iInvest Eye on the Market – April 2016
The first quarter of 2016 commenced with a sell-off for local stocks after a surge into the final quarter of 2015. January was bye and large a very red month for local investors as we saw strong selling in local banks and major resource stocks. By mid-February the S&P/ASX 200 had fallen just over 10%, pushing the local market into a bear market. Reporting season through to the end of February saw local buyers return to the market, however, which resulted in the S&P/ASX 200 rallying back above the 5000 point level.
Dividends were a big focus through the reporting season, since with local interest rates remaining at record lows, investors have remained heavily focused on dividend payouts. Resource stock dividends were heavily discussed leading into their results, with both BHP and Rio in focus as falling iron ore prices placed pressure on miners to manage their balance sheets.
The local banks have remained weak as concerns about their profit margins continue, and talk of a Sydney property bubble run hot. In our view this looks very overdone, with Sydney average house prices falling only 1.5% in the final quarter of 2015 versus a rise of 13% in the previous 12 months. We still feel local investors should buy our major banks on this weakness, and while the dividend levels may need to be cut, we don’t see the sector as being in danger of collapse.
Volatility has remained very high during the quarter as concerns over the world economy remain intact. Concerns about growth in European economies and uncertain trading conditions in the Chinese share market have seen investors jumping out of local stocks.
Slow growth in the US economy looks to have put a stop to rate rises for the US market for the remainder of 2016. Unless growth rates improve over the US summer we expect the Feb reserve to remain on hold for 2016.
With local interest rates remaining at 2% and unemployment at very low levels, the RBA is unlikely to drop rates lower. The local currency has reacted to this steady interest rate environment by pushing over .76 US cents.
Commodity prices have rebounded hard from the very over-sold levels seen in the first few weeks of 2016. Iron ore has lead the charge with a recovery to over $50 US a tone. Oil made a strong recover after trading under $30 US a barrel. With West Texas Intermediate currently trading at US$38.50 and the US moving into its summer driving season we could see further upside over the next month or so.
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