It’s always that the dollar is too high, property is out of control, petrol is too expensive, and wages are too low. But if you step back you can see that a lot of those numbers bode well for the economy. Some have been brought about by the strange twists in the political landscape which sees property developer/reality TV star in Donald Trump about to become president of the United States. 

Subsequently US rates are expected to rise and therefore the Aussie dollar has been falling, from testing US78c to below US75, helped along by fears of a trade war between China and the US. If that doesn’t happen then local exporters get a leg up on world markets, especially mining and energy stocks which have seen commodity prices jump off the bottom over the past 12 months. This is also good news for repairing the Federal Government deficit via the tax system. 

Petrol prices are falling again despite the best efforts of the Arabs and the Russians to put a floor under the price. Lower petrol prices translate into lower inputs for business and more spending power for consumers. And while consumer spending has been sluggish this year it looks like we’re heading into a good Christmas with the Commonwealth Banks Business Sales Index rising in trend terms in October. 

Can consumers shake off mid-year slump and save Christmas?

If interest rates stay low and people shake off the mid-year slump that featured around the Federal election the broader retail market should be happy.

Of course wages aren’t going up, which has everyone moaning, but that’s good for business inputs and it’s obviously not stopping spending with inflation at its lowest level in years and employment remaining pretty steady at 5.6 per cent. 

That figure may get ramped up as more businesses look for efficiencies via mergers, acquisitions and restructuring.

The two worrying factors in the economy are the continuing problem of getting revenue savings measures through the two houses of government and a growing weakness in apartment/construction market. At the moment it’s really only the property speculators who are feeling the heat as the easy capital gains dry up, but if higher US interest rates spread to Down Under then the mortgage belt could feel some strain. 

That’s why I hear the banks keep continuing to stress test their mortgage market exposure. Good luck

It only took the Australian Financial Review to ask Fortescue boss Twiggy Forrester whether he though the worst was over in the commodities cycle (He said yes)  and then get their markets desk to agree that yes iron ore, coal and energy were all off the bottom and then the Canberra desk to figure out that higher tax revenue from resource exports might just cut the Federal Budget deficit by one third over the next four years.

I might be being little unkind here as most of Australia’s resource stocks still standing have actually done a good job of cutting costs that would have been thought impossible five years ago.

It took just one more day for the boffins down at the stockmarket to figure out that the commodities cycle might also put a bit of life back into our sharemarket leaders, based on the maxim that a rising tide lifts all boats. Predictions for the ASX top 200, currently at about 5500, hitting 6000 by Christmas were also being bandied about. Look out for the Santa Claus rally.

Next cab off the rank was the government trying to push through its long-horizon tax cuts for business, which be defeated in Senate. There you go, another $48 billion that doesn’t have to be spent. We’ll have that deficit licked in no time if we can only figure out how to raise more taxes on what we do best – nothing.  

Apartments may soon be hitting the supply side wall

APARTMENT WOBBLES

As one market gets some good news another looks into the abyss. The property market is awash with grim predictions from economists and analysts that the apartment market is headed for a fall with oversupply looming inthe next two years, particularly in Melbourne and Brisbane. 

You have to wonder what all those market economists were doing in their BMWs as they drove home, with every second railway station overshadowed by cranes in a building boom that hasn’t been seen since the 1970s. 

Of course there’s  going to a reckoning, of course investors are going to be hit, of course some developers/builders will go broke and their staff lose their jobs, and of course rents will probably fall in line with lower valuations. 

What I can’t understand is why people didn’t see it coming. APRA did and acted and belatedly so did the Reserve Bank and there is more pressure being brought to bear on borrowing requirements. 

But just when the banks had been told to pull their horns in on property investment, they opened up their books again. The reason is obvious. Even though auction sale prices have been holding up valiantly this year, particularly on houses and centrally-located apartments, there are just not as as many sales as last year. Banks need mortgage volume and they’ll get it any way they can.

And you wonder why the banks are getting such bad press. 

Of course the PM is doing things and making some headway on cutting the budget deficit but with an overdraft bill of $37 billion it’s hard going. However as Turnbull keeps saying when he’s accused of compromising on issues ‘Eighty per cent of something is better that 100 per cent of nothing.’ 

