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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 15th of September.
Confused consumers are unsure about saving
Consumer confidence
- Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index fell by 1.7 per cent to 98.2 in September.
- Wisest places for savings: The proportion of people that ‘don’t know’ where is the wisest place to put new savings lifted from 6.4 per cent to a record (24-year) high of 8.7 per cent.
The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.
What does it all mean?
- Many Aussies are confused about what to do with their money in the current environment. While low interest rates may be seen as positive for borrowers, the fact that the cash rate is at all-time lows of just 1 per cent worries plenty of Aussies. Some people question – especially the more senior Aussies – how strong the economy can be if cash rates are just 1 per cent and are tipped to go lower. While the Reserve Bank believes that rate cuts are still stimulatory (based on the gap between borrowings and savings), that doesn’t take into account consumer sentiment.
- Consumers are increasingly uncertain about where to put new savings. Banks remain the choice of ‘wisest’ destination for savings, despite record low interest rates. Property is more in favour. But almost 9 per cent of people confess that they don’t know where is the best place for savings.
- Consumers are feeling just OK at present with the latest sentiment index dropping below the 100 level that separates optimism from pessimism. Still, the latest confidence result is a victim of bad timing – the economic growth figures released last Wednesday were the weakest in a decade. The ‘news’ that most people remember hearing about over the past week was “economic conditions”. (News from ‘overseas’ was also high up the ‘recall’ list – again largely negative news.) Having said that, the economy has entered its 29th year of growth, extending the record expansion. But strangely that didn’t feature in a lot of media reports.
What do the figures show?
Consumer confidence
- The Westpac/Melbourne Institute survey of consumer sentiment index fell by 1.7 per cent to 98.2 in September after lifting 3.6 per cent in August.
- The current conditions index fell by 2.7 per cent, and the expectations index fell by 1.0 per cent.
- Four of the five components of the index fell in September.
- The estimate of family finances compared with a year ago fell by 2.5 per cent to 84.3;
- The estimate of family finances over the next year fell by 2.2 per cent to 96.9;
- Economic conditions over the next 12 months fell by 3.1 per cent to 92.6;
- Economic conditions over the next 5 years rose by 2.1 per cent to 97.8;
- The measure on whether it was a good time to buy a major household item fell by 2.8 per cent to 119.6.
- Housing outlook: A good time to buy a dwelling? The index fell by 2.9 per cent to 123.3 but was still up 19.1 per cent on the year. House price expectations rose by 3.9 per cent to 130.3 and was up by 19.1 per cent on a year ago.
- Unemployment expectations: Unemployment expectations rose by 0.2 per cent to 133.6 in September.
- Wisest place for savings: ‘Banks’ rose from an 11-year low of 24.9 per cent to 26.7 per cent; ‘shares’ fell from a 3- year high of 9.6 per cent to 8.8 per cent; ‘real estate’ rose from 10.4 per cent to a 21-month high of 11.9 per cent; ‘spend it’ fell from 6.3 per cent to 5.5 per cent; ‘pay debt’ fell from 24.7 per cent to 20.7 per cent.
- The proportion of people that ‘don’t know’ where is the wisest place to put new savings lifted from 6.4 per cent to a record (24-year) high of 8.7 per cent.
What is the importance of the economic data?
- Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
What are the implications for interest rates and investors?
- Retailers would be disappointed by the latest consumer survey. Not only are consumers feeling a little ‘meh’, but Aussies are not sure about what to do with their cash. When asked about the wisest place to put savings, a record 9 per cent of respondents answered ‘don’t know’. That result is even higher than the 5 per cent of consumers saying that new saving should be spent. But encouragingly Aussie consumers expect home prices to rise over coming months, and that may boost wealth levels and spending.
- There have been rate cuts in June and July. Mortgage rates are at record lows. Shouldn’t those who are paying off a mortgage be happy? Consumer sentiment for this key spending demographic is at 11-month lows.
- Economists are tipping a quarter per cent rate cut in November and then a follow up move in February 2020.
Spotlight on dividends: Payouts hit $29.2 billion
Economic and Financial market perspectives
- Cash payouts: Since July, ASX 200 companies have paid out around $5 billion in dividends to shareholders. But dividend payouts really start to ramp up in mid-to-late September. Overall, around $29.2 billion will be paid out to shareholders from July to December, little changed from $29.4 billion in the February 2019 earnings season, but up from $26 billion in the August 2018 reporting season.
- Dividends still in vogue: The majority of companies reporting full-year earnings results (88 per cent) chose to pay a dividend, above the 86 per cent long-term average. And 79 per cent of these companies lifted or maintained dividends.
- Injection into the economy: Around $23 billion will be paid out by listed companies to their shareholders in the next four weeks.
What does it all mean?
- Dividends remain in vogue. In fact, despite finding it harder to lift profits, still 88 per cent of full-year reporting companies in the ASX 200 chose to pay out a dividend. But reflecting the tougher environment, the proportion of companies seeking to pay out dividends was down from the highs in the 2015 and 2016 financial years.
