Equities Desk - Monthly Summary - August 2019

Economy and Indices

The ASX (Top 200) shares have fallen down after momentarily making new all-time highs – levels just above pre-GFC highs almost 12 years ago.

The reason for the fall is being blamed on US/Trump vs China trade wars. Although this has been bubbling along for some time, along with:

slowing Chinese growth rates
low growth expectations world-wide
interest rates expected to fall further
low wages growth, keeping inflation low
concern that central banks and government’s are unable to stimulate growth

Arguably all of these issues have been present for years. Singling one factor out as the reason the markets fell will always be guess rather than a fact.

To simplify the market fall;

The market has risen for a years off the back of cheap money
Investors have paid expensive prices for shares that pay good income and promise good growth (similar to Sydney property 2010 – 2015)
Investors separate reason and sound investment principles and buy shares off the back of hype and crowd mentality
When the market invariably wobbles, the less convinced investors panic for the exit – just like a fire alarm at a crowded disco.

The most interesting insight this month:

After this market pull-back, the odds are that the market rallies to a (slightly) higher level over hte next month.

When markets very quickly fall back from all-time highs like they have in the last two weeks, the odds are that the market

is a little bit higher one month later; and
about 11% lower nine months after the first quick fall, being February 2020

Gary Glover discusses this insight in this interview on the August drop, also noting that there are no certainties in markets, only probabilities.

Leading Sectors This Month

Consumer Staples (Grocers) +4.0%
Consumer Discretionary (Retail) +2.7%
Communications (Telcos) +2.4%

Lagging Sectors this month

Information Technology -8.2%
Metals and Mining – 7.6%
Utilities -6.0%

IT has been the worst performer on the AU market for two consecutive months.

Metals and mining have fallen with iron ore prices that have tumbled -25% in the last few weeks. This will also impact the Australian dollar and federal budget surplus that is forecast of strong iron ore prices – while still above the AU government estimates, the significant excess above expectations has quickly fallen away.

Surprisingly Utilities have fallen faster than the market. Normally Utilities are more conservative and are more stable in troubled market times. This would seem to be a function of ‘hot money’ or ‘weak investors’ piling into Utilities just to get incomes or consistent dividends – this is where the term ‘bond proxies’ comes from.

See more on these sectors in Talking Stock here.

Segments this Month

Emerging Markets (EC), the smallest segment, have made a strong comeback.

2016-2017 was a very strong period for EC.

2018 EC fell from an undisputed 1st to dead last from the start of the year to the end – being hit exceptionally hard in the weak market times of October – December 2019.

2019 EC recovered with the rest of the market until March, when the market paused and EC kept climbing higher.

After the early August drop EC is up +5% while the rest of the market is up only 1.5%.

Blue chips have fared the worst, and Small Caps have marginally been better than the market and other segments

Market Trends and Leaders

Leading groups are those with international exposure or earnings:

Australian Gold miners selling in USD with AUD costs

Other Australian miners with strong commodity prices fit in this group too, although the gold price has been the more prominent and so too have the gold miner’s share prices.

Software companies, particularly those with international exposure, or earning in foreign currencies that benefits from the falling Australian dollar.

Noting that companies with cloud-based services have greater scale and have performed well

Also, so too have IT services where their business compliments industry as an outsourced department or efficiency provider

Wealth management firms that are not linked to the Big 4 Banks.

A distinction between the wrong doers in the Royal Commission (banks and AMP) and un-related or younger companies seem to be benefiting form the industry’s recent turmoil