RIGGING THE MARKET

And is it only me that finds it funny that when two of the world’s biggest oil producers – Saudi Arabia and Iran – set out to rig the global oil market, the worlds’ stock markets applaud. Yes, it looks like the Saudis experiment with free market if over and the OPEC spirit is alive and well even if the world’s biggest producer, Russia, isn’t in the tent yet. In fact the Russian are pumping like there’s no tomorrow with a production record set only last month. 

If any company in Australia decided it might be a good thing to cut back production in collusion with other producers in an attempt to push up prices and margins the ACCC would be all over them. But of course it’s a lot harder to punish a country. It should also be noted that the Saudis and the Iranians are in a proxy confrontation in Yeman as they back different groups fighting for control of the country. Hey, business is business. 

One can only hope that the Russians and the South Americans, and a re-energised US oil shale industry, come flooding back into the market. An artificially high oil price is no good for anyone. 

DANCING AROUND THE BUBBLE

The arguments keep coming over whether Sydney property market is just over-heated or the world’s biggest bubble. It is true that there have been some extraordinary high prices being paid  in the run-up to the Spring selling season, but I always fall back on supply and demand numbers. Around Australia property prices are evening out. In Sydney, Melbourne and Brisbane apartment prices are decidedly toppy as investors find it hard d to get finance and more and more stock joins the market, especially in the small unit category. Sydney will be the last to feel the pain as population growth and low borrowing rates keep prices steady at the low end.

But the real problem in Sydney is the lack of supply in the housing sector with some properties fetching well over reserve and grabbing the headlines. For a bubble to burst there has to be a disruptive factor in the market, like high unemployment, high interest rates or a black swan event like an international economic collapse. I agree with the RBA that the market will work it out. Prices may not go down much but they will flatten out. 

WHY BANKS ARE BASTARDS

And while i’m having a rant it will be interesting to see how the bank CEOs handle yet another parliamentary inquiry into their practices next week. Early noises from the Labour Party side seem to indicate they will be examining whether there’s enough competition in the sector, which strikes me as peculiar as over the past decades government after government has signed off on one bank takeover after another.  For example Bank of Adelaide, Bank of Melbourne, BankWest and St George.  I know some of these banks were in trouble, but in hindsight maybe a government rescue would have resulted in a better marketplace than the one we’ve got today.  

But realistically it’s a backward looking number based on some good economic reforms last century and a good bit of luck for the Lucky Country. The trick now is to keep that growth going and that’s starting to look decidedly difficult.

Our major economic tool this century is to hope that reforms forced on the rest of the world, post GFC and fuelled by world awash with money, will kickstart the bigger economies and in turn sweep Australia up in its backdraft. Good luck on that. 

But let’s not be too negative, after all a lot of the Australian workforce wouldn’t even remember the last recession back in 1991. Australia has muddled through before and let’s hope it can do it again. 

Muddling through

The economists down at CommSec are still upbeat about the future, pointing out that he June quarter growth number of 0.5 per cent lifts annual growth from 3.0 to 3.3 per cent, slightly above the trendline.

What is worrying is that a lot of that growth is bring generated by the Government investment, up 0.7, and and government spending, 0.3 per cent. This can’t last unless a lot of the stalled Budget cuts actually get passed through the Upper House. 

The rest of the numbers are OK including household spending and dwelling investment, but key drivers like business investment and non-residential construction are missing in action while the export scene is still lagging badly from low commodity prices. 

Despite scepticism down at the share market, business is still doing well on sales, profits and dividends but it all seems to be generated by more and more cost-cutting. It amazes me that this can continue.

While everyone was backslapping themselves on what a great little country Australia was here’s some economic numbers that are cause for concern.

Consider this:

• The nation’s current account, the broadest measure of of our trade and financial position, rose from a deficit of $14.9 billion to a deficit  of $15.5 billion in the June quarter.
• Net foreign debt rose from $1021 billion to a record $1045 billion in the June quarter.
• Net exports continues to be a drag on Australia’s well-being and will continue to do so until farming resumes its strong uptrend and more income starts to roll in from Queensland’s big LNG projects.

Because jobless numbers, and forward job advertisements, remain strong consumers are still confident enough to keep buying houses/apartments and new cars (mostly SUVs) but it all seems to be slowing. 

