While the second half of calendar year 2018 was one of the worst periods for global share markets in recent memory, the start of 2019 has turned out to be one of the strongest. Since the 1st January the ASX200 index has rallied +9.2%, while the global MSCI index, which represents the returns of global shares, has gained +13.0% (in local country currencies). So what has changed?
Firstly, it appears that fears of an imminent global recession that were permeating markets in late 2018 were overdone. Underlying global growth, while slowing, remains relatively robust overall. The recent softening of rhetoric between the US and China in their ongoing trade negotiations has also helped improve sentiment, although it remains to be seen whether the two powers can come to a formal trade deal.
Secondly, the US Federal Reserve changed its policy guidance in January from a stance with a bias towards increasing interest rates to one of favouring a pause in rate rises. In doing so they are helping to perpetuate the “goldilocks” conditions of the past few years which have been positive for global sharemarket returns. That is, economic conditions strong enough to sustain economic growth, but with low interest rates. As long as the inflation environment remains benign, which it currently is, the Fed feels it has the room to be patient with further rate rises. Domestically the RBA has also shifted its bias, from one of future rate rises to the possibility of rate cuts, largely in response to what is happening in the Australian housing market.
The graph below shows the return of the ASX200 Accumulation Index (which includes dividends) since the start of the current financial year. As you can see there has been a strong turnaround:
Australian Company Reporting Season
Over the past month most ASX listed Australian companies reported their half yearly profit for the second half of 2018, along with forward earnings guidance. Despite low expectations, the Feb 2019 reporting season surprised on the upside, with aggregate reported earnings growth of +4% across the market, a respectable number given expectations. Most of the growth came from the resource sector (+13%), which helped outweigh falling earnings in the Industrials sector. The Financials sector reported earnings growth close to that of the broader index, but experienced strong price gains due to the outcome of the Hayne Royal Commission. Specifically Hayne avoided recommending an end to vertical integration, which could have seen the break-up of some large Australian companies.
Libero’s MDA portfolios enjoyed a good reporting season. In terms of specific results, A2 Milk, a recent addition to the portfolios, posted strong gains after a record result due to the seemingly endless demand from China for infant formula. Xero and Goodman Group also posted very strong numbers, the first due to the increasing shift to efficient cloud based software, the latter due to its investments in warehousing and state-of-the-art automated logistics facilities.
If you have any queries please don’t hesitate to call or email.
Glen Holder, BCom, DipFP, MAppFin, CA
Director – Investment Management