Weekly Market & Currency Developments – From Our Bankers

Each week Freightplus updates our community on the latest market and currency developments. Here are the developments for the week of the 1st of September.

Strongest investment plans in 7 years

Record investment in NSW and Victoria

Business investment

  • Past business investment: New business investment (spending on buildings and equipment) fell by 0.5 per cent in the June quarter. Over 2019/20 investment fell by 0.4 per cent.
  • Expected business investment: The third estimate of spending in 2019/20 was $113.4 billion, up 10.7 per cent on the second estimate for 2018/19 and the strongest growth in seven years.

 

The investment data is important for companies in mining services, construction, transport and other industrial sectors.

 

What does it all mean?

 

  • The investment data is encouraging. Ahead of an election you wouldn’t have expected business to spend up big. And businesses didn’t. But investment spending fell by just 0.5 per cent in the June quarter.
  • The outlook is more positive. The 10.7 per cent lift in expected investment for 2019/20 is the biggest increase in seven years.
  • It’s important to note that investment spending over the past year was at record highs in NSW and Victoria and just down from record highs in South Australia and Tasmania.

 

What do the figures show?

 

  • Overall: New business investment (spending on buildings and equipment) fell by 0.5 per cent in the June quarter after falling by 1.3 per cent in the March quarter. Spending is down 1.0 per cent on the year.
  • Spending on buildings fell by 3.3 per cent in the quarter but spending on equipment rose by 2.5 per cent. Building investment is down by 6.6 per cent over the year, but equipment is up by 5.7 per cent.
  • Sectors: Mining investment rose by 1.7 per cent in the June quarter, manufacturing spending rose by 8.5 per cent, while spending by “other selected industries” fell by
    2.4 per cent.
  • States: In seasonally adjusted terms investment rose in four of the eight states and territories in the June quarter: NSW (up 4.2 per cent); Victoria (down 2.7 per cent); Queensland (down 5.9 per cent); South Australia (down 3.7 per cent); Western Australia (up 4.8 per cent); Tasmania (down 9.8 per cent); Northern Territory (up 10.0 per cent); ACT (up 19.7 per cent).
  • Prices: The overall deflator for investment goods rose by 0.7 per cent in the June quarter after a 0.9 per cent lift in the March quarter. The cost of buildings and structures rose by 0.7 per cent while the cost of equipment rose by 0.9 per cent.
  • Over the year, the cost of investment goods rose by 2.9 per cent, down from 3.2 per cent in the March quarter (the fastest growth in five years). The cost of buildings rose by 2.7 per cent. And the cost of investment equipment rose by 3.4 per cent – the strongest annual growth rate in 31⁄2 years.
  • 2018/19 result: In real terms investment totalled $117.8 billion, down 0.4 per cent. Non-mining investment was at record highs of $85.7 billion in the year. In nominal terms total investment rose by 2.3 per cent.
  • Forecasts: The third estimate of spending in 2019/20 was $113.4 billion, up 10.7 per cent on the second estimate for 2018/19 and the strongest growth of expectations in seven years.

 

What is the importance of the economic data?

 

  • “Private New Capital Expenditure and Expected Expenditure” is released quarterly by the Bureau of Statistics. The figures show both actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.

 

What are the implications for interest rates and investors?

 

  • The Australian economy probably grew by 0.5 per cent in the June quarter to be up 1.8 per cent on the year. The US-China trade war has stifled global economic activity over the past year. And the Federal Election curtailed momentum in the Australian economy in the first half of 2020.
  • But the outlook remains positive. Business plans to invest; interest rates are low; the tax cut should lift spending; the low dollar is supporting Aussie companies; and infrastructure activity is projected to lift.
  • Experts tip a rate cut in November and another rate cut in February 2020.

 

Earnings Season: Successfully navigating a tough year

Corporate Profit Reporting Season (Final figures)

  • Each ‘earnings season’ or ‘profit-reporting season’ we track all the earnings results of ASX 200 companies to obtain a comprehensive picture of the aggregate health of Corporate Australia.
  • Overall, 138 of the ASX200 index group reported full-year results while 31 companies with a December 31 reporting date issued half-year (interim) results.
  • Broadly, companies have struggled. Companies are still reporting profits – 92 per cent of companies that reported full year results did report a profit, above the average of 88 per cent over the past decade. But only 52.2 of companies were able to lift profits. Aggregate statutory profits are up – a gain of 17 per cent. But if BHP and Wesfarmers are excluded, profits rose by 1.2 per cent – a better reflection of the year.
  • Despite the tough conditions, companies are issuing dividends. The 88.4 per cent of full-year reporting companies that elected to pay a dividend was above the average of 86 per cent over the 19 reporting seasons covered.
  • And in further good news, nine companies elected to pay special dividends to shareholders. Aggregate dividends of full-year reporting companies lifted by 4.9 per cent.