 But with the Reserve Bank running out of options on the interest rate front and the damagingly high Aussie dollar now captured by events in the United States, let’s hope the Australian economy doesn’t receive some sudden external shock. 

I don’t think we’re in good enough shape to handle it. But then again we might just muddle through!

The main one was the Reserve Bank’s decision to cut interest rates 0.25 percent to a record low of 1.5 percent.

The RBA acknowledged it wasn’t worried about re-inflating the property bubble (more on that later) so was obviously worried about the sluggish performance of the economy going forward which have shown up in the employment and inflation numbers.

BANK BLOWBACK

Of course when the four big banks failed to pass on the full extent of the cut to home loan borrowers the Federal Government hit the roof and demanded explanations. But really the horse bolted years ago with no real competition out there to make sure pricing is exercised at the highest level.

Secondly the banks are now conscious that a large part of their customer base is older depositors who are growing more concerned about fix interest returns and are frantically looking around for better yielding investments.

So if the banks pass on the full cuts to home loan borrowers then they have to lower fix interest returns for a large majority of their depositors. That puts their earnings and subsequently their dividends under pressure. And who makes up the banks’ largest number of individual shareholders? That’s right those older/retiree depositors.

Who would want to be a banker in this market?

So what else is there to worry about?

OVERALL SPENDING IS WEAK

Well for a start no one seems to be spending. Retail sales rose 0.1 per cent in June after a 0.2 per cent lift in May. CommSec points out that real (inflation-adjusted) terms, retail trade rose by 0.4 per cent in the June quarter which up 1.9 per cent on a year ago – but the slowest annual growth in three years.

 HOME BUILDING SLOWS

House building fell back in July from June’s 30-month high and apartment building contracted, according to the latest performance of construction index.

The house-building sub-index dropped 7.2 points to 54.9, while apartment building activity also fell 7.2 points to 48.  There’s no getting around the fact that construction is slowing, the question is by how much? Dwelling approvals have also been reflecting this, falling by 2.9 per cent in June after falling by 5.4 per cent in May.

CAR SALES STALL

Despite being well on the way to a record year for cars sales in Australia, the month of July was not a happy one for the motor trade despite a myriad of end-of-financial-year sales promotions.

According to Federal Chamber of Automotive Industries 91,331 new vehicles were sold last month, which is down 1.1 per cent over July last year. Annual sales sit at 689,471, up 2.8 per cent over last year’s record.

The good news was that business fleets grew 12 per cent to 38,222 last month, but private sales fell 13 per cent to 41,594.

CONCLUSION

Most of these slowdowns have been put down to the drawn-out and slightly inconclusive federal election. Let’s hope that confidence is restored quickly otherwise the RBA might have to give the economy another boost. At the end of the week the RBA was maintaining its economic targets at 2.5-3.5 per cent growth over the coming year with underlying inflation in the 1.5-2.5 per cent range over the next year, below the 2-3 per cent target band.

The inflation number showed 0.4 per cent growth in June giving a seasonally adjusted rate of 0.6 per cent which when translated into an annual figure comes out at 1.00 per cent well outside the RBA comfort range of 2.00 to 3.00 percent. The headlines seem to confirm a cut was on the way.

As I wrote recently the economy needs a little help. All the data crossing the desk is looking a little soft, i.e. unemployment, business lending, personal credit creation, and consumer confidence. And the Australia dollar is staying high as a buffer against low interest rates around the world. The only bright spot is the export prices are finally moving up across a range of commodities but nowhere need as steep as they fell over the past two years.

So what will the RBA do? Next Tuesday’s meeting coincides with similar meeting of the Bank of Japan and the Bank of England. Both are expected to cut rates or shower money on the economy in one form or another.

So why wouldn’t the RBA move? It could well consider that it might be advantageous to keep its power dry as the other central bank moves rates into negative territory, thus leaving them exposed to another banking crisis.

And a quarter of a percent move might not be enough to get things moving in any case.

The RBA could also be advised to see what happens in the United States with the Fed board there hinting it might lift rates before the end of the year as economic growth starts to lift inflation.

That should have the effect of sinking the $A back to its comfort zone around A72c.