- Of the ASX 200 companies reporting for the full-year to June and 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.
- Of the 138 companies reporting full-year results, 92 per cent reported a profit, above the average of 88 per cent over the past decade. But only 52 per cent lifted profits while 58 per cent lifted cash holdings. Aggregate cash holdings were little-changed over the year at $83.4 billion. Adding in the 31 companies reporting full-year earnings, cash stood at $110.7 billion at the end of June.
- Over the period from July to December, around $29.2 billion will be paid to shareholders as dividends, up from $26 billion in the August 2018 reporting season but down from $29.4 billion in the February 2019 earnings season. So despite the tough trading environment, shareholders continue to be well rewarded.
- Some shareholders will receive the dividends as cash and others will deploy the proceeds through dividend reinvestment schemes. While the majority of the funds will be paid to domestic investors, other funds will go offshore to foreign investors. And while some of the dividends are paid to ordinary investors, other payments are paid to superannuation funds, thus with more limited short-term consequences for the economy.
- While dividends flow at this time every year, the dollars potentially could lift spending. Certainly with wages growing at a slower pace than in the past, (around 2.0-2.5 per cent annually) investors may be more inclined to spend rather than invest.
The Profit Reporting Season
- Regular readers would be aware that each six months we undertake a detailed review of the profit reporting season – the time when companies report half-year or annual results for the period to June or December. (A far smaller proportion of companies have a different reporting period, such as March or September).
- To recap, 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 reported annual results, reported a statutory profit (net profit after tax). That is below the record high 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.
For full-year reporting companies:
- 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 Dividend Timeline
- IRESS provides data on the dividends declared by companies, the number of shares on issue and the pay date of the dividends. So it is possible to derive a dividend timeline. The ASX 200 companies were assessed.
- As always there are complications to the analysis such as where the shareholders are based, whether dividend reinvestment plans operate, special dividend payments and currency translation effects for foreign investors. But the aim is to get a broad idea of the timing and magnitude of dividend payouts.
- Experts estimate that around $29.2 billion will be paid to shareholders by ASX 200 companies from July- December, but largely from late August to late October. The key period for dividend payments is the four-week period beginning September 16. Over that four-week period, $22.6 billion will be paid out as dividends by listed companies:
- in the week ending September 20, dividends totalling $3.3 billion will be paid;
- in the week ending September 27, $12.3 billion will be paid out as dividends;
- in the week ending October 4 dividend payments totalling $4.3 billion will be made; and
- in the week ending October 11 distributions total $2.7 billion.
The importance of dividends
- If you indexed the All Ordinaries index and the All Ordinaries Accumulation index at January 2004 it would show share prices (All Ords) have broadly doubled while total returns have quadrupled. The differential (dividend growth) has especially widened from the low point for shares after the global financial crisis in February 2009. So dividends have taken on greater importance.
- There are a few reasons for this. Investors have been more cautious about buying shares, despite the fact that Australian companies have been making money and strengthening balance sheets. So share prices have not fully captured the stronger fundamentals.
- The economy has also continued to mature and the “potential” growth rate has eased from around 3.5 per cent to 2.6 per cent. Many of Australia’s biggest companies operate in mature industries. So while companies continue to generate good returns, growth options are more limited. Add in the fact that inflation has also slowed from around 2.5 per cent to around 1.5-2.0 per cent.
- Over time Australian companies have to compete with property markets and overseas equities to secure the affection of investors. With share prices seemingly constrained by a range of influences, that puts more onus on companies to offer attractive dividends or to support share prices with buybacks.
- Until recently there has been some reluctance by companies to plough back cash into the business. And expansion, renewal, replacement or efficiency measures have boosted the funds that can be made available as dividends.
What are the implications for investors?
- Investors have the usual choice over the next few weeks. Those investors who still elect to receive dividend payments direct to their bank accounts can choose to spend the extra proceeds, save the proceeds (leave it in the bank) or use the funds in combination with other savings and reinvest into shares or other investments.
- For companies, retailers and financial firms, the dividends flowing through to shareholders clearly represent opportunities. The Reserve Bank will also monitor the trends in the next few weeks: if confidence lifts, an inflow of funds represents a potential spending boost.
- Of the major bourses across the globe, Australia is amongst the largest payer of dividends. In part this reflects the maturity of Australia’s industry sectors. It also reflects the stability of the companies that dominate the ASX20 and ASX50 indexes. And it also reflects the on-going growth of the Australian economy and corporate profitability.
- Over the past couple of years many companies took the “safe option” of paying out dividends and buying back shares – in other words, keeping shareholders happy. But many companies are now opting for greater balance.
- Adequate cash must be maintained to pay out dividends together with confidence on future profitability. But cash levels as well as modest borrowings are important for reinvestment in the business and applied to new opportunities – entering new markets or engaging in mergers and acquisitions.
