise in the per-capital total cash earnings, a 0.6% year on year rise in scheduled base pay and 1.9% year on year employment growth in February.
  • China's foreign exchange reserves surprisingly rose in March; the first monthly gain since November, as cooling expectations of US interest rate hikes eased pressure on the yuan.
  • The Caixin China services purchasing managers' index rose to 52.2 in March from 51.2 in February.  China's official nonmanufacturing PMI, a competing gauge, also showed faster growth in March indicating some validation of the Chinese government’s efforts to prop up growth in the world’s second largest economy.   

Company News

  • Both the independent board and independent expert KPMG have recommended the Dexus Property (DXS) takeover of Investa Office Fund (IOF), citing access to long-term growth opportunities, diversification of risk and significant income accretion.  Assuming this takeover proceeds, clients holding IOF are expected to receive 0.4240 Dexus Shares and $0.8229 cash for each Investa Office Shares held. 
  • Telstra (TLS) has signed a $1.6 billion contract with NBN to provide planning, design, construction and construction management services within the existing HFC footprint. The new contract complements existing agreements between Telstra and NBN.
  • The CEOs of Australia's biggest banks have dismissed Labor's call for a royal commission into the financial sector as the Federal Government rules out launching its own.  ANZ chief executive Shayne Elliott said there had been a number of recent inquiries into the industry and a royal commission could damage Australia's standing among global investors.  
  • Fortescue Metals Group (FMG) is looking to cut more costs as it scraps its contract with Downer EDI (DOW) at Christmas Creek and moves to a full owner-operator model. Fortescue did not say whether employees from Downer would move across to the company when the current mining services contract in the Pilbara ends on September 30.
  • Macquarie Atlas Roads (MQA) says it is well positioned to benefit from improving economic conditions in France and the US. The company, which recently divested two of its six assets, said it is continuing to see traffic growth at its Autoroutes Paris-Rhin-Rhone (APRR) network in France and the Dulles Greenway in the US.


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