End of Year Market Wrap 2017

Just over 12 months ago all we heard in the Media was Donald Trump, 12 months on not we are still hearing about Donald Trump but the wealth of the USA has increased. In fact the overseas has outperformed with Hong Kong up 29%, United States of America - NASDAQ up 29%, Dow Jones up 27%, S&P 500 up 20%, Germany up 24%, Japan up 23%, China up 14% and Australia up 10%. Although Australia has performed well it has underperformed on the World Stage. Why has Australia underperformed, because of our dependence on trade with China.  Australia is the largest exporter of Iron Ore in the world with a 29% global share, around 80% of this goes to China making us very dependent on the Chinese economy. Our other major export is Coal again Australia is the largest the export in the World supplying 38%  our two main exports markets are Japan and China who have both forecasted drop in demand. China’s demand has fallen over the past three years.

The Australian economy is closely tied with growth of China and construction in the country. Back home the government has yet to start a Nation building infrastructure projects which would build an economic future for Australia. We are struggling to gain traction building new jobs for the future. With mining falling form 19% of GDP down to 7% of GDP jobs in the sectors are also reducing. On top of this we are also in the at the top of a property bubble which has lasted for 55 years and seen prices increase 6500% since 1961. This is mostly driven by foreign investment, construction in Sydney alone is responsible for a 24% increase in GDP. Clearly this situation is unsustainable.

Our reporting season was better than expected and although not kicking major goals overall it was a solid result. This helped push our market up over the last few months of the year. With the market sitting above 6000 points our market is showing sign of a sustained recovery and a decrease in the volatility we have been experiencing in the past couple of years. With interest rates so low investors are starting to be more comfortable with the risk required to achieve better returns.

Key issue to watch.

The two key areas to watch are China and Residential Property. I expect China’s demand to remain steady for now, over the longer term it is important for Australia to develop other sources of exports. I also expect to see the government start to embark on infrastructure projects which will also provide further support for the resources sector.

Our main concern is the property market, there has been a call for a correction in the property market for some time now especially with oversupply of units on the market. Given the increase in the percentage of take home pay now being used to cover the average mortgage I expect that we will see more mortgage stress in 2018. As of October 2017 it is estimated that 29% of households in Australia are in debt stress, a collapse in the property market will have an impact on a number of sectors including the retail sector and the Banks. Although I do not expect that the property market will collapse overnight in fact it could be years, I do however expect investors to start to move away from property and back into the share market over the coming year.

Retail has struggled in Australia due to little to no increases in wages over the past couple of years, on top of this unemployment and under employment has been running at a historic high. A property bubble burst would add to the issues. That said we have seen slight improvements in the retail sector and a number of companies prices have fallen to a level that they now look cheap and should produce sold capital growth over the long term, we are cautious to recommend this sector as it will remain volatile and a small move up in interest rates would affect the sector.

The Banks produced a solid result and are paying historically high dividends at present. They have gone through five liquidity stress tests to ensure that they cannot fall over or require government assistance if there was to be a property crash. Given that the big four bank issue 80% of the residential mortgages in the country they hold the largest exposure to the sector. The banks are around 30% of the market capitalization as such any everyone with superannuation has exposure to the banking sector. It is not time to panic, but investors should just be aware of the situation and note that we could see dividend fall in the banking sector. At present we are still happy to hold the banks but will continue to review.

What to do in 2018

I expect that 2018 will bring an increase in capital projects in Australia and as such I am looking at service companies with a focus in Infrastructure. I also expect that overseas markets will continue to perform, as such we will continue to increase exposure to this sector. Investors need to take care in the fixed interest sector as increasing interest rates will hurt capital values. If you are holding preference shares in the banks which have been issued in the past 5 year you may want to look to exit at the right price and move into an index based product.  Retail sector will continue to work had to cut margins and increase profits with consumer confidence improving all the time as we get used to the post GFC economy.

With an election looming in 2019 I expect that the government will be pushing hard to get budget measures through and spend money on infrastructure and job creation during 2018, this should hold off any property crash and reduce unemployment in Australia.

Overall I expect 2018 to be a positive year, since October 2017 we have seen our market make strong upward moves, it achieved 6000 points and has stayed there. This is a big technical target which indicates that investors are now more confident in the stock market. Perhaps the pending property crash and low interest rates are influencing investors to look for safer and higher yielding returns. The next technical target for our market is 6800 points, this level will indicate the end of the GFC as it is also to point of where it started. We could see this happen in the 2018 year as it will be 10 years since the start of the GFC.

I wish you all the best over the Christmas and holiday period and look forward to 2018.

 

Best Regards

Jason Fittler    

B:Com, Dip FP

CPA - Financial Planning Specialist and CPA - SMSF Specialist