It’s not like me to avoid being optimistic but I can’t be relaxed about stocks going forward until I see how China responds to the US President’s decision to sign into law two Hong Kong related pieces of legislation that has undoubtedly ruffled the feathers of the leadership in Beijing.
One day on and we still don’t know what the response will be. And it seems logical that what China has promised i.e. “strong counter measures” will have an impact on the phase one of the trade deal.
And if that’s so, then obviously a lot of the stock market gains that were linked to the optimism of the trade deal progress could easily unwind.
On top of a possible spanner in the works for the progress of the trade deal, you have to remember that President Trump has promised more tariffs to start on December 15, if a trade deal hasn’t been inked!
It was October when Mr Trump started talking about a trade deal signing being “close” and his chief economic adviser, Larry Kudlow, was going out of his way to tell the media and Wall Street that real “progress” was being made so US stocks have risen from around 2887 to where the index was at the time of writing i.e. 3140. That’s an 8.7% gain that could be more than lost if this current China-US disagreement gets out of hand and affects the trade deal progress.
The chart below shows what has happened on the US index, the S&P 500, for the past six months, where the stock market was going sideways, until the US President started telling us that a deal was close.
S&P 500
Source: finance.yahoo.com
So it’s a waiting game until the Chinese respond to the US decision to support the democracy protestors. And I have to say that I’m surprised at Wall Street’s reaction.
All three major US stock market indexes are down but not dramatically and it has to be because we don’t know how China will respond. As you can see, I’m not comfortable with the silence from China and I would’ve preferred this support for Hong Kong to have come after a deal was signed.
But that’s my hip pocket talking and my fingers are crossed that Donald knows what he can get away with.
Of course, until this Hong Kong development, US share markets hit fresh record highs on Wednesday, as stronger-than-forecast economic data pointed to a resilient economy ahead of the Thanksgiving Day holiday on Thursday.
As I’ve already said, the President had told us that the US was in the “final throes” in its attempt to reach a trade deal with China.
Meanwhile, a Reuters story revealed that “China said on Sunday it would seek to improve protections for intellectual property rights, including raising the upper limits for compensation for rights infringements”.
It was the kind of progress that justified a rising stock market but now we have to wait for the Chinese return fire on the Hong Kong play by Donald.
On the local front, the market has been dominated this week by the Westpac debacle that has put bank share prices under pressure. This sector really didn’t need this and fittingly the CEO and Chairman of the bank have had their tickets cancelled.
This completed a shocker of a month for the big banks, with Westpac down 13.1%, while we learnt that the dividend would be cut. NAB dropped 9.5%, ANZ 7.1% and the CBA only lost 2.8%.
The usual star for the month was CSL up 10.7%. While it ended at $283.47, Credit Suisse has a new target price of $305, which should make CSL lover, Paul Rickard, very happy.
A stellar performer for the month and this week was Bravura Solutions, which Rudi Filapek Vandyck put us on to on my Switzer TV show a bit over a month ago. I recall making him re-pronounce that tricky word for someone with a rich Belgian accent, as he admitted to wondering why the market had such a low opinion of the company. That’s changed.
What I liked
- The fourth estimate of spending in 2019/20 was $116.7 billion, up 2.5% on the fourth estimate for 2018/19 and 3.4% higher than the third estimate for 2019/20.
- Mining investment rose by 3.9% in the September quarter to be up by 1.2% over the year – the strongest annual growth rate in 6½ years.
- This headline from CommSec that said: “Reserve Bank dismisses need for special measures”.
- In the US, the second estimate of third quarter annualised economic (GDP) growth was revised up to 2.1% from 1.9%.
- Durable goods orders in the US rose by 0.6% (forecast: -0.9%) in October.
- The pan-European STOXX600 index lifted by 0.3%, hitting a 4-year high during the trading session.
What I didn’t like
- The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.8% to a 4-year low of 106.8 points. Sentiment is below both the average of 114.3 points held since 2014 and the longer-term average of 113.1 points since 1990.
- Consumer views on the economic outlook over the next 5 years are the most pessimistic since the weekly survey commenced in August 2008.
- According to the Australian Institute of Petroleum, the national average price of unleaded petrol rose by a record 10.9 cents last week to a 4-week high of 153 cents a litre. But prices in east coast capital cities are now easing from cyclical highs.
- Residential building fell by 3.1% in the September quarter – the fifth straight decline. Work done is down 10.6% over the year – the biggest annual fall in 18 years. Alterations & additions fell by 0.1% in the quarter to be down by 8.2% over the year.
- Construction work done fell by 0.4% in the September quarter – the fifth straight decline – but above economists’ expectations for a 1% decline. The value of construction work done is down by 7% on a year ago.
- Private sector credit (effectively outstanding loans) rose by 0.1% in October, after lifting 0.2% in September. Annual credit growth fell from 2.7% to a 9½-year low of 2.5%.
- According to APRA, loans by deposit-taking institutions to households via credit cards fell from $37.7 billion in September to a 9½-year low of $37.5 billion in October. Credit card lending is down by a record 6.6% over the year (the biggest fall in over 14 years).
- New business investment (spending on buildings and equipment) fell by 0.2% in the September quarter to be down by 1.3% over the year.
- The Conference Board consumer confidence index in the US fell by 0.6 points to 125.5 points (forecast: 127 points) in November.
