[table “190” not found /]
What’s a few points among investing friends, especially when the stock market has endured the post-Brexit shock to the financial system?
Yesterday, the S&P/ASX 200 index finished at 5246. However, over the first day of the new financial year, we went within three points of 5280, which was where our market was the day before we were Brexited!
I thought a 13 point gain on Friday was OK, considering we thought the Poms had condemned us to another period of fear and loathing, thanks to their crazy decision to leave the EU. And not even the often-accused too optimistic Peter Switzer would’ve tipped a 2.5% gain for the week, but it happened.
The better way to look at the stock market was to go back to the Monday before the Thursday when the Brits went to the polls and our ASX 200 index was at 5162.7. To be at 5246.6 right now (that’s a 1.6% gain), considering what we’ve been through, says a lot about where stock market investor attitudes are right now.
The arguments for stocks are stronger than the arguments against, unlike January and early February, and the Brexit crisis reminded us why. Right now, central banks still hold the aces but I’m praying that we see sufficient economic growth in the US this year or we could be in trouble.
Overnight, Europe and even the UK’s FTSE were up, with the latter 1.13% higher. Meanwhile, the German DAX was up 0.99%, the French CAC put on 0.86% and the Spanish IBEX rose 1.29%. And get this: the FTSE was up 7% for the week and that’s the best gain since December 2011!
(The Yanks were a little less enthusiastic on Friday, with the Dow up only 19 points or 0.11%)
So you could say that the Brexit blues were beaten up by the Big Banks (central banks) of the world.
We needed help as I don’t like the bond market making history with headlines like this: “30-year US bond yield hits record low amid global bond rally.”
When scaredy cats buy bonds like there’s no tomorrow, it pushes down yields to these record low levels and makes me worry about tomorrow.
Central banks have to create economic growth or else there could be a serious crisis of confidence. Happily, the Yanks have upgraded their first quarter growth this week from 0.8% to 1.1% and the BBC reported this week that “Economists currently expect second quarter growth in 2016 to be close to 2.4%,” which is a great boost in economic activity, if it happens.
Nariman Behravesh, chief economist at IHS, said: “Consumers will resume their role as the powerhouse of the US economy, with personal consumption expenditures in the second quarter estimated to grow by 3.7%.” These are the kinds of stories that will prove the bond market wrong.
So it was the threat of what central banks can do to beat the negative effects of a Brexit that has helped stocks this week. However, stocks must face the headwinds of potential EU rebellions by the likes of Italy and other struggling economies and then there’s the Trump terror out there waiting to hit and hurt markets.
The head scratcher fact of the week was the rebounds of the likes of BHP Billiton, which spiked 8.8% and Rio Tinto up 7.6%. I like it as I’ve been talking up material stocks and so have many of my expert buddies but it’s still a little hard to explain.
There wasn’t great economic data out of China or Japan this week, so these rises are harder to comprehend. I guess I should thank central banks.
What I liked
- The Brexit bounce back of the stock market. God bless central banks.
- Europe’s unemployment fell from 10.2% to 10.1%, which makes our 5.7% jobless rate look pretty impressive.
- On the local front, the Performance of Manufacturing index edged up 0.8 points to 51.8 in June. A reading above 50 indicates that the sector is expanding. The index has been above 50 for 12 months – the longest period of expansion since September 2006.
- Dwelling prices rose in three of the eight capital cities in June. Hobart house prices are up 6.2% on a year ago – marking the fastest pace of growth in six years. Go Tassie. (For June, here are the price changes: Sydney (up 1.2 %), Melbourne (up 0.8%), Brisbane (down 0.1%), Perth (down 0.8%), Adelaide (down 1.3%), Canberra (down 1.1%), Hobart (up 1.8%), Darwin (down 1.6%).
- Business credit rose by 0.3% in May to record highs. Business credit is 7.1% higher than a year ago, which a great omen.
