Where is the Australian share market heading?

The Australian share market has been quite volatile in recent months but perhaps the most relevant fact is that over the course of 2014 it has gone nowhere – the ASX 300 index is almost exactly where it was at the end of 2013. This shouldn’t be a huge surprise given we have had a number of very positive years since the GFC and unfortunately not every year can be a good one.  The good news is that dividends for a typical portfolio should have been at least 4%, plus franking credits, so that’s better than bank interest. My outlook is for only modest improvement in the near term due to slow economic growth in Australia and the difficulty many businesses are having in improving earnings. While some individual businesses are doing well, such as healthcare stocks and funds managers, the mining sector and retailing are struggling and the broader picture is mixed at best. This is due to:

  • Slowing world growth led by Europe and Japan
  • Some slowing in China, though their growth is still likely to be above 6% over the next year
  • A significant fall in Australia’s terms of trade (the prices we get paid for our iron ore, coal, LNG, etc.)
  • Business investment and top-line sales growth remains weak for most Australian businesses
  • Earnings multiples or what investors are willing to pay for shares have increased considerably over the last few years so further share price gains will need to be supported by stronger earnings. The top 50 shares on the ASX are currently at an average P/E ratio of 14.9x and the second 50 at 16.3x (both slightly above their long term averages).
  • Anticipation of the US and the UK starting to raise interest rates (modestly) during 2015, which will may become a drag on global equity markets.

On a positive note, the weakening Australian dollar will help many businesses as will the on-going focus on cost management.

Income Protection (Salary Continuance) Premiums increasing

Over recent years insurers have been reporting that claims have been increasing significantly, in particular for various mental conditions (stress, depression, etc.) and this is now being reflected in widespread increases in premiums across retail, corporate and industry funds. The increases in some industry funds, such as Australian Super, have been over 50%. Amongst retail funds the rises have been less dramatic but not insignificant. For example, OnePath is raising the premiums for many categories of income protection by 10% from 17 January 2015. We regularly review whether more attractive cover (better terms and/or pricing) is available for our existing clients but should you wish to have your cover reviewed just contact us and we will undertake a review at no cost to you.

Europe – unfortunately the news is not good

After some relatively encouraging news earlier this year it is disappointing to see that the Euro area is weakening again and it appears that deflation is taking hold and another recession is possible despite the best efforts of the European Central Bank to stimulate growth.

Consumer prices in September were lower than a year ago in Greece, Hungary, Italy, Poland, Portugal, Slovakia, Slovenia and Spain. In Belgium, Denmark, France, Ireland and The Netherlands they were about 0.5 per cent or less above levels a year earlier. There is a real danger that Europe will join Japan in facing deflation and very low economic growth which is bad news, particularly for the unemployed and Governments with large debt burdens. Fortunately the impact of this on the rest of the world is unlikely to be significant given Europe has been growing slowly for a number of years so the impact on global growth is limited.

Manufacturers in China, South Korea, Thailand, the Philippines, Taiwan are also seeing some deflation which suggests something more systemic might be happening. This is potentially of greater concern to Australians given they are our major trading partners and Asia is critical to maintaining a reasonable level of global growth.

The Falling Oil Price

There is much being said about the oil price, from ample supply and weak demand fundamentals to conspiracy theories that the US and Saudi Arabia are working together to force oil lower for geo-political reasons, such as hurting Russia, Iran and also ISIS and its supporters.

There is little doubt that the shale oil revolution in the US has significantly increased supply and in a global environment of weakish growth, that can be expected to impact price. Of course, the roughly 30% fall in the oil price over recent months makes some producers unprofitable so if lower prices persist you would expect supply to weaken somewhat.

As for the geopolitical factors, Russia reportedly finances 45% of its budget from energy export revenues. Therefore, the fall in the oil price is far more damaging than the sanctions from the US and Europe. Iran, after reportedly losing half of its oil profits since 2011, is under enormous economic pressure so the low oil price limits Iran’s flexibility in negotiations over its nuclear program.

 

This newsletter contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. 

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