Wealth Managed - 15 June 2016

By David Lane - June 16, 2016

The odds of a UK Brexit are firming, and this is heightening the nervousness around the markets. Recent polls – and a flurry of betting – suggest that the chances of the UK exiting the European Union are increasing. Some European government bonds are trading at all-time lows as investors seek safety.

The referendum, which occurs on 23 June, is gaining interest from around the world, with a recent poll of US investors suggesting they are more concerned about the Brexit than they are the Federal Reserve increasing rates at the next meeting.

What would be the impact of Brexit?

It seems that the answer to this question is the reason that markets are getting concerned: Brexit spells uncertainty. Markets do not like uncertainty.

The referendum is merely step one in the process . . . a process that does not appear to be clearly mapped out at this stage. The full negotiation of the exit (should the vote go that way) could take up to seven years.  It is also unclear whether Britain would completely leave the EU, or whether they would remain a trading participant, but stop the free flow of people.  

Economically, a decision by the British to leave the EU is likely to negatively impact growth in the UK, and could have wider ramifications on Europe. The British Pound has fallen significantly against major currencies since the end of May.

MSCI Delays adding China A shares

Chinese and Asian markets are expected to react negatively to the announcement from MSCI that they have delayed adding Chinese local-currency shares (China A) to the Emerging Markets index.  

MSCI have justified the decision on the basis of global investor concerns about the lack of openness and transparency of Chinese markets.

The anticipated inclusion of the shares was expected to bring tens of billions of dollars into the Chinese stock market, as global institutional investors would have added these shares to their portfolios that track the MSCI Emerging Markets Index. For now, it will mean that the Chinese stock market (the second largest in the world) will remain out of most global portfolios. The MSCI Emerging Markets Index does include Chinese companies that are listed in Hong Kong and New York, but does not include Chinese companies listed on the Shanghai and Shenzhen exchanges.

News in Review 

  • The Reserve Bank of Australia held its powder dry at Tuesday's scheduled policy review as the strong first-quarter Gross Domestic Product curbed the need for additional monetary stimulus. The RBA left the benchmark cash rate unchanged a month after it unveiled a 0.25% cut, which took rates to their current record low of 1.75%. Following the announcement, the Australian dollar leapt to a one-month high above US$0.74.
  • Owner occupied housing loans in Australia fell 0.5% while investment housing loans rose 0.2%. In seasonally adjusted terms, the total value of dwelling loans (excluding alterations and additions) fell 1.8%.
  • US Federal Reserve Chair Janet Yellen expressed concern about the recent hiring slowdown just one week before the Federal Reserve's committee meets in Washington. "This past Friday's labor market report was disappointing," Yellen said in a speech on Monday in Philadelphia. According to the April JOLTS report, the pace of hiring by US employers slowed to near a two-year low, pushing up job openings to 3.9%, a potential sign that American firms are struggling to find workers.  Job openings, a measure of labour demand, increased 118,000 to a seasonally adjusted 5.79 million, the highest number since July 2015.
  • The rate of the Eurozone economic growth for the first quarter of 2016 has been revised back up to 0.6% in the final estimate for the period from the Eurostat agency.
  • China trade surplus stood at US$50 billion in May of 2016, down from US$59 billion reported a year earlier and below market estimates as exports fell more than imports. Since 1995, China has been recording consistent trade surpluses.
  • China's Consumer Price Inflation in May rose 2.0% from a year earlier, below market expectations. Food prices, a major component of the index, rose 5.9% compared to the same period a year ago, lagging April's 7.4% expansion. Producer prices in May fell 2.8% from a year earlier, compared with market expectations for a drop of 3.3% and a decline of 3.4% in April.
  • China’s industrial production rose 6.0% from a year earlier following a similar advance in April. A median estimate of economists called for a gain of 5.9%. Chinese retail sales, a measure of both private and government purchasing, rose 10% in May from a year earlier. That followed a 10.1% advance in April and median estimates calling for the same. 

Company News

  • BHP Billiton (BHP) shares have fallen more than four per cent after Brazilian police completed their criminal investigation into last year's deadly dam burst at a mine co-owned by the Australian giant.  Police have accused three companies and eight employees of crimes including wilful misconduct at the Samarco mine, a joint venture by BHP and Vale SA. The dam collapse polluted a major river and killed at least 17 people. BHP Billiton has been contacted for comment.
  • Air New Zealand said Friday it will sell the bulk of its stake in Virgin Australia (VAH) to Nanshan Group, making the Shandong-based conglomerate the airline's second Chinese investor in as many weeks.  Nanshan will pay $0.33 a share for a 19.98% stake in Virgin Australia, valued around $230 million.  Other major shareholders in Virgin Australia include Etihad Airways, Singapore Airlines and Virgin Group.
  • Vitamin and supplement supplier Blackmores (BKL) has been promoted to the Australian share market's list of the top 100 companies, replacing caterer and cleaner Spotless, whose share price plummeted from $2.20 to $1.06 after a profit warning.  Blackmores' share price is currently around $149, giving it a market value of about $2.56 billion.  In other changes to the indices, the A2 Milk Company was added to the S&P/ASX200 index and Liquefied Natural Gas Ltd was removed.
  • California-based Yahoo is set to put together a list of bidders for its core internet business after several parties, including Verizon Communications Inc and AT&T Inc made bids of up to $3.5 billion for the struggling tech company.  Private equity firms backed by Berkshire Hathaway’s Warren Buffet are rumoured to be among the bidders.   
  • Microsoft is buying the professional networking website LinkedIn for US$26bn; the US$196 per share represents a 50% premium to the LinkedIns’ share price.
Disclaimer
This material is intended for the use of the clients of Pitcher Partners Wealth Management Pty Ltd only.  It is current at the date of preparation, but may be subject to change.  This document does not constitute financial product advice.  It is of a general nature and has been prepared without taking into account any person’s objectives, financial situation or needs.  Before acting on the information you should consider the appropriateness of it having regard to your objectives, financial situation or needs and seek independent advice.  You should obtain and consider a Product Disclosure Statement in relation to any financial product before making any decision about acquiring the product.  To the maximum extent permitted by law, Pitcher Partners Wealth Management Pty Ltd and its representatives will not be liable for any loss or damage incurred by any person directly or indirectly for any use or reliance on this document.

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