- US consumer spending rose 0.4% in May, after surging 1.1% in April.
- US first quarter profits were revised up from 0.6% to 2.2%, which is a big revision.
- Copper broke above its 200-day moving average, touching 7-week highs, which might be another good omen, as this metal has been languishing in the past few years.
What I didn’t like
- The ANZ/Roy Morgan consumer confidence rating fell from 2½-year highs, down by 1.7% to 116.8 in the week to June 26. The weakness was driven by the financial market volatility following the UK referendum vote to leave the European Union. After this Brexit bounce back, it should be interesting to see next week’s reading.
- Josh Steiner (whoever he is) from Hedgeye Risk Management in the US (whatever that is!), who ran with another Aussie housing bubble story. He suggests shorting our banks! And the media ran with it, showing what patsies we can be.
- Why don’t our banks come back with guns blazing against these ‘experts’, who tell the world that their balance sheets stink? I’ll be following this one up on TV this week along with the question: how serious is our total debt problem?
- Why does APRA allow our banks to be slagged when it will be blamed if these nutcases are proved to be sane and right?
- Job vacancies fell from 3½-year highs, down by 1.9% to 169,400 in the three months to May. It was the first fall in vacancies in seven quarters. Job vacancies are up 8.1% on a year ago. (Note the fall was from record highs but we have to watch this development.)
- New home sales declined by 4.4% in May, after falling by 4.7% in April. The decline reflected a fall in detached house sales (-6.7%) but sales of ‘multi-units’ rebounded (+4.9%). These numbers were before the RBA’s rate cut on Budget day.
- In China, the manufacturing sector stalled in June, with the official Purchasing Managers’ Index (PMI) easing to 50, compared with 50.1 in May, in line with expectations from a Reuters poll.
- China’s services sector expanded at a quicker pace, with the official PMI reading at 53.7 in June, from 53.1 in May. A reading above 50 indicates an expansion.
- This interpretation of the above figures by ANZ’s Raymond Yeung and David Qu: “Today’s data suggest that China is unlikely to achieve a GDP growth of 6.7 percent in the second quarter.” “We do not think that there is a significant rise in service sector activity that can offset the downturn of the old economy.”
Election comment
I think my colleague Paul Rickard did a great piece on what a Labor victory in the election might mean [1] and it’s worth reading. I believe we need a period of stability in unstable times, with unknown terrorism and Trump threats out there worrying markets, along with known unknowns such as Brexit’s effects, Fed interest rate rises ahead and the failure of economies such as Japan and Europe to grow sufficiently fast to KO negative interest rates.
While I think the Coalition’s super changes weren’t thought out properly, I suspect good sense and a troublesome Senate will modify some of these regrettable reforms. A Labor victory wouldn’t be a complete disaster – I rate Chris Bowen – but it won’t help market and business confidence, which have been on a nice and overdue comeback. Also, I don’t think we need a change to negative gearing, when there are dopes out there predicting the housing bubble will burst. I don’t see it as a bubble, maybe more a manageable balloon but could Labor hold the pin that could prick that balloon? That’s an important issue if tomorrow we’re talking about a Prime Minister Shorten.
Top stocks – how they fared
[table “189” not found /]
The week in review
(click the blue text to read more)
- You know I like a buying opportunity when I see one, and Brexit is no exception. My job is to tell you when it is, so watch this space [2]!
- Paul Rickard gave his view on one of the latest unlisted property funds – the Centuria Zenith Fund [3]. He says the forecast distributions are attractive and the investment rationale is well-considered.
- Roger Montgomery said major private hospital companies including Healthscope [4] are well placed to boost earnings over the long term.
- Our super stock selectors [5] liked Telstra but placed a couple of UK-exposed stocks on their dislikes list.
- Charlie Aitken [6] discussed how he’s playing the market post-Brexit and stressed the importance of holding reliable dividend stocks in this environment.
- Tony Featherstone tipped some battered Brexit stocks [7] to consider – more on this below.
