Weekly Market Update

Investment markets and key developments over the past week

  • Global share markets mostly fell over the last week on ongoing concerns about the coronavirus outbreak, particularly after several US companies warned of disruptions to supply chains and sales. Chinese shares managed to rise though as China continued to role out new stimulus measures. Australian shares also rose slightly to hit a new record high helped by better than feared profit results and renewed talk of RBA interest rate cuts. Bond yields generally fell on growth fears, but commodity prices were mixed with oil up on supply concerns and iron ore up on Chinese stimulus measures but metal prices down. The Australian dollar fell to just below $US0.66 its lowest in over ten years on fears of a big hit to Australian exports from the coronavirus, increased talk of RBA rate cuts and as the US dollar went up on safe haven demand. The plunge in the $A by making Australia more competitive internationally will act as a shock absorber for the blow to exports from the coronavirus outbreak, which partly also explains why the Australian share market is at or around record levels.
  • There is lots of bad news on the coronavirus front with the total number of new cases still rising, a drift up in the mortality rate to 2.9% and rising cases outside Hubei province – including in Japan, Korea and Singapore – although 98.4% of cases are still in China. But if the official data is to be believed there are some signs that the daily number of new cases has peaked in Hubei which is where 81% of globally confirmed cases are. Another definitional change in Hubei seemingly back to only reporting lab test confirmed cases has confused the data. But as shown in the following charts it looks like the number of daily new cases may have peaked in early February. If this is correct, then its good news. And as we saw with SARS share markets bottomed around the time new cases peaked.

Source: PRC National Health Commission, Bloomberg, AMP Capital

Source: PRC National Health Commission, Bloomberg, AMP Capital

Source: PRC National Health Commission, Bloomberg, AMP Capital

Source: PRC National Health Commission, Bloomberg, AMP Capital

  • Of course, there is much uncertainty about the case data and the economic flow on has further to go with the Chinese economy likely to have contracted in the March quarter and so too for the Australian economy. Rough estimates suggest that 50% of China’s GDP is under lockdown and so far this has been the case for three weeks which means nearly 12% knocked off GDP this quarter. With the knock on to supply chains globally this could see world GDP stall or go negative in the current quarter. The Australian GDP is also expected to contract this quarter by around -0.1%. But if it is contained soon then growth will rebound in the June quarter and share markets will largely look through it. With some signs that the number of new cases is peaking, this remains the base case.

Major global economic events and implications

  • US economic data was good with strong home builder conditions and housing starts, gains in manufacturing conditions in the Philadelphia and New York regions, continuing low jobless claims and a rise in the leading index for January.
  • Japanese GDP fell more than expected in the December quarter thanks to the hit from the latest GST hike in October and the hit from the coronavirus outbreak in the current quarter raises the risk that it has entered yet another recession. Possibly consistent with this, Japan’s composite business conditions PMI fell sharply in February. Core inflation also fell back to 0.8%yoy in January.
  • Chinese credit rose more than expected in January possible reflecting PBOC efforts to offset the impact from the coronavirus outbreak, although annual credit growth slowed slightly. Meanwhile, home prices showed continued modest growth in January. Chinese policy stimulus measures continued to ramp up with more rate cuts and plans to cut more corporate taxes and fees. This could supercharge the post Covid-19 growth rebound when it comes.

Australian economic events and implications

  • Australian data was soft and points to the need for further policy stimulus. While employment rose by slightly more than expected in January and full time employment rebounded after 3 weak months, annual jobs growth slowed to its weakest in nearly 3 years, hours worked slowed, unemployment rebounded to 5.3% and underemployment rose to 8.6% which combined to push labour underutilisation to 13.9%. With job vacancies and other forward labour market indicators pointing to a slowdown in jobs growth below the 20,000 a month needed to absorb new entrants to the workforce unemployment is likely to drift up. The CBA’s business conditions PMIs also weakened sharply in February consistent with the coronavirus outbreak weighing on economic activity this quarter.
  • With Australia stuck a long way from full employment (which is probably well below 4% for the headline unemployment rate), wages growth which was just 2.2% through last year is likely to remain weak and underlying inflation is likely to remain well below target. The bottom line is that more policy stimulus is required. Ideally this should come in the form of more fiscal stimulus but in the absence of that the pressure falls back on the RBA, which is likely to have to act on the easing bias that it again reiterated in its February board meeting minutes despite the risks associated with further easing. So, it is likely to see another rate cut in either March or April and the cash rate falling to 0.25% by mid year.
  • The December half profit reporting season is now two thirds done and while the results have improved a bit compared to a week ago, they are still mixed. 55% of companies have seen their profits rise from a year ago, which is below the long-term norm of 65%. And while downside surprise has fallen to 40% of companies its above upside surprise of 38%. There were some strong dividend increases including from BHP and Fortescue, but only 53% of companies have now raised dividends and this is below the long-term norm of 62%. Several companies also issued profit downgrades related to the impact of coronavirus, but investors seemed prepared to look through this given that underlying results were generally better than feared. Reflecting the mixed results overall, the proportion of companies seeing their shares outperform the market versus underperform on the day they reported is running at 51% to 49% which is the same as in the August reporting season. Earnings growth expectations for 2019-20 are coming in at around 2.8% which is in line with expectations at the start of the reporting season. Earnings growth is strongest in tech, telcos, gaming and healthcare stocks with good growth from resources stocks and weakest amongst utilities, media and insurers.

