Australian Market Summary – 17 November 2017

From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.

This week I am going to be pretty short and sharp.

We had some consolidation in markets locally, after what has been a pretty tidy rise this past 6 weeks.

For now, sentiment remains entirely hostage to the passing of US tax reform legislation. On that front, it remains difficult to predict, particularly given the various factions within the Republican party and the concerns many conservatives have over the likely blowout in government debt this tax cut will trigger.

Local Economic Data mixed (again)

On the economic front this week we had more moderately constructive news through, with business conditions at their highest recorded level in 20 years according to the October NAB Business Sentiment index.

The report was a funny one and really typifies the current economy – business conditions are terrific, and improving, profitability is strong, but actual business confidence is fair to middling, and the indicators of forward order flow is easing.

It seems that even with business conditions really kicking into gear, management are still reluctant to be too optimistic on the future.

Part of the problem continues to be Australia’s distinct lack of productivity growth, its misallocation of capital into housing and the lack of new industry drivers locally to take the ‘growth baton’ on from the past 20 years of resources boom.

But more on that later.

Employment conditions continue to improve, with another month of full-time employment growth coming as part-time jobs turn to fully-paid ones.

SEEK (SEK) shares surged through $19 this week as the company reported October new job ads rose a whopping 16% annually.

The trend here is constructive.

But wage growth remains moribund. This week saw the Q3 wage growth number rise timidly from 1.9% annualized in the June quarter to a mere 2.0% in the year to September.

This level of wage growth is anemic to say the least, and far from capable of sustaining neither the local economy, the massive accrued household debt and importantly, Australia’s Federal Budget assumptions.

With this in mind, its understandable Australian consumers remain decidedly indifferent to economic conditions, with this week’s Westpac Consumer Confidence remaining bereft of momentum and locked in the same middling range it has been in for the last 4 years.

A must-read article by Matt Barrie

Click here for an article that Matt Barrie, the founder and CEO of Freelancer – one of Australia’s great recent corporate success stories – wrote.

It is a must-read for anyone seeking some context on the problems facing Australia’s economy in the years ahead.

As you well know from reading this column, these are issues that I take great interest in as an allocator of investment capital.

Though there are some topics in the article I may disagree with, or have a different angle on, the essence of Matt’s article relates to the far less rosy economic outlook Australians face due to the structure of our economy and its reliance on China, low-value added commodity exports and services.

He is absolutely spot on in his assessment in my mind, and I have argued this every other week for the past 2-3 years.

Australian productivity growth has been non-existent in the past 10 years with legislation slanted toward capital allocation to non-productive assets (housing), and with the combined impact of rising accommodation costs and poor wage growth, household debt has spiraled.

These issues can’t be denied, wished-away or ignored, and its precisely why we rant about the need for investors to diversify more funds into international investment markets for the benefit of long-term returns.

Year-to-date PRIME’s International Growth Separately Managed Account (SMA) has risen 16% and well ahead of the +8% gain made in the ASX200 Accumulation index.

This is not a one trick pony. This trend we expect to continue for many years to come, and will be augmented by my strong conviction that the Australian Dollar is headed back to 70c or less in the coming 12 months.

I would note again, that the Australian Government’s Future Fund has a mere 6% invested in Australian Equities and 4x that amount (24%) invested in foreign share-markets.

Please give the article some consideration, and do drop me a line directly if you want to chat through any of the topics in greater detail. It really is a desperately thought-provoking piece, but one that is very obvious if you are willing to open your eyes to see it.

Just ‘because’ the last 20 years have been good isn’t justification for ignoring the changing fundamentals of our economy.

‘She’ll be right’ won’t cut it in the next 10 years if all you have in your portfolio is Australian large-cap shares.

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Aus companies

For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.