Market Watch

In summary:

• 55% exceeded earnings expectations (versus a norm of 43%);

• 66% have seen their profits rise from a year ago (in line with recent trends); and

• 62% have increased dividends from a year ago (also in line with recent trends).

The better performers during the season were beneficiaries of the continuing low interest rate environment such as banks, property and infrastructure companies, along with companies that generate significant revenues from offshore businesses. Efficiency gains from cost reductions also continued to be a common theme.

A key feature of this results season was significant increases in dividends, with many companies choosing to reward shareholders with additional returns of cash rather than reinvesting in their businesses. While this is good for shareholders, it does raise the question of management confidence in pursuing future growth opportunities.

Looking ahead to the full year results, companies that benefit from a weaker Australian dollar and exposure to strong growth opportunities outside of Australia should continue to do well, as will companies that can continue to deliver sustainable growth in dividends.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 2.25 per cent.

Growth in the global economy continued at a moderate pace in 2014. A similar performance is expected by most observers in 2015, with the US economy continuing to strengthen, even as China’s growth slows a little from last year’s outcome.

Commodity prices have declined over the past year, in some cases sharply. The price of oil in particular has fallen significantly. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates.

Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns at all-time lows over recent months. Some risk spreads have widened a little but overall financing costs for creditworthy borrowers remain remarkably low.

In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak. As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Credit is recording moderate growth overall, with stronger growth in lending to investors in housing assets. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have risen, in part as a result of declining long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.

Source:
RBA Media Release 3/3/15

There has been a lot of commentary surrounding Europe in recent weeks. In this article, we explore the main issues that require consideration.

1. Quantitative easing

The European Central Bank (ECB) launched quantitative easing (QE) as expected. It plans to make purchases of 60 billion euros per month until at least September 2016. The move is unambiguously positive for European equities. When you combine the low bond yields and lower currency that may flow from QE, lower oil prices, low relative valuations and gradually improving credit dynamics, all things seem to point to a better outlook for Europe and European shares. Yes, structural reforms are still needed, but at least the cyclical outlook is good.

2. Switzerland removes its ceiling

The recent decision by the Swiss National Bank (SNB) to remove its currency cap with the euro saw the Swiss franc spike as much as 41% against the euro. The cap was introduced in September 2011 as Swiss policymakers tried to prevent their currency from becoming too strong against the euro. The move– which caught out many foreign exchange traders and forced several brokers to collapse – is a negative for the Swiss economy as it makes it less competitive relative to the Eurozone. In saying this, there is a danger in exaggerating the impact. Firstly, the decision to remove the currency cap was offset by even more negative interest rates in Switzerland. Secondly, while the Swiss franc is is up against the euro, the euro has been falling against other currencies. As such, the blow to the Swiss economy is not nearly as great as feared. Beyond Switzerland, there is minimal impact globally except to highlight the pressure that European economies are currently under in the face of monetary easing. Perhaps this is a good thing as it adds to confidence that a sustained bout of global deflation will be headed off.

3. Greece election

With Greece back in the headlines after the election win of the Coalition of the Radical Left (known colloquially as Syriza) it’s natural to wonder whether we are going to see a re-run of the Eurozone crisis that roiled global financial markets in 2010-2012. However, much has changed since 2012 and there is a long way to go yet before a Greek exit from the euro will occur, if at all. Another election cannot be ruled out as it’s still not clear how stable the new coalition will be. Assuming the coalition holds, the next step is negotiations regarding the ongoing debt support and reform program for Greece. Reaching an agreement could take some time and will likely be the source of financial market volatility in the months ahead. In summary, other peripheral countries in Europe are now in better shape as are the defence mechanisms – including ECB QE – than was the case in 2010-12.

What it means for investors?

While there will be bouts of short-term uncertainty for Europe, overall we don’t see a return to the Eurozone crisis. More broadly, there is a strong case to overweight Eurozone equities as valuations are relatively cheap and liquidity is positive. However, with the ECB easing monetary policy at a time when the US Federal Reserve is gradually edging towards rate hikes, and Greece throwing in some short-term uncertainty, the euro is likely to fall further against the US dollar. Against the Australian dollar, the euro may also slip – but with the Reserve Bank of Australia also set to ease further, any fall here may be limited.

