End of Quarter Market Review + Champion Stocks

In this wire, we recap key market events, the current investing environment, and our market outlook. We also reiterate our Champion Stocks.

Market review

Despite some periods of volatility on the back of a softer global macroeconomic outlook, the long-running US-China trade dispute, Brexit negotiations and geopolitical tensions in the Middle East, record low interest rates have provided support to equities markets. The ASX 200 finally surpassed its 2007 peak in the quarter hitting a record high of 6,845 on 30 July, before closing the quarter up 1.1% at 6,688 points. The S&P 500 continued to set new highs gaining 1.2% for the quarter to 2,977 points. China’s Shanghai Composite Index declined 2.5% to 2,905 points while the MSCI World Index fell 0.5% to 521 points.

The profit reporting season in August was largely cautious with marginally more misses than beats along with a general trend of softer guidance for FY20. Nevertheless, the main upside this reporting season came from dividends with almost 36% of large companies beating expectations. Trends on cost management and sales growth were mixed with miners noting higher capex and wage pressures. Looking ahead as a key theme for FY20, a number of companies outside the Resources space announced cost management initiatives. Some profit results which exceeded expectations included CSL, JB Hi-Fi, Treasury Wine Estates and Suncorp. On the other hand, we had disappointing results from a2 Milk, Brambles, Orora and Iluka Resources.

The standout quarterly performances for the sector indices were Consumer Staples, up 10.0%, with gains of 15% for Coles and 12% for Woolworths, Consumer Discretionary increased 6.6%, and Health Care gained 6.2%. The Materials sector was the weakest, down 5.5% and Communication Services lost 5.0%.

In commodities, spot gold gained 4.5% to US$1,472 per ounce, hitting a 6 year high of US$1,552 on 4 September, equating to a record high A$ gold price of A$2,290 per ounce. Elsewhere, the quoted iron ore price fell 20% from US$118 to US$94 per tonne, while the Brent oil price remained volatile, closing the quarter down 7% to US$59 per barrel, as the market continued to look for a new equilibrium following the recent attacks on a key Saudi Arabian oil facility.

Investment environment

The latest Australian GDP data showed the annual economic growth rate slowed from 1.7% in the March quarter to 1.4% in the June quarter, where weakness in household spending and lower residential construction offset strength in exports and Government spending. Underlying inflation for the June quarter was 1.4%, remaining below the RBA’s target inflation band of between 2% and 3% since early 2016.

We forecast the Australian economy to grow by 1.8% in calendar 2019 and then 2.5% in 2020. By comparison, we expect the world economy to grow by 2.7% both in calendar 2019 and 2020.

Low inflation and soft economic growth provides support for the RBA to cut the official cash rate by another 25 basis points to 0.75% by end of calendar 2019, with the potential for the cash rate to move even lower. We forecast the Australian dollar to remain below US70 cents over the coming months.

Share market outlook

Looking ahead, investors are likely to remain cautious on the back of geopolitical developments as well as the timing of a final trade deal resolution between the U.S. and China. U.S. President Donald Trump and China's Xi Jinping are in ongoing negotiations trying to reach an amicable resolution on issues including how to roll back tariffs and enforce a deal.

On a positive note however, the U.S. Fed, the European Central Bank, and other central banks have signalled moving to more accommodative monetary policies as they closely monitor the global economic environment.

The Australian share market is currently valued on a forward consensus price earnings ratio of 16.3x, which is 12% above the long term average of 14.6x. The forward consensus dividend yield for the Australian share market is attractive at 4.3% (80% franked), particularly when considering the historically low 10 year bond yield of 1.0%, and an average 12 month bank term deposit rate of 1.4%.

All up, modestly positive domestic and global indicators should enable the Australian share market, as measured by the S&P/ASX 200, to reach our target of 7,000 by the end of fiscal 2020, which is ~5% above the 30 September 2019 close of 6,688 (excluding dividends).

Champion Stocks

We reiterate our ‘Champion Stocks’ which have remained the same since July 2019: Amcor, Brambles, Challenger, CSL, Goodman Group, Lendlease Group, Netwealth Group, Sonic Healthcare, and Transurban Group.