Source: AMP Capital

Source: AMP Capital

Source: AMP Capital

Source: AMP Capital

Source: AMP Capital

Source: AMP Capital

Source: AMP Capital

Source: AMP Capital

What to watch over the next week?

  • News on the Covid-19 outbreak will no doubt continue to dominate in the week ahead as investors attempt to assess whether the number of new cases has actually peaked as data is suggesting and how bad the hit to economic activity will be.
  • In the US, expect to see a gain in consumer confidence for February and continuing modest rises in home prices (all due Tuesday), gains in new home sales (Wednesday) and pending home sales (Thursday) and a small rise in underlying durable goods orders (also Thursday), another solid rise in personal spending and core private final consumption deflator inflation (Friday) edging up slightly to 1.7% year on year.
  • Eurozone economic confidence data for February (Thursday) will be watched closely given the economic impact from coronavirus and core inflation (Friday) is likely to remain depressed at around 1.1%yoy.
  • Japanese labour market and industrial production data will be released Friday, with unemployment likely to remain low and production likely to show a small gain.
  • Chinese official business PMIs to be released Saturday will likely fall sharply given the disruption from Covid-19.
  • In Australia, construction and business investment data will provide guidance to December quarter GDP data to be released in early March. December quarter construction data (Wednesday) is expected to show a 1% decline with housing investment continuing to fall with business investment (Thursday) also likely to be soft. Business investment plans will also be watched closely but beyond a pick-up in mining investment are unlikely to show much improvement given ongoing softness in business investment. Credit data to be released Friday will be watched for signs of rising property lending, but overall its likely to remain soft.
  • The Australian December half earnings reporting season will wrap up with around 40 major companies due to report including Worley and BlueScope (Monday), Seek and Oil Search (Tuesday), Adelaide Brighton and Woolworths (Wednesday) and Rio and Afterpay (Thursday). Earnings growth is expected to be running around 2-3%.

Outlook for investment markets

  • Improving global growth and still easy monetary conditions should drive reasonable investment returns through 2020, providing the coronavirus is contained in the next month or so. But returns are likely to be more modest than the double-digit gains of 2019 as the starting point of higher valuations for shares and geopolitical risks are likely to constrain gains and create some volatility:
    • Shares are at risk of a further short-term volatility, particularly with uncertainty around the coronavirus remaining high both in terms of the outbreak’s duration and its economic impact even if it’s soon contained.
    • But for the year as a whole global shares are expected to see total returns around 9.5% helped by better growth and easy monetary policy.
    • Cyclical, non-US and emerging market shares are likely to outperform, particularly if the US dollar declines and trade threat recedes as expected.
    • Australian shares are likely to do okay this year but with total returns also constrained to around 9% given sub-par economic & profit growth.
    • Low starting point yields and a slight rise in yields through the year are likely to result in low returns from bonds.
    • Unlisted commercial property and infrastructure are likely to continue benefitting from the search for yield but the decline in retail property values will still weigh on property returns.
    • National capital city house prices are expected to see continued strong gains in the months ahead on the back of pent up demand, rate cuts and the fear of missing out. However, poor affordability, the weak economy and still tight lending standards are expected to see the pace of gains slow leaving property prices up 10% for the year as a whole. The coronavirus outbreak could be a bit of a short-term dampener though, particularly in terms of keeping Chinese buyers away.
    • Cash & bank deposits are likely to provide very poor returns, with the RBA expected to cut the cash rate to 0.25%.
    • The $A is likely to fall to around $US0.65 as the coronavirus outbreak depresses Australia’s exports and the RBA eases further but then drift up a bit as global growth improves to end 2020 little changed.

Source: AMP CAPITAL ‘Weekly Market Update’

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