The key might be the that improvement in the terms of trade which rose around 2 per cent in June following a 1.4 per cent rise in export prices. Import prices fell by 1.0, which helps explain the weak inflation number.

Glad I’m not making the decision next Tuesday.

 THE GREAT AUSSIE HOTEL BOOM

One of the really bright spots on the export scene is the growth in tourism (another reason to keep the Aussie dollar low). It generates a lot of money and a lot of jobs, albeit not the highest yielding in the land. But now it’s also generating a construction boom, which might bridge the gap between the end of the apartment boom and the beginning of the much heralded infrastructure boom.

According to hotel consultant Dransfield Hotels and Resorts more than 8000 hotel rooms are under construction across Australia, with the possibility this could stretch to almost 30,000 rooms, as long as record numbers of overseas and domestic travellers keep coming.

Researcher BIS Shrapnel also told  the big Sydney hotel conference that the value of accommodation construction would peak at more than $2.2 billion in 2016, and remain elevated in 2017 and 2018.

This is what the RBA said: “The Board noted that further information on inflationary pressures, the labour market and housing market activity would be available over the following month. This information would allow the board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”

Well we’ve seen the unemployment numbers and while not alarming they don’t seem to be heading in the right direction.

JOBS SLOW DOWN 

Employment rose by 7900 in June after gaining 19,200 people in May. Full-time jobs rose by 38,500, while part-time jobs fell by 30,600. None of that is cause for celebration because it actually signals a slowdown in employment. Full-time jobs growth has gone backward so far in 2016 compared with jobs growth of almost 74,000 in the same period last year.

Most economists were predicting that the historically long election would slow things down but it’s also showing up in consumer confidence numbers and sluggish consumer spending.

The ANZ/Roy Morgan consumer confidence rating fell for the fourth straight week, down by 0.3 per cent to 114.9 in the week to July 17.

And the Commonwealth Bank Business Sales Indicator (BSI) rose by 0.1 per cent in June after similar gains from March-May. In 2015 spending lifted by an average of 0.5 per cent a month in trend terms. The only real bright spot was spending in clothing stores and that was attributed to the weather suddenly turning cold.

CARS AND PROPERTY HOLDING UP

The other bright spot in the economy seemed to be the car market, where new vehicle sales rose by 3.1 per cent in June. Over the year to June a record 1,174,121 new vehicles were sold. Maybe everyone who can’t afford a house is out there buying a new car?

And speaking of houses, the housing market is still steaming along with no apparent slowdown in sales despite the federal election and tightening credit.

The supply-side equation in Sydney and Melbourne will finally catch up with the market and the upcoming spring selling season will be a real test for the market. All this could be softened, of course, if the RBA moves on rates. Mortgage rates are becoming even more competitive.

Inflation numbers key to next move on interest rates

The RBA will be looking at all these factors when it meets on August 2 by which time it will have the latest inflation figures, and the country will be returning to normal after the election. And if the inflation rate is above, say 0.5 for the quarter, then all bets are off.

The strength of the Australia dollar will also weigh heavily on the RBA board as the $A currency heads back toward the high 70c to the $US. The continual recovery in export numbers is critical to maintain economic growth and the key to that is a low dollar.

 EUROPE BEST FOR RETIREMENT

Norway, Switzerland, and Iceland are the world’s best places to retire. They won the top three spots in Natixis Global Asset Management’s fourth annual index rankings.  As reported on Bloomberg, Norway joins a number of top 10 countries in having a compulsory workplace savings program with 2 percent of a worker’s earnings annually going into a retirement fund. Of course that pales next to Australia, which came in at No. 6, where employers must kick in at least 9.5 percent.

The retirement leaders with scores of 77 percent or better were Norway, Switzerland, Iceland, New Zealand, Sweden, Australia, Germany, the Netherlands, Austria, and Canada. The US, with a score of 73 percent, moved up into No.14 out of 43 nations in the global retirement index.

SMITH ON THE MONEY

Former ANZ CEO Mike Smith had a few pointed things to say to the AFR’s Smart Investor mag about analysts who have been highly critical over his Asia expansion policy while at the ANZ: “These analysts are interesting, I mean none of them run anything and their own organisations don’t use them for advice so you wonder why the market does. As I wrote recently many analysts would be more believable if they either had previous management experience or better still had skin in the game.

