Monthly Summary May 2019

Economy and Indices

Since 2019 started, the markets have rallied the fastest since climbing out of the GFC in 2009.

We’re well and truly into the strongest bullish (rising) cycle of modern markets. In some respects, the markets have never been kinder to investors.

A complete 180 degree turn:

The driving force behind the blistering pace of 2019 so far, was a complete change of the two main factors that dragged markets down in late 2018:

• What the market thought interest rates would do; and

• Trade wars, mostly between the US and China

While other prominent factors of 2018 remain today in 2019 such as:

• ‘lower for longer’ – being interest rates at levers well below any historical averages; and

• Global growth projections consistently being revised lower and lower still

The start of 2019 saw the markets dismiss ‘lower for longer’ issues in response to the US Federal Reserve completely switch from rising rates, to more likely lowering rates. That’s a very big change in a very short time.

Favourable conditions continue:

Add in the Trade Wars between US and China reducing to a mild simmer. If not cooling all together as we have seen the tariffs set for March 2019 delayed and promising news from both parties of a reasonable resolution. This seems to be about the only predictable part of the Trump administration’s policy making process;

• lots of media hype; and

• pushing extreme policies, ending with

• a mild final resolution; coupled with

• massive media promoting a ‘US victory’

Throw in strong jobs growth, low wages growth, low inflation and China loosening the purse-strings yet again, and the party seems to go on for at least another cycle.

What that means for Australians:

The impacts vary of the different parts of the economy, although the main areas are:

• Property:

• Gets a shot in the arm.

• The RBA is set to lower interest rates 1-3 times this year which bodes well for Residential property prices that have fallen over 8% since the peaks in October 2017

• An interesting comparison here is that the Property Index on the ASX is up +27.8% over the same time frame

• Shares:

• In the hunt for better returns that money in the bank shares are propelled higher still

• Dividend shares, or ‘bond proxies’ have strong demand

• Exchange rates (FX):

• Shares that earn money overseas act as a shock absorber to portfolios and are more popular. Because investors expect the AUD to fall more when as interest rates drop.

• International shares continue the shock-absorber benefit to portfolios holding that are not hedged

The most interesting insight this month:

When looking at the US markets, it had been strong that all other markets. The corporate US tax rate changes, lower interest rates and a slew of other factors have been helping for years now. However the most interesting statistic I saw over the last month was about who is and importantly, is not buying into the markets.

There have been increasing net redemptions (total withdrawals) from US mutual funds – despite the market rising. This means that everyday-investors and professionals have been reducing their total exposure to shares, by selling their shares.

However, share prices have been rising, largely attributed to US listed companies buying their own shares. This effectively cancels the shares and means there are less slices to every pie – making each share worth more money.

It would be very interesting to see how much the US market us up (or not) once the share buy-backs were taking out of the equation.

Leading Sectors This Month

1. Consumer Staples (grocers) +7.7%

2. Industrials +6%

3. Technology + 5.7%

Telecommunications and Financials were up around 4% and most other sectors were within +/-2% of the index.

Segments this Month

Emerging Companies (smallest group) companies have been the leaders this month, only out-paced by Small-Caps since 2019 started.

Since the inflation data was released, and RBA interest rates drops mostly priced in, Emerging Companies have been the only group still rising, while the rest of the market’s segments have been wallowing lower.

Market Trends and Leaders

Technology, Energy and Iron Ore have been the strongest groups this month and year so far.

However, in the last two weeks, Iron Ore has dropped off the back of supply increasing after injunctions were lifted on Brazilin Miner Vale after the dam collapses in January

Podcasts:

We regularly interview industry exports on numerous topics available in the Podcast playlist here

1. For a dissecting view of the market leader Afterpay Touch listen to the Torpedo Tuesday interviews Hugh Dive. Also looking at IOOF after the Royal Commission has shaken the company throughout.

2. Shares in Play – looking at the leading companies on the ASX

3. Insights into the ‘the most hated uptrend in history’ listen to the interview with Rudi Filapek-Vandyck

4. Warning bells ringing for the markets looking at timing, trading points and trading shares see the slides and audio with Gary Glover and his charts.