Final thoughts

One of the key risks for Europe this year is the political drift to the extreme left, extreme right and associated anti-euro sentiment. Given the recent turbulence, we expect the intensity of the political angst to subside somewhat as the economy improves over time. In saying this, investors should not dismiss the risks entirely. There will be a number of other elections this year (notably in Spain) which will produce more news headlines and invariably some jitters along the way!

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

There’s been a lot of commentary around the recent drop in oil prices, and what it might take for them to recove r. Integral to this discussion is the Organisation of Petroleum Exporting Countries (OPEC) and Saudi Arabia, which produce about 33% and 9% of the world’s oil respectively. In this article, we examine the factors that have led to the drop in prices and what this all means for investors.

Some background

Last year, at a meeting in Vienna on November 27, the OPEC voted to maintain oil production at current levels. As a result, we’ve seen the price of oil plummet by more than 50%, from a high of over US$100 a barrel for brent crude oil last year to below US$50 a barrel in recent times. The hardest hit have been oil-exporting countries such as Russia, Iran, Nigeria, Venezuela, Norway, Canada and Mexico.

A case of supply and demand

The sharp drop in prices has been caused by a supply glut. Continued growth in US shale production and an increase in non-US OPEC oil exports have led to excess capacity. This is being exacerbated by slowing demand which is a product of slowing growth in the emerging world. Also, some nations, such as Japan, have substituted oil for natural gas and alternative fuel sources. A stronger US dollar hasn’t helped either. This weighs on most commodity prices as they are priced in US dollars.

Conspiracy theories emerge

Some believe that the US and Saudi Arabia have colluded to lower oil prices as a way of punishing Iran and affecting the economies of Russia and Venezuela. There’s also been commentary that the Saudis may view long-term low oil prices as a way of combating their geopolitical rivals and hindering Iran's nuclear program. Other conspiracy theories revolve around the fact that if oil prices decrease far enough and remain low for long enough, Saudi Arabia may steal market share from US shale producers and thus gain far more long-term revenue. This may also serve to weaken its major rivals in the Middle East (both in an economic and military sense) and expand its sphere of influence.

Many of the conspiracies have similar structures — suggesting that there are deeply powerful but unseen players working behind the scenes to shape world events. These are certainly much more colourful than a story about supply and demand which may be more technically accurate.

What does this mean for investors?

Share markets have reacted negatively to the fall in oil prices in recent weeks. This is because the negative impact on energy producers is what is most visible and this is being magnified by the steepness of the fall. Interestingly, over a longer period of time, lower oil prices will likely have a positive impact on global growth. In fact, after oil prices plunged in 1986, 1998 and 2008, US shares gained an average 23% over the subsequent 12 months. In effect, any significant downturn in share markets in response to lower oil prices should be seen as a buying opportunity. As benefits from lower oil prices start to flow into the economy, this should help drive share markets higher by year-end.

About the Author
Nader Naeimi, Head of Dynamic Asset Allocation and Portfolio Manager, AMP Capital

In the first industry-wide move since 2012, the People’s Bank of China (PBoC) cut its reserve ratio requirement (RRR) – the amount of cash banks have to hold as reserves – by 0.5% to 19.5% this month. The easing is likely to provide support in the near-term to China’s slowing economy – and, in-turn, sluggish property market. In this article, we provide an outlook for property in China and more broadly.

What’s been happening?

The sluggish property sector has continued to put downward pressure on economic growth in China. The slump has hit many households and industries, deterring home buyers and lenders, and leading to bankrupt developers and abandoned projects. Adding to the turmoil, some developers are fleecing investors with scams, while legitimate firms are increasingly stretched for cash, leading to elevated lending rates in some cities.

On an annual basis, property prices are down (-3.1% in January versus -2.7% in December) – however, the latest property pricing data shows that the market may be turning, rising by 0.2% and breaking the eight-month streak of price falls.

What the latest lifeline means for the market

The PBoC’s latest move to loosen loan restrictions across the board is likely to encourage banks to step up lending, providing support to the property market and stock prices in the near-term. In November 2014, it also cut interest rates for the first time in more than two years to lower borrowing costs and support growth. Given the structural nature of the property market slowdown, it is fair to say that it will take time for these changes to flow through and take effect.