 

The Profit Reporting Season

 

  • Every six months we track the earnings of Australia’s largest listed companies. Some analysts track whether companies have met broker expectations. That tells you little about the financial performance of companies. And unfortunately for many companies only a few brokers ‘cover’ all the stocks.
  • Other analysts just track the earnings of those companies they ‘cover’ – the companies that they have detailed information on. We include all ASX 200 companies in its macro (big picture) assessment of the reporting season.
  • Overall, investors have reason to be pleased with the performance of Corporate Australia. Arguably business conditions in the past year – especially the first half of 2019 – have been the toughest faced by companies in a decade. The China-US trade war has continued with the lack of agreement serving to cap investment and employment by companies across the globe. The UK exit from the European Union (Brexit) has been delayed, creating more business uncertainty. Fears of US recession have added to negative global environment.
  • Closer to home, uncertainty about the outcome of the Federal Election crimped economic momentum, especially in the first half of 2019 (Bapcor). Sluggish wage growth constrained consumer spending together with lower home prices in Sydney and Melbourne.
  • But quite remarkably, companies are still making money. In fact 92 per cent of the companies that have reported annual results, reported a statutory profit (net profit after tax). That is near below the record highs of 94 per cent recorded in ‘interim’ results seasons of February 2017 and February 2018 but above the 88.4 per cent average. Still, only 52.2 per cent of companies lifted profits compared with a year ago. That is still better than the 48.6 per cent result in the ‘interim’ reporting season in February.
  • Aggregate statutory earnings lifted by 17 per cent on a year ago, but once BHP and Wesfarmers are excluded, profits are up just 1.2 per cent on the year. The 88.4 per cent of companies that issued a dividend is above longer-term averages despite flat cash levels and despite growth of expenses outpacing sales.
  • Some of the themes of the season:
    • Share prices of companies were volatile on the day of their earnings announcement. But the spread of companies recording a lift in its share price has almost completely matched those recording a share price fall. That is, ‘ups’ matched ‘downs’.
    • Costs or expenses continue to lift, as has been the case for over a year (Qantas, Coles, Woolworths, Whitehaven Coal). Growth of cost of sales/expenses exceeded that of sales/revenues. Higher wage bills and energy costs were specifically noted.
    • Housing construction and development companies have reported challenging conditions with supply adjusting to weaker demand. (Sunland, Finbar, Stockland). Noticeably the office and industrial market has remained strong (Dexus, GPT, Mirvac, Charter Hall).
    • The experience of consumer-dependent companies has proved more mixed than conventional wisdom. Those companies that have adjusted strategy and listened to consumers have done well. This includes retailers like JB Hi-Fi and shopping centre owners like Scentre. Big box retailer, Aventus, has also weathered the fluky retail conditions. Vicinity Centres believe that not enough of the good news is being priced in.

 

The statistics: Full-year reporting companies

 

  • We have analysed the results from the ASX 200 companies that reported earnings for the year to June or half-year to December. Traditionally brokers or analysts focus on smaller subsets of results. And some merely focus on just whether companies have met or fallen short of “market expectations”.
  • In the ASX200 index group, 138 companies with a June 30 reporting date issued full-year results while 31 companies with a December 31 reporting date issued half-year results.
  • Some of the key results for full-year (FY) reporting companies:
    • In aggregate, revenues lifted by 6.0 per cent on a year ago to $609.6 billion; expenses increased by 6.8 per cent to $507.7 billion; profits have lifted by 17.0 per cent to $63.7 billion; dividends lifted by 4.9 per cent but cash fell by 0.1 per cent in recognition of the tough business conditions and desire to pay dividends.
    • The lift in dividends was influenced by special dividends by a number of companies including ASX, Coles Group and Medibank Private. Excluding these companies, aggregate dividend payments fell by 0.6 per cent.
    • Excluding BHP and Wesfarmers, profits rose by 1.2 per cent. While ‘underlying’ results may show a different picture, BHP reported a 90.4 per cent rise in statutory profit with Wesfarmers reporting a 360 per cent lift.
    • Profits of BHP, Telstra, Wesfarmers, Woolworths and CBA accounted for 44 per cent of all full-year profits.

 

The following points relate to those companies that reported full-year results (FY reporting companies).

  • On revenues, 79 per cent reported increases and 21 per cent reported declines.
  • On expenses, 82 per cent reported increases and 18 per cent reported declines.
  • On profits, 92.0 per cent reported a profit.
  • Only 52.2 per cent reported a lift in profit (long-term average 61.5 per cent).
  • Of those reporting a profit, 55.9 per cent have lifted profits and 44.1 per cent have reported a decline.
  • In terms of dividends, 88.4 per cent issued a dividend and 11.6 per cent didn’t.
  • Of those reporting a dividend, 54.9 per cent lifted the dividend, 21.3 per cent cut dividends and 23.8 per cent left dividends unchanged.
  • On cash holdings, 58 per cent lifted cash holdings over the year and 42 per cent cut cash levels.
  • Cash holdings of both full-year and half-year reporting companies stood at $110.7 billion as at June 30,(full-year companies, down 0.1 per cent on a year ago to $83.4 billion).

