• In a positive move for investors, workers, retirees and most likely the economy, Scott Morrison won what many experts had considered the ‘unwinnable’ election. He will return to Government with a majority and a number of major personalities out of his way. Scott Morrison won on a status quo approach and by raising real concerns about the potential impact that Labor’s higher tax environment would have on a weakening economy. Now we can only hope the Coalition is able to cobble together a long-term energy policy and halt the rise in living costs.
  • The Australian Sharemarket bucked the global trend, delivering a positive performance of around 1% for May, as the rest of the world was hit by growth concerns and the escalation of the US-China trade war. The S&P 500 fell 7%, the Hang Seng 10% and the FTSE close 4%. Global growth concerns are increasingly reflected in bond rates, with the Australian 10 Year Government Bond hitting an all-time low of 1.46% after starting the month at 1.79%. The threat of a US recession increased as the bond rate fell similarly from 2.50% to 2.12%. The weaker bond rate saw Australia’s exchange rate continue to weaken, moving below 70c. US GDP growth was confirmed at 3.1% for the first quarter.
  • Microsoft reported strongly delivering 16% growth in revenue for the third quarter. The result was driven by the increased focused on cloud and business services, rather than the Office product, which actually saw the company move past a market cap of $1tn; just the third listed company to do so. Apple is coming under increasing pressure from various sources, with an anti-trust lawsuit against its dominant but restrictive App Store business, which represents some 35% of revenue. The company is also being hit heavily by the US’s tariffs announcements, as the majority of the iPhone is built in China, with the potential for an increase of $160 in the production costs. The company is down from a high of $230 to just $180 and now trades on a P/E ratio of just 15x.
  • It was a bad month for forecasters and economists in Australia, with the majority failing to predict the result of the Federal Election or the RBA’s decision to hold rates steady. Interestingly, close to half of the highly paid economists got the RBA’s call wrong and not one poll predicted the flood of votes to the Liberal National Party across the country. As always, it just reiterates the importance of not making investment decisions on expert forecasts and planning for several rather than a single outcome.
  • It is, however, becoming increasingly likely that interest rates will be cut in June, with the Governor announcing as much at a speech in Brisbane. Inflation remains under control, as does employment, however, weaker property prices have begun impacting the economy, with reports of mortgage delinquencies and cancelled settlements growing. In our view the RBA is likely moving too fast in cutting rates once again, leaving very little room to move should the economy weaken further.
  • ASIC continues to push harder with penalties for vertically integrated financial advice businesses claiming to be independent, with industry super the latest caught in the net. HOST PLUS received a $12,600 fine for claiming it’s financial advice was independent in recorded telephone calls; we ask will members be paying for this?
  • The ACCC’s decision to block the merger between TPG Telecom and Vodafone was derided by the financial sector and saw TPG’s share price fall heavily. The ACCC seems to be believe that TPG will recommence the construction of their 4G and 5G networks as a standalone entity even after this was cancelled earlier in 2019. The decision is expected to be appealed, as was that of QR National, which ensures Telstra remains in the box seat for growth as its competitors focus remains elsewhere.
  • It was reported during the month that APRA and the RBA are considering alternate strategies to revive the struggling lending market and spurring the major banks to open their wallets for borrowers once again. We understand the RBA/APRA are considering reducing the 7.25% benchmark rate which banks are required to use to determine the serviceability of the loans they provide. At this stage it is believed a 0.5% reduction to 6.75% is likely, given the muted outlook for interest rates around the world, which could potentially release 5% more capital to all borrowers.
  • The economic news around the world was mixed, with Australian unemployment increasing to 5.2%, from 5.0%; however the major drive was an increase in those looking for work by 0.2%. US Core Inflation remained steady at 2.1% whilst housing starts recovered growing 5.7% month on month suggesting consumer sentiment is improving. Neither was enough to see monetary policy move, with both the US Federal Reserve and RBA on hold. Things are also looking up in Europe, where inflation hit 1.7%, GDP growth was revised to a positive 0.4% reading as Germany and Italy returned to growth and Spain pushed ahead following their election.
  • The US-China trade war continued to escalate with the US proceeding with an increase in tariffs to 25% for some $200bn worth of imported Chinese goods. The banning of Huawei began filtering into the country’s largest Tech stocks with the likes of Google no longer willing to operate on its platform or utilise its products. As expected, the trade war is actually hurting US businesses, with farmers in particular being hit by weaker exports, resulting in a recent aid package being announced. Like most, we don’t believe the US President’s tweets are particularly helpful to markets, but agree that much needed pressure is being placed on China’s history in relation to intellectual property and foreign competitors. Tariffs and subsidies are of course not uncommon, it is when they are one sided that it becomes an issue.
  • We aren’t sure about you, but whilst we value some of the input provided by the likes of Invest Smart and Intelligent Investor, it seems the product pushing has moved to another level in the post Royal Commission world. We must have counted three invitations from Alan Kohler regarding an investment in a new ‘Ethical ETF’. Interestingly the Paul Clitheroe-backed Invest Smart recently purchased Kohler’s Constant Investor business, and are now launching any number of in-house investment opportunities. As always, we suggest proceeding with caution.
  • UK PM Theresa May stepped down, after putting years of effort into finalizing Britain’s exit from the EU. Her timing to take over the leadership couldn’t have been worse with her own party playing hard ball on any level of negotiations with the EU and basically costing her career. Boris Johnson, the likely replacement is pro-Brexit, however, it is still to be seen whether any agreement can be made before the Halloween deadline.