In June 128,569 vehicles were sold, taking the half-yearly total to 598,140, which is 3.4 per cent above the same period last year. But it’s the make-up of those sales that makes for interesting reading.

We all know people are buying Sports Utility Vehicles like never before. Whether they believe they are safer or just because Australia’s roads are so bad the figures don’t lie. Sales of sports utility vehicles are up 8.9 per cent from the same month a year earlier and 18.2 per cent increase compared with June last year.

But it is the four-wheel-drive commercial pick-ups and cab-chassis that are really setting the pace now – up 5.9 per cent on June 2015 but 16.4 per cent month on month. Tax breaks on items like vehicles to business with turnovers from $2 million to $10 million are believed to set this market on fire.

You only have to look at Australia top selling vehicles tin June to figure it out: The most popular car was the Hyundai i30, with 6432 sold, followed by the Toyota Hilux on 4613 and Toyota Corolla on 4427.The Toyota Hilux!. We must be having a ‘tradie’ led recovery.

HOUSING

But if all those tradies work in the building industry they are facing a decidedly weird future.

Sydney and Melbourne established house prices are holding up, but some areas in the new apartment market are beginning to look shaky with off-the-plan investors taking losses on the chin. There are also reports of developers having to pay more for finance with the Big Four banks shutting the lending window.

Figures out this week also show the rental market under pressure. CoreLogic is reporting a 0.6 per cent decline in rents led by Perth and Darwin compared with an increase of 1.1 per cent in full year 2015.

CoreLogic attributed the decline to the softest wage growth on record, high levels of investment in housing, a boom in residential construction (mostly new apartments) and slowing population growth.

With yields now approaching 3 per cent in major capitals, investors are faced with unpleasant choices. They can hunt for better returns in other cities, look for alternative investments altogether or try and increase rents. Yields will of course self -adjust if prices fall.

MIGRATION

And the latest migration figures won’t be coming to the rescue of the building market anytime soon. CommSec is reporting that over the past year, net permanent and long-term arrivals to Australia totaled 263,920 – that’s lowest level in nine years (March 2007).

The good news is that Chinese tourism rose to a record 1.36 million year-on-year, up 21 per cent and there’s no doubt the tourism will keep growing into the future.

But Capital Economics put some sobering perspectives on these number during the week by pointing out that while “exports (of services) themselves could experience a period of impressive growth over the next decade, the most likely scenario is that they will provide a reasonably small boost to the level of gross domestic product of around 0.1 per cent a year.”

Capital Economics calculated the resources boom added as much as 0.3 per cent to gross domestic each year over the past 10 years.

Capital made some interesting observations on the impact of tourism particularly from China and India. The most obvious was how many people from those markets could actually afford to travel and secondly how many actually held passports?

In India and China it is currently only about 5 per cent. In most western countries the number hovers between 25 and 50 per cent. Of course 5 per cent of Chinese or India’s populations of around 1.3 billion is still a lot of people, but it demonstrates the challenges facing Australia as it transitions away from the resources boom.

Capital estimates the number of tourists coming to Australia from those two countries would have to double before having a real impact on GDP.  

WHAT ABOUT GROWTH?

The last quarter’s growth number, which put a 3 in front of GDP, was a welcome relief to a slowing economy but will it last? Some economists have questioned the lumpiness of the numbers and pointed to the export contribution and whether it will continue. It was not encouraging to see a Australia’s trade deficit widening from $1.79 billion to $2.22 billion in May. It was the 26th consecutive monthly deficit.

WHAT ABOUT RATES? 

The Reserve Bank left the cash rate at 1.75 per cent at its last meeting but noted: “Over the period ahead, further information should allow the board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”.

Inflation and unemployment data are due second week of July and the RBA board meets again in early August.

The maxim holds that if you put your money into good stocks, say over ten years, you’ll always end up well in front and historically it’s been proved correct. But as dbdata pointed last week the S&P ASX200 index, reflecting Australia’s biggest companies, looks like finishing the financial year just about where its started!

Reflecting on this the markets’ boss over at the Australian Financial Review, Phil Baker, has been spending time in front of the Bloomberg data machine lately just to see where that market is historically . . . and pondering whether the maxim holds true.