 

The trends

 

  • Surveys conducted over 2018/19 have generally indicated tougher business conditions. The NAB business conditions index hit record (21-year) highs in April 2018 but conditions have significantly softened in the period since. This hasn’t been confined to Australia – business surveys across the globe have softened since the second quarter of 2018.
  • Companies are still making money. The 92 per cent of companies that reported a statutory profit for the year to June above the average of 88.4 per cent recorded over 19 profit seasons.
  • But the fact is that fewer companies were able to lift profits. In fact only 52.2 per cent of all companies managed to lift profits compared with a year ago. Certainly the ‘comp’ was harder – the comparison with a year ago. That was a time when business surveys were recording the best operating conditions for over 20 years.
  • The even split between those lifting and cutting profits also lines up with the mixed results of company share price performances on the day of reporting earnings. The first day change in share price is useful for picking up various elements – whether results have met expectations; outlook statements; capital management initiatives; and judgements by investors on whether recent share price performances have been justified in light of the new information.
  • Revenues rose in aggregate by 6.0 per cent – faster that the nominal growth of the economy (real growth near 2.5 per cent and inflation of 1.5 per cent). But the cost of sales and expenses rose even more on a year ago – closer to 6.8 per cent. A number of companies reported increases in the cost of doing business. Firms have been employing more staff and wage growth over the year was higher than a year ago (albeit only modestly). The cost of materials and transport costs also lifted over 2018/19, especially fuel prices (Qantas). A weaker Aussie dollar also added to the cost of imported materials (Adairs).
  • Companies are still keen to pay dividends. In fact the 88.4 per cent of companies that elected to pay a dividend is above the longer-term average (86.3 per cent).
  • Aggregate dividends are up 4.9 per cent over the year, but they were up almost 14 per cent on a year in the 2017/18 financial year. Some companies reported ‘special’ dividends, but the prevalence was not markedly greater than in the previous reporting season.
  • Of companies paying a dividend, the 54.9 per cent that elected to lift dividends was the smallest proportion in around six years. The trend was actually in favour of companies keeping dividends stable – the 23.8 per cent of companies was just down from 24.3 per cent in February (interim results) which was a 6-year high.
  • The tougher business environment meant it was harder to lift dividends and also to lift cash levels. In aggregate, cash holdings were broadly flat (-0.2 per cent), but there were more companies electing to lift cash levels (58 per cent) than those trimming cash levels (42 per cent).

 

What are the implications for interest rates and investors?

 

  • Challenges remain for Aussie companies, although most of the challenges reflect global factors. The US-China trade war rages on. Brexit hasn’t been solved. BHP, Brambles, Iluka, Amcor and Worley have noted global risks. But Amcor believes it’s in a strong position to weather the uncertainties.
  • Investors are fretting that an inverse yield curve in the US (shorter-term rates above longer-term yields) could lead to recession. Having said that, the US economy remains in good shape with 2 per cent plus economic growth, sub 2 per cent ‘core’ inflation and a sub 4 per cent jobless rate.
  • At home, the election is out of the road. Home prices are now rising in Sydney and Melbourne. The Reserve Bank has cut interest rates twice and is prepared to cut rates further. And the federal budget is balanced, opening the door for fiscal stimulus if required. While housing demand is expected to lift, Stockland, Sunland, Fletcher Building and even Bingo are cautious about the outlook.
  • Super Retail Group, Woolworths, Dominos, Bapcor are amongst those noting a pickup in the economy in the past six weeks.
  • Certainly there is a bevy of infrastructure projects either underway or poised to get underway in the next few years. These projects will support engineering and construction firms and mining service companies.
  • The lower Australian dollar has supported miners and other companies reporting results in US dollars. And the Aussie dollar is expected to hover in a US65-70 cent range over most of the current financial year.
  • Despite all the challenges, Australian company balance sheets remain solidly in the black. And the Australian sharemarket managed to hit record highs at the end of July.
  • Using traditional valuation tools, such as the price-earnings ratio (share prices to company earnings), the Australian sharemarket may seem ‘dear’ at 17 times earnings. But with interest rates at generational lows, and home prices up only modestly (with more supply to come), investors are asking what is a ‘fair’ or ‘normal’ PE ratio?
  • The major uncertainty is how or when the US-China trade war will be resolved. Still, high quality and lower-priced Australian goods are attractive for US and Chinese buyers as well as buyers in other parts of the world. The lower Aussie dollar is certain helpful at a time of relatively high commodity prices. Notably the gold price continues to hover near record highs in Australian dollar terms.
  • We expect the All Ordinaries to be in a range of 6,700-7,000 by the end of 2019, with the range for the ASX 200 between 6,600-6,900 points.

