Below trend growth to continue
Despite US equity markets posting fresh records in July, a late, large fall saw equity markets finish lower. While valuations are stretched, JBWere Chief Investment Officer, James Wright, reports that the US economic recovery should support current earnings forecasts.
Global equities finally capitulated to some stretched valuations and geo-political events and fell heavily on the closing two trading days of July. Fear and volatility engulfed nervous investors. The sell-off was in response to a combination of economic and geo-political factors, including tensions in Eastern Europe and the Middle East, a technical default by Argentina and fears that the US interest rate tightening cycle might commence sooner and be more aggressive.
In the United States, the S&P 500 index closed at a record high of 1987.98 before giving ground at the end of the month. The market finished down 1.5% in July, but remains up around 4.5% this calendar year. The US recorded strong growth in the second quarter (4% annualised pace) and the Federal Reserve confirmed it would likely keep rates near zero for a considerable time after the end of its quantitative easing policy. It says there remains significantly underutilisation in the labour market, despite payrolls adding a consistent 200,000 jobs per month.
European equity markets were down in July. The ECB left rates on hold early in the month as they emphasised that measures taken in June would take some time to lift overall economic growth and inflation towards their preferred 2% level.
The Australian equities market rose 4.4% in July. The standout sector was materials (+7.7%) which was driven by the biggest producers (BHP and RIO) delivering guidance-beating quarterly production updates. The successful listing of the $2.25 billion private hospital provider, Healthscope, also added to the positive mood of the market. The RBA was particularly vocal on the currency in July, with the RBA Governor saying that “investors are underestimating the likelihood of a significant fall in the Australian Dollar at some point”.
Despite the positive momentum built from the quarterly mining reports, we remain cautious on Australian equities this reporting season. Australian companies are expected to report relatively healthy earnings per share growth of 7.4% for financial year 2013-14. However, this result will be heavily influenced by aggregate cost-cutting, lower bad debt charges for banks and fewer write downs in resources.
In the Australian residential property market, Australian capital city dwelling prices recorded another strong rise of 1.6% in July – after rising 1.4% in June – according to the RP Data-Rismark Hedonic Home Value Indices. Again, the data shows a two-tiered property market. In Sydney and Melbourne, prices were up 1.5% and 3.7% respectively, while in Brisbane, Perth and Adelaide, prices actually fell slightly (by -0.1% to -0.5%). Over the past year, capital city prices rose 10.2%, with the highest gains in Sydney (14.8%), Melbourne (11.0%) and Brisbane (6.9%).
The Australian Dollar traded in a two cent range in July. It peaked at US$0.9504 on the first day of the month and dropped to US$0.9276 on the last day of the month, for a monthly fall of 1.4% relative to the US Dollar.
For further analysis, download the full report:
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.