Switzer on Saturday

Could slowing growth trump Trump’s trade deal?

Founder and Publisher of the Switzer Report
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US stocks were down overnight and it had a lot to do with the news flow over the week. And consistent with what we’ve had to deal with over 2018, there’s good and bad news, so we have to work out which ones will be the most impactful on stocks in the near and long-term.

The first of three huge market-driving news items of the week was the backdown of the Reserve Bank from 3% plus growth, putting a rate cut close to a 50/50 chance and sinking the dollar to 70.96 US cents. This actually coincided with the Fed overnight dropping its growth forecast and explains why the US 10-year bond rate is now 2.6% but was 3.25% around September.

Of course, the second item was the Royal Commission recommendations that changed the fortunes of our big banks. The share price of Westpac (the only bank committed to keeping its wealth business) rose close to 9.5% for the week. Paul Rickard (who’s been ‘coping’ with skiing in Europe while I maintain the fort) and I breathed a sigh of relief on that market reaction, as we’d stuck our necks out on many occasions supporting the banks’ future share price outlook, following the RC’s show-and-tell.

And the other was the March deadline for a trade deal between the US and China, which might not be met by March 1! CNBC reported on Thursday (US time) that the meeting of Donald Trump and Xi Jinping won’t happen in February! However, on Friday, the White House came out and told the market that the March 1 deadline is flexible, so it can be pushed back, presumably based on the progress of the talks. If no deal had happened by the end of February (19 days away!), it was thought that 25% tariffs would be slapped on Chinese imports.

That should’ve helped stocks but this trade nervousness and all this softer economic growth globally from Europe to China to the USA and now us too, is taking momentum out of the rally that started in January and has returned 11% to all those who bought my “buy the dip” recommendation. And yes, I did say it with a little bit of trepidation, but we got it right and now we have to work out how the possibility of a trade deal will help offset fears about a slower world and local economy. (It’s a tough job, but someone has to do it!)

I liked this summation from Craig James at CommSec:

“It may have something to do with the uncertainty on US-China trade talks,” he suggested. “Or perhaps the softening of share prices, home prices and the Aussie dollar late in 2018, but economic data released so far in 2019 has generally taken on a softer hue.

Companies continue to do well and the job market is strong – especially in NSW and Victoria. While job ads have slowed, they’re still consistent with hiring, but at a slower pace. Overall, most indicators suggests that momentum has been checked. And that means the Reserve Bank has no need to change policy settings in any direction.”

The US economy is suffering a slowdown but it’s a crazy slowdown. The Yanks are now expecting a first quarter growth, according to the Fed, of just 2% but here the RBA has cut forecasts for economic growth to 3% for 2019, which was once set at 3.25%.

Throw in the downgrade to European economic growth forecasts we saw this week and it’s no surprise that stocks are turning negative worldwide and it makes sense that the energy sector weakened as the oil price eased.

Also not surprising, US company earnings for the first quarter are heading to negative territory, as 40% of S&P 500 company revenue comes from overseas. In October, the guess was 8.1% growth but this had been pulled back to 5.3% in January. Now it has been dragged down to minus 0.1%. Now remember, we’re now hearing the final quarter earnings numbers but we’re also being given a sneak preview of what’s going on in this first quarter. Consistent with a slower growing economy, profits’ growth is slipping.

And it’s probably a story we’ll see here but it mightn’t be as bad, as the lower dollar and our stronger growth could help us. With a huge number of companies reporting, next week means many of these speculations will meet reality.

And why can I be more positive on stocks here than say for the US? Well, we just had the best week in over two years! The S&P/ASX 200 Index rose 208.7 points (or 3.6%) to end up at 6071.5 and it happened, not surprisingly, as the dollar lost over 2% for the week.

(On Monday, James Dunn will be looking for the currency-sensitive stocks that could benefit from a lower dollar.)

Obviously, the banks helped, with even the NAB up about 4%, despite resignation issues with its CEO and Chairman. Gamblers who punted on AMP saw an 8.9% lift, Steadfast put on 19.7% and IAG (Julia Lee’s stock of the week announced in this Report last Monday), wacked on 5.9%.

Our miners had a good week on the back of some bad news out of Brazil, where another iron ore-related, tailings dam, owned by Vale (the rival of BHP and Rio) collapsed, possibly killing 300 people. This is how the AFR reported it: “Brazilian regulators issued a court order restricting the use of Vale’s Laranjeiras dam, a move which could sideline 30 million tonnes of iron ore.

Iron ore prices shot up following their two-day pause, climbing 4.4% to $US90.50 a tonne on Thursday. Analysts still believe the price of the bulk commodity could top $US100 a tonne in the coming days, with Vale facing a mountain of legal work in order to resume normal production.”

What I liked

  • The RBA Governor thinks the fall in house prices is “manageable” and is a smaller concern compared to overseas threats.
  • The RBA Board described the labour market as “strong” with “a further decline in the unemployment rate to 4¾% expected over the next couple of years.”
  • Despite an ordinary number for national retail sales, the annual retail sales number in Western Australia was at a 3-year high.
  • The trade surplus rose to a two-year high of $3,681 million in December from $2,256 million in November (consensus: +$2,225 million). It was the 12th successive surplus in 2018. Australia’s exports to China were at record highs in the year to December. China now accounts for a record 34.2% of Australian exports.
  • The trend value of alterations and additions approvals rose for the fourth straight month in December, up by 1.2% to 9-month highs.
  • The US trade deficit narrowed from US$55.7 billion to US$49.3 billion  in November (forecast US$54 billion).
  • The ISM services index in the US fell from 58 to 56.7 in January (forecast 57.2). It’s a fall but still a good number over 50, which indicates the services sector is still expanding.
  • Italian shares rose by 0.8%, supported by stronger bank stocks, after a new 30-year Italian bond met with record demand, which is a good sign, considering Italian economic and political concerns lately.