- The Chicago Federal Reserve National Activity index fell from -0.45 points to -0.71 points in October (forecast -0.43 points).
What am I waiting for?
Next Wednesday we get the latest economic growth numbers for the September quarter. The previous number was 1.7% and predictions suggest the next result could be lower. Looking at the run of data above, it wouldn’t surprise me and we really need a confidence circuit breaker. The trade deal signing was what I was waiting for to be exactly that. More tax cuts would be good for a local confidence booster but the Treasurer, Josh Frydenberg, isn’t keen to play ball but he might have to change his mind if China nukes the trade deal.
So the two important developments I’ve been waiting for i.e. better economic data locally and a trade deal, remind me of a funny story from the UK this week.
A TV presenter called Rachel Casey was doing a live program covering the gallops at Kempton, when an email was sent to a panel she was hosting that asked the chances of a horse in an upcoming race.
Rachel read out the name of the horse and checked the field for details but its name wasn’t there. This did lead to a bit of embarrassment and laughter from the panelists. The name of the horse was Norfolk’n Chance!
I hope that doesn’t apply to what I’m desperately waiting for.
Register now for our final webinar of the year [1], where Paul Rickard and I will be joined by Rudi Filapek-Vandyck to share predictions for the year ahead and to answer your questions.
The week in review:
- Last week I was invited to the annual Sohn Hearts & Minds conference in Sydney. From two of the world’s best investors and a number of fund managers, I gained many insights that I shared with you in my article this week [2].
- No doubt two questions many Westpac shareholders will have are: is all the bad news out? And what’s Westpac’s future? Paul Rickard looked at the likely answers to these two questions and more in his latest article [3].
- Charlie Aitken wrote this week that you shouldn’t try to time the market [4]. If you get the “timing” wrong, as most people will, it will seriously affect the returns from your equity portfolio.
- Aquaculture is a growing mini-sector on the ASX, with eight representatives of varying size, profitability and species focus. Read Part 1 [5] and Part 2 [6] of James Dunn’s guide to the sector.
- 8 Listed Investment Trusts (LITs) have floated in the past two years, and more are likely. There are opportunities in private debt but plenty of risks too. Here are two that Tony Featherstone likes [7].
- For anyone who attended our Income Conference recently or for those subscribers who couldn’t make it, here’s the video of our fixed interest Masterclass hot off the editing press [8]!
- Recently, some more excitable commenters have prophesized that Listed Investment Companies (LICs) are dead in the water. Is this really the case? And are there any bargain LICs? [9]
- Stockbrokers issued 11 downgrades and 9 upgrades in the first Buy, Hold, Sell – What the Brokers Say of the week [10], then 9 downgrades and 6 upgrades in the second edition [11].
- Soul Pattinson was our Hot Stock [12] from CMC Markets’ Chief Market Strategist Michael McCarthy.
- Paul Rickard [13] answered Suncorp’s Capital Notes 3 hybrid issue, whether there is value in Westpac and changes to our model portfolios.
On our YouTube channel this week:
- Stock tips from the country’s top fund managers! [14] – Switzer TV: Investing
- The hottest suburbs around the country [15] – Switzer TV: Property
- Frank Calabria from Origin Energy (ASX: ORG) [16] – The CEO Masterclass
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday December 2 – CoreLogic home prices (November)
Monday December 2 – CBA & AiGroup indexes (November)
Monday December 2 – Building approvals (October)
Monday December 2 – Business indicators (September quarter)
Monday December 2 – ANZ job advertisements (November)
Tuesday December 3 – Reserve Bank Board meeting
Tuesday December 3 – Balance of Payments (September quarter)
Wednesday December 4 – Economic growth (September quarter)
Wednesday December 4 – New car sales (November)
Wednesday December 4 – CBA & AiGroup indexes (November)
Thursday December 5 – Retail trade (October)
Thursday December 5 – International trade (October)
Overseas
Monday December 2 – China Caixin manufacturing index (November)
Monday December 2 – US ISM manufacturing index (November)
Monday December 2 – US Construction spending (November)
Tuesday December 3 – US Vehicle sales (November)
Wednesday December 4 – China Caixin services index (November)
Wednesday December 4 – US ADP employment change (November)
Wednesday December 4 – US ISM non-manufacturing index (November)
Thursday December 5 – US International trade balance (October)
December 5-6 – OPEC oil ministers meetings
Friday December 6 – US Non-farm payrolls/employment (November)
Friday December 6 – US Consumer sentiment (December)
Friday December 6 – US Consumer credit (October)
Food for thought:
“If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.” – Benjamin Graham
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:
AMP Capital’s Shane Oliver this week wrote about the trend where the gap between the interest rates set by the Reserve Bank and The Fed usually falls at the same time as the value of the Australian dollar:
Top 5 most clicked:
- 7 hot stocks from hot fund managers [2] – Peter Switzer
- What’s ahead for Westpac? [3] – Paul Rickard
- 4 yummy stocks to try [5] – James Dunn
- Buy, Hold, Sell – What the Brokers Say [10] – Rudi Filapek-Vandyck
- Stay the course. It’s a long game [4] – Charlie Aitken
Recent Switzer Reports:
Monday 25 November: 7 hot stocks from hot fund managers [17]
Thursday 28 November: Time in the market [18]
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.