- Tony Negline explained why you might consider splitting super [8] with your spouse and how to do it.
- This week, the brokers liked Aurizon Holdings [9]. In our second broker report [10], Mayne Pharma and NAB were in the good books but CYBG was out of favour.
What moved the market
- Global markets bounced back after Brexit fears subsided and bargain hunters swooped. As always, stock players sell first and ask questions later.
- Markets also reacted positively when Britain’s central bank raised the prospect of stimulus measures.
- End-of-year window dressing by fund and portfolio managers may also be behind stock positivity.
The week ahead
Australia
- Monday July 4 – Melbourne Institute Inflation (June)
- Monday July 4 – ANZ Job advertisements (June)
- Monday July 4 – Building approvals (May)
- Tuesday July 5 – AiG services index (June)
- Tuesday July 5 – Weekly consumer confidence
- Tuesday July 5 – Retail trade (May)
- Tuesday July 5 – International trade (May)
- Tuesday July 5 – Reserve Bank Board meeting
- Wednesday July 6 – Tourist arrivals (May)
Overseas
- Tuesday July 5 – US Factory orders (May)
- Tuesday July 5 – US Durable goods orders (May)
- Wednesday July 6 – US Trade balance (May)
- Thursday July 7 – US ISM services index (June)
- Thursday July 7 – US Federal Reserve minutes (June)
- Thursday July 7 – US ADP Employment report (June)
- Friday July 8 – US Non-farm payrolls (June)
- Friday July 8 – US Consumer credit (May)
Calls of the week
- Tony Featherstone says CYBG and Macquarie Group could be buying opportunities [7] after the Brexit beat-up.
- Speaking of a Brexit beat-up, Standard and Poor’s beat the UK’s credit rating with stick, taking it down from AAA to AA. They also downgraded the EU’s credit score from AA+ to AA.
- In sport, hurdler Sally Pearson made the call to pull out of Rio after a hamstring injury, while Shooting Australia deemed Michael Diamond ineligible for nomination to the Australian Olympic Committee due to police charges.
Food for thought
It always seems impossible until it’s done – Nelson Mandela
Last week’s TV roundup
- What will be the market implications of a Coalition or Labor win at the polls? Switzer Super Report’s Paul Rickard and AFR’s Philip Baker join the show [11].
- Is it the right time to buy companies hit by the Brexit news, or are there still scary times ahead? Contango Asset Management’s George Boubouras shares his thoughts [12].
- SMSF Association’s Andrea Slattery joins the show to analyse the respective superannuation proposals [13] from the Coalition and Labor.
- Fund manager Charlie Aitken recently described Washington H. Soul Pattinson as Australia’s Berkshire Hathaway. The company’s CEO, Todd Barlow, joins the show [14] to discuss the growth of the business.
Stocks shorted
ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table also shows how this has changed compared to the week before.
This week, one of the biggest movers was Corp Travel with an increase in the proportion of shares sold short from 6.59% to 7.60%. Flight Centre followed, increasing from 10.55% to 11.45%.
[15]Source: ASIC
My favourite charts
Brexit blues kicked to the curb
[16]Here is the ‘well-der’ moment of global stock markets after people worked out they overreacted to the Brexit.
US economy revs up?
[17]Yellen would be one happy chap after the key US economic indicator, consumer spending, rose 0.4% higher to 11372.9 billion (USD). This is a great sign because what US consumers spend drives two-thirds of economic growth.
Top 5 most clicked on stories
- Peter Switzer: Brexit will create a buying opportunity, but when? [2]
- Charlie Aitken: Brexit – a black swan event with opportunity [6]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [9]
- Paul Rickard: Zenith – a yield of 7.6% [3]
- Charlie Aitken: Tourism remains my no.1 structural growth theme [18]
Recent Switzer Super Reports
- Thursday 30 June: Black Swan [19]
- Monday 27 June: Brexit shock [20]
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.