- Over the past year, costs or expenses have lifted. Aussie companies have done well to lift revenues, record profits and pay dividends in the current environment. And with competition increasingly becoming global, Aussie companies need to get the balance right in focusing on lifting revenues and restraining costs.
- Shareholders increasingly realize that it is important to select companies with good potential for solid, sustainable growth in total returns – share price plus dividends. And that means paying attention to all aspects of the business.
- There has been a renewed focus on dividends with some observers calling for greater investment spending rather than companies focusing on buybacks and dividends. But the environment is not currently conducive to a major focus on investment given the global slowdown caused by the US-China trade war. Good companies will keep an open mind on opportunities.
- The average dividend yield is around 4 per cent but returns for some ASX200 companies are well in excess of the average. Investors need to be mindful that past performance is not always a good guide on the future.
Investor Signposts: Week Beginning September 15 2019
Australia: Employment data in the spotlight
- In the coming week the August jobs data will attract most attention together with the minutes of the last Reserve Bank Board meeting.
- The week kicks-off on Tuesday when the Australian Bureau of Statistics (ABS) issues data on home prices for the June quarter in its publication Residential Property Price Indexes. The figures are dated – early September data from CoreLogic is already being issued. But the publication includes the latest estimates on the number of homes in each state and territory.
- Also on Tuesday weekly consumer confidence data is issued by ANZ and Roy Morgan. Sentiment is just below the long-run average levels. Worries about the economic outlook dominate although people are generally happy about the state of their finances.
- Also on Tuesday the Reserve Bank issues minutes from the Board meeting held on September 3. Little guidance is expected on a future rate cut. But each month Board members discuss a topic of interest and that may provide fresh information for investors to contemplate.
- On Thursday, the ABS releases the August Labour Forcepublication. Not only is data provided on employment and unemployment, but there are also estimates on hours worked and under-utilised labour. The Reserve Bank will assess all these measures – not just the unemployment rate – when deciding if another rate cut is required.
- Economists expect that 20,000 jobs were created in August with the jobless rate unchanged at 5.2 per cent. The Reserve Bank is expected to stay on the interest rate sidelines if the results are in line with forecasts. The jobless rate has been steady in recent months as more people entering the job market have picked up the new jobs on offer.
- Also on Thursday, the ABS releases population estimates for the March quarter. Australia’s population has grown by 1.6 per cent over the past years, near the average growth pace over the past decade. Population is growing fastest in Victoria although Tasmania’s population is growing at the fastest rate in 28 years.
- And finally on Thursday, the Reserve Bank issues its quarterly Bulletin – a publication that contains topical reports on the economy and financial markets.
Overseas: US Federal Reserve to decide on a rate cut
- There are two stand-out events in the coming week. China releases monthly activity data and the US Federal Reserve holds its policy meeting over Tuesday and Wednesday.
- The week begins on Monday in China when the National Bureau of Statistics issues August data on retail spending, investment and industrial production. The data is important as it will show what impact that the trade dispute with the US is having on the Chinese economy.
- On Monday in the US, the September Empire State manufacturing index is produced by the New York Federal Reserve, The index is regarded as an influential regional gauge on the economy.
- Over Tuesday and Wednesday the US Federal Reserve policy-making committee meets – the FOMC. Financial markets are tipping another rate cut of 25 basis points (or a quarter of a percent) in order to sustain the record economic expansion.
- On Tuesday in the US, the regular weekly reading on US chain store sales is due together with industrial production data, capital flows figures and the housing market sentiment index from the National Association of Home Builders.
- On Wednesday in the US, the weekly reading on mortgage applications is issued as well as the building permits and housing starts data for August. In July, building permits grew by a sizeable 8.4 per cent – suggesting stronger building activity lies ahead. But the number of homes where work actually started in August fell by 4 per cent to a 1.19 million annual rate.
- On Thursday, the weekly figures on jobless claims are issued in the US, along with data on existing home sales and the leading index. In July sales of existing homes hit a 5-month high (second highest reading over the past year), up 2.5 per cent on the previous month. The National Association of Realtors estimated the median house price at $280,800 in July, compared to $269,300 a year earlier.
- The leading index in the US is calculated by the Conference Board. After two modest 0.1 per cent declines in May and June, the leading index lifted by 0.5 per cent in July. There are ten indicators that make up the leading index including new orders, building permits and share prices. The Conference Board says the latest results “economy will continue to expand in the second suggests the US half of 2019, it suggest the US is likely to do so at a moderate pace.”
- Also on Thursday the Philadelphia Federal Reserve manufacturing index is released. Just like the Empire State index, the Philly Fed index is seen as an influential gauge of the broader economy.
- On Thursday in the UK, the Bank of England policymaking committee meets. In New Zealand, economic growth data is released.
Stay updated with the latest market and currency developments here.
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