 

Investor Signposts: Week Beginning September 1 2019

 

Australia: the ‘Spring Tsunami’ of economic information

  • In sharp contrast to the previous week, a barrage of new economic information is expected in the coming week. The ‘Spring Tsunami’ will include data on economic growth as
    well as a Reserve Bank Board meeting.
  • The week kicks on Monday with a raft of economic indicators. Leading the way is the Business Indicators publication from the Australian Bureau of Statistics (ABS). Data included is company profits, stocks, wages and sales.
  • The CoreLogic home value index will also get plenty of attention on Monday with home prices rising again in August.
  • Also on Monday figures on job advertisements are released with the monthly inflation gauge and surveys of manufacturing purchasing managers conducted by the Australian Industry Group. This survey indicates that modest expansion of the manufacturing sector is proceeding.
  • On Tuesday the Reserve Bank Board holds its monthly meeting. No change in interest rate settings is expected. The Reserve Bank Governor has indicated that the Board is gathering information to determine whether another rate cut is warranted.
  • In economic data on Tuesday, the broader gauge of Australia’s trade or external position is released in the form of the current account figures. The current account has been in deficit since 1975. But that could all change on Tuesday with a small surplus forecast by a number of analysts.
  • Also on Tuesday, the June quarter government finance statistics are released – a key input to the quarterly economic growth figures.
  • Those economic growth estimates for the June quarter are
    issued as part of the “National Accounts” publication to be
    released on Wednesday. While there is still some information to be received (such as the government data) the economy probably grew by around 0.5 per cent in the June quarter to be up 1.8 per cent over the year.
  • Also on Wednesday, the Federal Chamber of Automotive Industries (FCAI) is expected to release the August data on new car sales. The anecdotal evidence suggests that a larger number of budding home buyers are purchasing late model used cars in preference to buying new cars.
  • On Thursday, the ABS issues the publication “International trade in Goods and Services”. In June the trade surplus hit a record high of $8 billion with exports to China at record highs.

 

Overseas: US jobs data grabs the spotlight

  • As in Australia, a barrage of new economic information is set for release in both the US and China over the week. The monthly US jobs data (non-farm payrolls) is of most interest, but investors will have to wait until Friday to assess this new information.
  • The week begins on Monday in China when the private sector media company, Caixin, releases the August survey of purchasing managers in the manufacturing sector. Earlier (on Saturday August 31) the “official” National Bureau of Statistics purchasing manager indexes on manufacturing and services are issued.
  • After the Labor Day holiday in the US on Monday, the flow of economic data begins on Tuesday. First cab off the rank is data on construction spending together with surveys of purchasing managers in the manufacturing sector from the Institute of Supply Management (ISM) and Markit.
  • Also on Tuesday is data on US new car sales and the IPD/TIPP economic optimism gauge.
  • On Wednesday in China, Caixin releases the results of a survey of purchasing managers in the services sector.
  • On Wednesday in the US, one of the weekly economic highlights is released. The Federal Reserve releases theBeige Book – a qualitative summary of economic conditions across Federal Reserve district banks.
  • In economic data, the July trade figures (exports and imports) are released on Wednesday, together with weekly readings on chain store retail sales and mortgage applications as well as the regional ISM New York index. The monthly trade deficit sits near US$55 billion.
  • On Thursday, the weekly figures on jobless claims are issued in the US, along with the ADP survey of private sector payrolls and factory orders. Results of the surveys of purchasing managers in the services sector will be published by ISM and Markit. The ISM index was at 53.7 in July with Markit at 53.0. Any reading above 50 represents expansion of the services sector.
  • On Friday, the all-important US monthly Employment Situation survey publication is released containing data on non-farm payrolls or employment. The US jobs market is solid, with the good outcomes driving wage increases, and in turn, consumer spending.
  • Analysts expect that jobs grew by 160,000 in August with the jobless rate near 49-year lows at 3.6-3.7 per cent. Average hourly earnings may have lifted by around 3.0 per cent over the year, still with a healthy gap above inflation.

 

Stay updated with the latest market and currency developments here.

 

DISCLAIMER

This Freightplus article contains information obtained from sources believed to be reliable and has been prepared in good faith and with all reasonable care. Freightplus makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this website.

Neither Freightplus (Australia) Pty Ltd, its related entities, nor any of its providers of information, have any liability to the user, or any other third party, for the accuracy of the information or models contained in this article, or for any errors or omissions therein, nor will Freightplus (Australia) Pty Ltd or any of its providers of information have any liability for the use, interpretation or implementation of the information or models contained herein by any person.



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