The month that was...
The ASX300 Accumulation Index fell 1.1% in August with the reporting season the key driver of returns. The key theme out of reporting season was an improvement in retail performance as well as positive outlooks from selected contractors. Outside the reporting season the Australian federal government election was a key focus domestically.
Whilst a "conclusive" result has been reached uncertainty remains on the effectiveness of government to get legislation through. On the sharemarket this particularly impacts our resources sector (resource tax), gambling and TLS (National Broadband Network).
Globally, soft economic data again heightened concerns about global growth thus driving equity markets lower. US unemployment at 9.5% remained stubbornly high and July US housing starts still a low annualised 546K caused investors to fret over the pace of the US recovery (or worse still a double dip). US 2Q10 GDPg was revised down from 2.4% to 1.6%, due to a change in the contribution of net exports & inventories.
The view from New York...
Previously we have discussed the importance of offshore investors on our market and specifically the current appetite of the US investor for our market. Anecdotal evidence suggests that mutual fund outflows in the US have been growing. Is this because US investors have had enough of the returns in their own backyard, and if so are US fund managers looking more to the returns of high growth emerging markets such as China (and indirectly Australia) to boost returns?
Here is the view of an analyst who works on the Australian equities desk in New York that gives a feel for the current environment as US investors return from their summer break:
"....offshore flow is becoming increasingly important for Australia and the US obviously plays a significant part in this. US investors are definitely becoming more and more aware of global investment opportunities. I'd say the level of interest and knowledge has ticked up each of the years I've been here, and an increasing number of funds now have 5 year track records to market for their global funds. Earlier in the year many of them became very domestic focused, but as the US recovery stalled, they again shifted their attentions to the Emerging markets globally. Can't say I've noticed any specific geographic exposure, but the obvious ones are China and India, Brazil.
On the whole I'd say US investors are positively disposed to Australia at the moment. They generally like the macro picture (altho if China has a hard landing all bets are off!). Balance sheets have improved and are probably undergeared, valuations look attractive compared to the globe, yield looks attractive and this will likely become more important the longer a low interest rate environment persists and there's the recent uptick in Mergers & Acquisitons.
BUT there are a few hurdles which remain, not least of which are the strong Australian Dollar (AUD) and political and fiscal uncertainty (the latter 2 despite the fact we've finally decided who's going to form govt!). In terms of flows and impact, when the AUD dipped to 80c in May we saw a significant uptick in our flows into Australia. This was enough to help drive the Aussie market up for a month. So, it can be very significant.
So all in all a fairly common theme but one key takeout is that the eye is still on China. We do not believe China is on the verge of a "hard landing" and believe the signs are there for a solid recovery from their 12 months of controlled slowdown.
The Shanghai index has begun moving in anticipation having increased over 12% off its lows. Interestingly it was highlighted to me the other day that the Shanghai market has actually proven to be an effective 3 month lead indicator for the S&P500 so if this proves to be the case should have positive implications for the US market around October. And for the super China bulls, take a read of this article from the Australian yesterday:
CHINA'S farmers are possibly about to be sucked into the greatest financial revolution since the invention of the credit card.
Hard done by and irritable, the ruralites are not allowed to use their land for purposes other than agriculture and, unlike their lucky urban counterparts, have no individual claim to the property. What they are absolutely not allowed to do is use their nominal land claims as loan collateral. Property rights were transferred to Chinese urbanites in the early 1990s - a reform that, arguably, created the economic miracle at which we tremble and gasp today.
But quietly and with minimal fuss, the government has been pilot-testing what would happen if it allowed farmers in a scattering of provinces to use their land as loan collateral. The effects have been remarkable. Given the opportunity, the farmers have borrowed twice as much as those still bound by the national law.
If you are Beijing and you are trying to generate a consumer revolution, those are fairly enticing results. When it published those loan numbers, the regulator said that "financial products designed for farmers and rural development will be offered across the country".
Some think this means that the pilot scheme is going to go national by the end of this year.
According to Glenn Maguire, head of China economics at Societe Generale, if it does we may be looking at a monumental unleashing of rural consumerist power and potentially the biggest economic stimulus ever conducted. Anywhere. Letting the farmers borrow against their land could give Beijing the elusive tools it needs to rebalance and conjure up a second economic miracle when the first hasn't even begun to lose its wow factor.
For any further information please do no hesitate to call.
