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Happy New Financial Year!

The last quarter (Apr-Jun '18) was interesting to watch with a mixed bag of results across the major investment markets. Below is an overview of the main points to note and our thoughts on what lies ahead for the start of this financial year.

RESIDENTIAL PROPERTY

The value of property in Australia’s two key markets, Melbourne and Sydney, are in decline and anecdotally action on the street is demonstrating continued weakness suggesting the falls may continue. Auction clearance rates are as low as can be remembered at around 50% in Sydney (worst in 7 years) and 60% in Melbourne. Top end property is bearing the brunt of price falls, with relative strength being exhibited at the lower end of the market and cheaper suburbs thanks to the first home owners grant. Many experts seem to have underestimated the speed of the falls, which have been exacerbated by lending restrictions making obtaining finance a lot tougher than previously. ANZ have predicted a further 10% fall from these levels, and others, once proclaiming slower growth as a worst case scenario, are reassessing based on the past few months. It is most definitely a buyer's market again and we expect this to continue into the foreseeable future. 

INTEREST RATES

The Reserve Bank will not be raising rates in the foreseeable future. A combination of low inflation, slow wage growth and high levels of personal indebtedness will see to this. That’s the good news. The bad news however is that lenders are raising rates independently as their cost of funding increases. With rates rising globally, lenders are paying more for their funds (about half of lender money comes from global wholesale markets) and they’re passing this on to borrowers. To date these increases have been limited to the small to mid-tier lenders, with the Big 4 holding steady. We think as the fallout from the Banking Royal Commission continues, they’ll be less inclined to pass on cost increases until it is politically more palatable to do so.

INTERNATIONAL SHARE MARKETS

Global market returns varied significantly by region over the quarter as geopolitical tensions took hold. The fear and reality of a significant US and China trade war saw Asian and Emerging Market regions pummelled. Developed markets, including the US and Europe, were broadly positive with returns helped by a falling Aussie Dollar. In addition to the current trade wars, many see the pace of interest rate rises in the US as the key factor impacting markets over the medium term. Continued strength of the US economy could see rates rise more quickly than currently anticipated, which could be expected to have a negative impact on share prices - but only if they rise more quickly than anticipated. Valuations in the US also remain a concern to many, however this needs to be balanced against expectations of strong earnings growth by US corporates. Given the recent sell off amongst Asian and Emerging Markets, many see the valuations and outlook attractive at these levels.

AUSTRALIAN SHARE MARKETS

The Australian market rebounded strongly over the quarter after falling sharply for the first three months of the year. The gains over the quarter were generally broad based with both large and small companies performing well. With the local economy performing well we expect this to continue, however are wary that any property downturn could have flow on effects for certain sectors of the market. Looking at individual sectors, Resources, Healthcare and Energy stocks were particularly strong whilst Telecoms (predominantly Telstra) were very weak. The banks regained some ground on bargain hunting but have been sold off aggressively over the past 6 months in part due to the Royal Commission (as has AMP). Banking stocks are currently providing attractive fully franked yields for investors, but this needs to be weighed up against a deteriorating growth outlook. Interestingly, growth orientated companies are attracting particular attention while value (cheaper) companies are struggling to gain any momentum. It’s hard to see significant upside from the Top 20 stocks and we see increased opportunity in the small to mid size segment of the market.

SUMMARY

In short, we expect some short-term volatility to continue across the share markets as Trade Wars continue, but value is emerging in some markets. Regulatory intervention has had the desired slowing effect on the property market which is good for next home buyers, but property owners do need to start budgeting for increasing loan repayments. As always, any changes to your strategy should be considered in line with your long term plans and discussed with your adviser first.

If you have any questions about the above, please do not hesitate to contact us on 03 9686 4976 or info@choicecapital.com.au.

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