If the market stays where it is – around 5300 – it will not only be steady on the year, but steady on the year before that! In the past ten years swings and roundabouts have seen the index hit a peak of 6828 before the GFC only to crash back to as low as 3145 after GFC.

 Indeed, give or take a few points it was at that same level in April 2006, when it was on its way to 6828 and then again in March and June 2008 when the index was on its way back down to 3145. It then repeated this performance in 2013, moving from a low 4655 to almost 6000 only to repeat a slide back to those 5300 levels.

Looked at another way the Australian sharemarket has gone nowhere in ten years.  Putting this into context Wall Street suffered the same sort of performance in the first ten years of the this century. It was know as the lost decade.

Roller coaster ride: shares back to where they started.

It’s true if you followed the maxim and stayed in the market for ten year you’d still be sitting on some pretty useful dividends, but not much in the way of capital gains.

If you entered the market a couple years back – post the GFC – you would have reaped good capital gains particularly among the banks. 

But in today’s market Phil Baker estimates in the recent period  the top 20 stocks are down almost 12 per cent, which gets cut to 7 per cent thanks to dividends, while the major index, as we pointed last week, is basically flat including dividends during the same time.

Baker reports “the big improver has been the property index is up almost 22 per cent once dividends are included, and industrial stocks have also done well with a total return of 18 per cent.

“The banking index, however, is down 10 per cent, despite those dividends, while the small-cap sector has delivered a total return of 15 per cent.”  On a sector basis consumer discretionary stocks, were up 16 per cent, health and utilities up 15 per cent, while the energy sector fell 23 per cent reflecting the decline in the oil price.

According to CBA’s market arm CommSec it is property, up almost 14 per cent and government bonds, 7.3 per cent, that have easily outperformed shares over the past three years. 

For the those investors still backing  the ‘time in the market’ theory the question is where does the growth come from for a lot of big mature companies that are facing challenges from tech-savvy interrupters looking to eat their lunch. 

To many it doesn’t matter as long as those franked dividends keep coming; it’s still a lot better that having your money in cash but woe and behold any of those big operations that are forced to cut dividends. The sharemarket reaction would be ruthless. 

 With only a few days to go until the until of the 2015-16 financial Craig James and his fellow economists over at CommSec have done an accounting on where the money was made in the past 12 months .

And although Craig is pretty upbeat on how Australian investments have performed I feel the sharemarket has really disappointed. 

• The  total returns on Australian shares – that is the all ordinaries accumulation index – is looking like it will end the year just about dead flat. Craig does point out that the 20-year average is still up 10.8 per cent but it doesn’t help much if you self managed super fund went long at this time last year
• And it doesn’t make you feel any better if you compare it to Australia’s favourite investment vehicle – property – which returned plus 13.9 per cent while returns on boring  government bonds lifted 7.3 per cent.
• Craig’s takeaway is that all three of the major investment sectors were steady to higher over the year and the outlook for the economy i.e. growth, jobs and inflation is still positive as Australia transitions away from the mining boom aided by record low interest rates and a currency seemingly comfortable in the mid to low US70c range. 

     Let’s hope he’s right but I couldn’t help noticing in the breakdown on stock market sector performance it was the mid caps that did well (up 14 per cent). Among the 21 sector groups food  and beverages, (29 per cent) automobiles and components, (27 per cent) and pharmaceuticals and biotech (23 per cent) were the stars. The losers were naturally energy (down 27 per cent) followed by banks (18 per cent) and the materials sector (10 per cent).

 And when we say banks we really mean the Big Four Australian banks -Westpac, CBA, ANZ and NAB – and materials is basically BHP and Rio which are still struggling with low commodity prices. 

 So while most individual super investors did well in companies holding the line with dividends this year it definitely doesn’t look that good on the capital side and it’s hard to see what’s going to turn that around. 

And just for the record Commsec estimates the Australian stock market will finish the financial year in 24^th  place in a field of 73 global exchanges with only 18 bourses in positive territory.  Best performers include Latvia (up 41 per cent), Slovakia (21 per cent) and Hungary (up 20 per cent). Worst performers have been Greece (down 43 per cent), Russia (29 per cent) and Columbia (23 per cent).