This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Not only has Malcolm Turnbull assumed the Prime Ministership and announced a major overhaul of cabinet ministers, but signs are now starting to emerge that the housing market may have reached its top.
National auction clearance rates are set to see their lowest month in three years, and most significant auction clearance rates in the red-hot Sydney and Melbourne property markets are steadily easing as well. The Australian Prudential Regulation Authority (APRA) has increased the amount of capital the banks are required to hold against residential mortgage exposures, and capped the annual growth allowed in investor loans at 10%.
Investor loan growth has already begun to slow, and these policies are clearly beginning to have an effect. But the other major development in the past couple of weeks has been the renewed clamp down on capital flight by the Chinese government.
China’s stock market crash and unexpected currency devaluation prompted a significant uptick in capital flight. In response, on 8 September the State Administration of Foreign Exchange (SAFE) imposed a 20% reserve requirement on Chinese financial institutions’ currency forward sales, and exhorted them to closely investigate their currency businesses.
Previously, it was quite common for Chinese to bypass the US$50,000 annual currency exchange restriction by pooling together a number of family members’ limits in order to get a large sum of money out of the country. This popular method has also been sternly cracked down on as well.
It does seem fairly significant that these regulations corresponded with a slowdown in Australian property clearance rates.
In any case, a slowdown in the Australian property market has been a long time coming. Property has been one of the major forces supporting the economy as mining investment steadily dried up alongside the collapse in the global commodities market.
With this avenue for growth steadily slowing, the risks of a recession in Australia in 2016 have picked up dramatically. While Malcolm Turnbull may have wrested the Prime Ministership away from Tony Abbott, he may have done so during the most difficult period for the Australian economy since 1991 – dubbed by Paul Keating as “the recession we had to have.”
If property data continues to provide further evidence of a property slowdown, then the likelihood of the Reserve Bank of Australia (RBA) cutting interest rates down to 1.75% or even 1.5% within the next twelve months increases dramatically. Currently, the bond market probability for an RBA rate cut by December sits at 38%, dropping from 42% prior to Glenn Stevens’s speech on Friday.
If the performance of the ASX today is anything to go by (down 2.5%), the threats to the Australian economy over the next couple of months seem to be weighing heavily in the minds of investors. The Big Four banking stocks, darlings of self-managed super fund proprietors, are at significant risk of a downturn in the Australian economy and particularly the property sector. These stocks have been hugged to closely by many investors because of their excellent performance over the past couple of years and their continuing high yields, but the outlook for their stock prices are likely to cancel out any potential yield benefits in the event of a property downturn.
If the banks do start to see further declines as new capital requirements and a slowing property market start to weigh on their stock prices, this would severely impact the performance of the overall index. The materials and energy sectors both declined by 3.2% and 3.1% today, respectively, and their outlook over the next few months looks no better – global growth continues to slow and excess supply is still yet to leave the markets.
With the outlook for financials, materials and the energy sector all fairly negative over the next few months, we are unlikely to see the ASX returning to its April/May highs just below the 6000 mark, and indeed a significant break below 5000 could well be in the offing.
Australian stocks have been suffering today after global sentiment was dinted by the Fed leaving rates on hold. December is now the most likely date for the fed to raise rates this year, but in the wake of last week’s decision many believe they could be forced to wait until 2016, adding to the general sense of pessimism about the global economy.
The main bright spot for the ASX at the moment is the prospect of further mergers and acquisitions. But a general sense of pessimism is likely to continue until some decent data on the Chinese economy starts to filter out.
The China Beige Book report just came out stating that negativity about the Chinese economy has been overdone and is divorced from the facts. The Chinese services sector, which accounts for over half the economy, continues to show improvement in sales, pricing, volumes and capital expenditure based on their survey data.
With temporary disruptions to China’s output data dissipating over the coming months and stepped-up demands for further fiscal spending, there is some potential salve for global markets in the coming months as China steps investment in an attempt to achieve its 7% growth target.