What I didn’t like

  • Retail trade fell by 0.4% in December, after an upwardly-revised 0.5% (previously-reported +0.4%) increase in November. Annual spending growth, however, was unchanged at 2.8% in December. In trend terms, spending eased to 3.2% over the year to December, from 3.4% in November.
  • Council approvals to build new homes fell by 8.4% in December, to be down by 22.5% over the year. Approvals stand at 5½-year lows. But Tasmanian dwelling approvals are at 8-year highs.
  • ANZ job advertisements fell by 1.7% in January. Ads were down by 3.7% over the year and down by 4.1% on 7-year highs set in May. (I don’t like the fall but once again it’s off 7-year high levels.)
  • The Reserve Bank has cut forecasts for economic growth and inflation, especially in the near term. The economy is tipped to grow 3% over 2019, with inflation around 2%. (I’ve been nervous about our growth but if the RBA is right, then great growth becomes good growth.)
  • In January, 81,994 new vehicles were sold, down 7.4% over the year. In the 12 months to January, sales totalled 1,146,554 units, down 3.9% on a year ago. (I know it’s a down result but it comes off record highs and the drop is less than 4%)
  • US President Trump said that a meeting with Chinese President Xi was unlikely to occur before the self-imposed March 1 deadline set for a trade deal.
  •  The European Commission has cut its 2019 forecasts for the euro zone economy from 1.9% to 1.3%.
  • The Bank of England also cut 2019 growth forecasts for the UK economy from 1.7% to 1.2%.

Stock watch reinforces my story

The Goodyear tyre company has seen its share price drop by 44% over the year. From its disappointing earnings report out overnight, we’ve learnt that the major cause for this bad year was slowing sales in China and India. Yep, the world economy is slowing and it could force the hand of the RBA to think about a rate cut. Let’s hope we don’t need it but if we do, Dr. Phil Lowe told us this week that he thinks a lower cash rate of say 1% would work!

The Week in Review:

  • With scary red flags at a minimum, you could have missed a very big leg up for the local index.
  • In his first review for the year, Paul Rickard looked at how our model income and growth portfolios performed in January.
  • In Charlie Aitken’s opinion, the best of Apple’s long-term outperformance is behind it, which is another clear reason he sees US equities underperforming in 2019.
  • You don’t have to look at risky stocks for double-digit returns. Here are 4 stocks on Julia Lee’s list, for various reasons.
  • Ahead of reporting season, James Dunn put together the honour and dishonour role of companies confessing early.
  • While caution is advised as the high-flying Qantas stock loses some altitude, Tony Featherstone wrote that the long-term outlook for regional aviation (Alliance and REX) is favourable.
  • In the first Buy, Hold, Sell – what the brokers say this week, there were 10 upgrades for ASX-listed stocks, and in the second edition 11 companies were downgraded and 5 upgraded.
  • Out Professional’s Pick from Ryan Sohn, Equity Analyst at Perennial was Redbubble and our Hot Stock from Michael McCarthy, chief market strategist at CMC Markets, was EMECO Holdings.
  • And in Questions of the Week, we answered readers’ queries about sourcing company data, AGL, Costa Group and bank dividends. 

Top Stocks – how they fared:

What moved the market?

  • The release of the Royal Commission recommendations brought a relief rally for the banks.
  • Reserve Bank governor Philip Lowe indicated that an interest rate cut is now just as likely as a rate hike, pushing the Australian dollar down.
  • US President Donald Trump will not meet with Chinese President Xi Jinping ahead of the March 2 deadline for a trade deal to be reached.

Calls of the week:

  • Insurance Australia Group (IAG) was Julia Lee’s top pick in the top 20 this week.
  • Charlie Aitken believes that the best of Apple’s long-term outperformance is behind it.

The Week Ahead:

Australia
Tuesday February 12 – Lending data (December)
Tuesday February 12 – Weekly consumer sentiment
Tuesday February 12 – NAB Business survey (January)
Tuesday February 12 – Credit & debit card lending (December)
Wednesday February 13 – Consumer confidence (February)
Wednesday February 13 – Speech from Reserve Bank official
Friday February 15 – Speech from Reserve Bank official

Overseas
Tuesday February 12 – US NFIB Business Optimism (January)
Tuesday February 12 – US JOLTS job openings (December)
Wednesday February 13 – US Consumer price index (January)
Wednesday February 13 – US Monthly budget (December)
Thursday February 14 – US Producer prices (January)
Thursday February 14 – US Durable goods orders (December)
Thursday February 14 – China International Trade (January)
Friday February 15 – US Industrial production (January)
Friday February 15 – China Inflation (January)
Friday February 15 – US Retail sales (December)

Food for thought:

“Business and life are like a bank account – you can’t take out more than you put in.” – William Feather

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 shows how this has changed compared to the week before.

Chart of the week:

Following the Reserve Bank’s decision to keep interest rates unchanged for the 30th consecutive month, CommSec published a chart showing previous periods when the cash rate has remained on hold:

Source: Reserve Bank, CommSec

Top 5 most clicked:

Recent Switzer Reports:

Monday 4 February: Scary market factors under control

Thursday 7 February: Apple, Airlines, Answers

 

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.