Expect continued weakness in the short-term

We believe monetary policy will continue to ease incrementally via interest rate cuts and easing of the reserve requirement ratios for all banks. While we saw property inventory levels fall in 2014, and more recently, prices starting to moderate, we expect that overall market conditions will be weak in the short-term. Coming into 2015, we are likely to see some consolidation across the industry, with stronger players set to benefit most based on their economies of scale and efficient business models. The recovery will also be varied across cities and different players.

In terms of government policy, China’s property market is being impacted by:

• The overseas debt market: This is likely to dictate the recovery in real estate investment as most developers can only fund land acquisitions from actual profits or from borrowing money overseas.

• More measured objectives: The government maintains a strong focus on applying sound economic management, delivering steady economy growth and avoiding excess capacity. Policy stimulus has been targeted and measured.

• Credit easing: Mortgage rates have eased, but this has not filtered through the system as widely as many had hoped in order to have a material impact on the sector.

• Structural reform: With the government appearing intent on achieving its objectives, we expect that anti-corruption will continue to be a factor. This extends to the government wanting to promote more accountability, transparency in real estate activities, which can only be positive for the sector in the long-term.

Divergence: some are doing better than others

Some cities are doing better than others and we believe this is likely to continue. Listed real estate developers are performing a lot better than the unlisted ones. In 2014, listed developers actually increased their sales for the year, at the expense of the unlisted ones which really struggled. We expect that the market share for the top players will continue to increase. Access to credit also differs across markets and individual players. Some companies might be paying high yields on their debt, or even defaulting on real estate related loans, but others are accessing onshore debt at very favourable rates.

What does this mean for investors?

We believe that in the current environment (falling bond yields primarily via monetary easing and low inflation) investors with long-dated liabilities will be looking to find yield from alternate sources. This is supportive of for high-yielding assets with stable income, like property. Bottom-up property fundamentals remain supportive of asset values. Most markets have now passed the worst in the property cycle and rents and occupancy continue to improve globally. Lack of new supply completing due to difficult financing conditions post Global Financial Crisis (GFC), provides added support to existing landlords.

From a global allocation perspective, we favour the US and UK. Growth in the US and UK is accelerating, supported by reasonable activity in the underlying economy. In or view, growth in Asia and core Europe remains at risk as neither region has undertaken the necessary structural reforms since the GFC.

About the Author
Charles Wong, Head of Asian Listed Real Estate, AMP Capital

Given the continued volatility in investment markets, it’s no wonder some investors develop mixed feelings about investing in shares. When markets are volatile, emotional instincts can begin to play a role in investment decisions. In this environment, a well-anchored investor stands to benefit by persisting with an appropriate investment strategy to achieve long-term results.

In the video below, we discuss why it’s so important to allow sufficient time for your investments to grow.

Tools to help you focus on long-term goals

Many advisers have told us that their primary role is to help their clients stay focused on their long-term goals. Specifically, they can add significant value by helping clients resist the temptation to switch strategies in times of market volatility.

We have assembled a presentation to help put a range of investment themes into perspective. Click here to download.

Investing over longer periods improves the probability of a positive return

Share markets do have their ups and downs, but over time the market has always recovered and prices have trended upwards. Over the long-term, many investors have also benefited from good dividends along with tax credits. This highlights the importance of maintaining a long-term discipline when investing in economically-sensitive growth assets like shares.

Source: Bloomberg, ASX All Ordinaries Index. Data as of 31 December 2014.

Final thoughts

For humans, ‘herd mentality’ is very strong, and present in everything we do. Emotions can drive an investor’s decision-making as most of us are heavily reliant on social norms and trends. It is important for investors to recognise that making an investment decision that’s driven by emotion instead of analysis can result in costly mistakes. Quality financial advice can assist clients in establishing sensible goals and in designing an investment strategy consistent with their capacity for investment risk. An understanding of market cycles can then help investors feel confident, even in volatile times, that their investment strategy remains on track to support the achievement of their goals.

About the Author

Jeff Rogers, Chief Investment Officer, ipac Investment Management at AMP Capital, joined AMP Capital in 2011 from ipac securities following its acquisition by AMP Ltd. He has over 27 years of investment management experience. Jeff holds a Bachelor of Science (Honours) from the University of Melbourne.