The ASX300 Accumulation Index fell 1.1% in August with the reporting season the key driver of returns. The key theme out of reporting season was an improvement in retail performance as well as positive outlooks from selected contractors. Outside the reporting season the Australian federal government election was a key focus domestically.
Whilst a "conclusive" result has been reached uncertainty remains on the effectiveness of government to get legislation through. On the sharemarket this particularly impacts our resources sector (resource tax), gambling and TLS (National Broadband Network).
Globally, soft economic data again heightened concerns about global growth thus driving equity markets lower. US unemployment at 9.5% remained stubbornly high and July US housing starts still a low annualised 546K caused investors to fret over the pace of the US recovery (or worse still a double dip). US 2Q10 GDPg was revised down from 2.4% to 1.6%, due to a change in the contribution of net exports & inventories.
The view from New York...
Previously we have discussed the importance of offshore investors on our market and specifically the current appetite of the US investor for our market. Anecdotal evidence suggests that mutual fund outflows in the US have been growing. Is this because US investors have had enough of the returns in their own backyard, and if so are US fund managers looking more to the returns of high growth emerging markets such as China (and indirectly Australia) to boost returns?
Here is the view of an analyst who works on the Australian equities desk in New York that gives a feel for the current environment as US investors return from their summer break:
"....offshore flow is becoming increasingly important for Australia and the US obviously plays a significant part in this. US investors are definitely becoming more and more aware of global investment opportunities. I'd say the level of interest and knowledge has ticked up each of the years I've been here, and an increasing number of funds now have 5 year track records to market for their global funds. Earlier in the year many of them became very domestic focused, but as the US recovery stalled, they again shifted their attentions to the Emerging markets globally. Can't say I've noticed any specific geographic exposure, but the obvious ones are China and India, Brazil.
On the whole I'd say US investors are positively disposed to Australia at the moment. They generally like the macro picture (altho if China has a hard landing all bets are off!). Balance sheets have improved and are probably undergeared, valuations look attractive compared to the globe, yield looks attractive and this will likely become more important the longer a low interest rate environment persists and there's the recent uptick in Mergers & Acquisitons.
BUT there are a few hurdles which remain, not least of which are the strong Australian Dollar (AUD) and political and fiscal uncertainty (the latter 2 despite the fact we've finally decided who's going to form govt!). In terms of flows and impact, when the AUD dipped to 80c in May we saw a significant uptick in our flows into Australia. This was enough to help drive the Aussie market up for a month. So, it can be very significant.
So all in all a fairly common theme but one key takeout is that the eye is still on China. We do not believe China is on the verge of a "hard landing" and believe the signs are there for a solid recovery from their 12 months of controlled slowdown.
The Shanghai index has begun moving in anticipation having increased over 12% off its lows. Interestingly it was highlighted to me the other day that the Shanghai market has actually proven to be an effective 3 month lead indicator for the S&P500 so if this proves to be the case should have positive implications for the US market around October. And for the super China bulls, take a read of this article from the Australian yesterday:
CHINA'S farmers are possibly about to be sucked into the greatest financial revolution since the invention of the credit card.
Hard done by and irritable, the ruralites are not allowed to use their land for purposes other than agriculture and, unlike their lucky urban counterparts, have no individual claim to the property. What they are absolutely not allowed to do is use their nominal land claims as loan collateral. Property rights were transferred to Chinese urbanites in the early 1990s - a reform that, arguably, created the economic miracle at which we tremble and gasp today.
But quietly and with minimal fuss, the government has been pilot-testing what would happen if it allowed farmers in a scattering of provinces to use their land as loan collateral. The effects have been remarkable. Given the opportunity, the farmers have borrowed twice as much as those still bound by the national law.
If you are Beijing and you are trying to generate a consumer revolution, those are fairly enticing results. When it published those loan numbers, the regulator said that "financial products designed for farmers and rural development will be offered across the country".
Some think this means that the pilot scheme is going to go national by the end of this year.
According to Glenn Maguire, head of China economics at Societe Generale, if it does we may be looking at a monumental unleashing of rural consumerist power and potentially the biggest economic stimulus ever conducted. Anywhere. Letting the farmers borrow against their land could give Beijing the elusive tools it needs to rebalance and conjure up a second economic miracle when the first hasn't even begun to lose its wow factor.
For any further information please do no hesitate to call.
