• Geopolitical tensions continued around the world, with Iran commandeering British oil tankers in the Strait of Hormuz and the Hong Kong protests over a planned Chinese extradition bill sending the city into lockdown. The UK Prime Ministerial race has concluded, with Pro-Brexit candidate and former Mayor of London, Boris Johnson the winner. He has arrived as a ‘circuit breaker’ after the Brexit debacle saw the departure of the last two leaders. His mandate is to force through Brexit by 31 October with or without a deal. Throughout all this, markets marched ahead, the S&P 500 was up 1.3% for the month, the ASX 200 2.9% and the FTSE 2.1%.

 

  • The ASX reached its highest point since just prior to the GFC, hitting 6,845 points in July. The ASX 200 eventually returned 2.93% for the month, with consumer staples (9.8%), consumer discretionary (4.9%) and healthcare (5.92%) leading the way. It was positive across the board with all sectors delivering a positive return for the month. The market continues to be driven by falling interest rates at the same time that geopolitical risks escalate, and the domestic economy shows signs of slowing. With the RBA now indicating lower rates will remain for longer, investors continue to seek out the more traditional, profitable businesses for their secure income and earnings.

 

  • The US economy delivered once again, reporting a 2.1% annualized GDP growth rate in the second quarter. It came after a better than expected quarterly reporting season during which 170 of the 221 companies delivered better than expected results. It is the companies generating most of their revenue in the US, rather than through exports, that performed strongest (including small caps). The result has been a 3.2% increase in earnings rather than the 2.6% contraction initially predicted. Interestingly, the Federal Reserve decided to cut their benchmark rate by 0.25% on the last day of July but indicated no further cuts are planned at this stage, which sent the market down quickly.

 

  • Closer to home inflation surprised to the upside, with a 10% increase in fuel prices resulting in Australian inflation hitting 1.6% for the 12 months to June. As expected, the Reserve Bank of Australia cut interest rates to an all-time low of 1.0% in July with the Governor suggesting the rate cuts was aimed at boosting the flagging unemployment rate of 5.2% and helping achieve the inflation target, which remains well below the 2-3% range at just 1.6%. Given the last round of rate cuts simply lead to a residential housing bubble, it’s difficult to see what real benefit this will have outside of forcing investors into riskier assets to generate income. Take for instance the latest term deposit offers, with the best 3-year rate just 2.0% per annum. The US Federal Reserve is also hinting at more accommodative monetary policy via an out-of-the-blue rate cut. They are concerned about the slowing economy and weak inflation.

 

  • The Australian economy remains in a difficult position, seemingly teetering on the edge of a slowdown, but receiving stimulus from both Government spending and lower interest rates.

 

  • New car sales were off 9.6% in June, the 15th straight monthly fall, whilst the housing cycle seems to be turning with Steller Developments and Ralan entering administration; worryingly the latter had requested buyers release their deposits as a loan to the company, which may never be returned. Anecdotal evidence is suggesting to us that the banks are simply unwilling to lend as much or as easily as before, which is seeing both pre-sales and apartment settlements reduce and along with them the value of newer apartments. This comes at the same time that the depth of the flammable cladding problem is being investigated by Governments. It’s becoming evident that those who built and approved the impacted towers will escape penalties with the cost passed onto taxpayers, with owners likely to bear the majority of the burden for cheap construction materials and profit maximizing developers.

 

  • The industry fund sector returns for the financial year were delivered during the month with the median growth option delivering a return of 7%. This represents higher risk options, with the more ‘Balanced’ strategy delivering closer to 6.2% for the same period. It’s more useful to compare against the median or average return for each option, as this reduces the skew that occurs from the higher risk-taking strategies. It remains as difficult as ever to understand the amount of risk each of these options is taking, or the appropriateness of the discount rates being used to price all those unlisted assets. Research house, Chant West, suggests more challenging times are ahead for the sector years of strong returns.

 

  • In what looks to be a positive move for suffering consumers in Victoria and NSW, the Australian Energy Market Commission released a draft rule allowing large energy consumers, like manufacturers and smelters, to sell back unneeded demand into the wholesale energy market. This means that major users can go around their retailers to reduce capacity when it is not required, whereas in the past retailers had no reasons to sell into the wholesale market as they simply passed the cost onto consumers. Given it is industry that are the greatest power users this makes some sense.

 

  • Chinese GDP growth fell to the lowest level in 27 years in the June quarter, at ‘just’ 6.2%. The result was weaker than expected as the trade ‘negotiations’ with the US continued to impact on exports but at that level remains one of the fastest growing economies in the world. Importantly, retail sales were up 8.4% year on year in the first 6 months, whilst industrial production also improved by 6%, meaning the quarter was quite strong.

 

  • The financial services industry purge continued during July as APRA’s disqualification case against prior directors of IOOF came to a head. APRA is suggesting the use of reserves within their super plan to compensate impacted investors was inappropriate. AMP’s maligned life insurance business sale was effectively rejected by the NZ Reserve Bank who noted that the buyer had not submitted the appropriate paperwork and it was not comfortable with many aspects of the change of control. NAB continues making strides to reform their business, with ‘crisis banker’ Ross McEwan appointed the new CEO.

 

  • BHP has made a huge decision to begin setting goals for its customers to cut their greenhouse emissions. Under what’s being called their ‘Scope 3’ de-carbonisation strategy the company will invest $500m to reduce the emissions from its coal and gas fired global operations and to pressure its customers into doing the same. It’s an important step for the mining sector given the companies dominance in coal mining and the fact it’s exports result in the emission of some 40 times their own.

 

  • The Australian reporting season will begin in earnest in August, highlights for the first two weeks that will give an insight into the outlook for the economy include:

 

  • Commonwealth Bank – 7 August
  • AGL Energy – 8 August
  • AMP Ltd – 8 August
  • JB HiFi – 12 August