Australasia

Tuesday, December 22, 2015 - 10:02

Ayers Rock

Sentiment toward stock markets and currencies Down Under remains in thrall to commodities and China, although the Auckland market in particular is doing its best to break this historic link.

A turn in milk prices and global dairy markets would nevertheless be a potential benefit to New Zealand’s financial markets, while crumbling iron ore, gold, oil and copper prices threaten to hobble Australian share prices.

However, there are some signs of strength in other areas of the Aussie economy. A spurt of takeover activity on the Sydney market also suggests someone, somewhere thinks there may be some value emerging.

In addition, Aussie stocks seem hopeful that the new Liberal Prime Minister, Malcolm Turnbull, can deliver a pro-business Government following his successful party coup in the autumn.

Politics

Australia’s cricketers lost the Ashes to England and although their rugby union team then exacted revenge in the autumn even that clinical display paled next to the manner in which Malcolm Turnbull replaced Tony Abbott as Australia’s Prime Minister.

Turnbull became his country’s fifth leader in six years after he won a snap Liberal party ballot and ejected from office the increasingly accident-prone incumbent, Mr Abbott.

Abbott’s popularity had waned after gaffes on a number of subjects, ranging from Aboriginal rights and callous remarks about the death of an Aussie solider in Afghanistan.

Opinion polls had begun to give big leads to the opposition Labor Party, under Bill Shorten, prompting Turnbull to swoop.

Parliment Canberra

New mood

The new Prime Minister has already started to put his stamp on Canberra, reversing his predecessor’s decision to include knights and dames in the Australian honours system, postponing university deregulation until at least 2017 and promising a review of the taxation system.

In New Zealand, John Key is still at the helm after seven years as Prime Minister and his 2014 election victory.

His National Party’s parliamentary majority will not be tested again until 2017 but New Zealanders will vote on whether to change their flag in March 2016, when they choose between the current version and one alternative, itself selected by a public postal ballot in November.

Key has been a leading proponent of a change in the Kiwi flag.

Economics

Tony Abbott ultimately paid for the price for Australia’s economic slowdown. The Lucky Country has enjoyed 24 consecutive years of GDP growth to take it within touching distance of the Netherlands’ world-leading 1981-to-2008 streak but weak copper, oil, iron ore, coal and gold prices are piling on the pressure.

According to research from BlackRock 32% of Aussie exports go to China, the highest figure in the G20.

That may now be a hindrance rather than a help as the authorities in Beijing look to rebalance their economy in a shift away from construction and exports toward consumption and services.

Economic momentum is waning Down Under

Economic momentum is waning Down Under

Source: Thomson Reuters Datastream

The Reserve Bank of Australia tried to help by cutting interest rates. Central bank Governor Glenn Stevens has also joined the so-called race to debase, talking the Aussie dollar down toward a to six-year low against its American counterpart.

Stevens’ opposite number in Auckland has proved no slouch in this department either.

Reserve Bank of New Zealand Governor Graeme Wheeler lowered the Official Cash Rate four times in 2015, as milk prices and worries over demand from a slowing Chinese economy weighed heavily.

The Kiwi and Aussie dollars ended 2015 with attempted rallies as the US Federal Reserve dithered over whether to raise rates or not.

Interest rates are moving lower again Down Under

Interest rates are moving lower again Down Under

Source: Thomson Reuters Datastream

The Kiwi and Aussie dollars are trading near six-year lows

The Kiwi and Aussie dollars are trading near six-year lows

Source: Thomson Reuters Datastream

Markets

Sydney’s ASX-200 appears to correlate closely with the Bloomberg Commodities benchmark, while Auckland’s NZX-50 benchmark is looking to forge a break away from a similar historic trend.

New Zealand at least offers a few stocks which have juicy dividend yields, notably some banks and property firms, which may explain its 2015 renaissance in a low-interest-rate world.

Australia’s commodity link means an improved economic outlook worldwide and in China in particular could be a positive for Sydney’s stocks in 2016.

Commodities tend to set the tone for the Sydney stock market ...

Commodities tend to set the tone for the Sydney stock market ...

Source: Thomson Reuters Datastream

...although Auckland is trying to break free from their influence

Commodities tend to set the tone for the Sydney stock market ...

Source: Thomson Reuters Datastream

As 2015 draws to a close the Bloomberg Commodities index stands at a fresh 16-year low, as copper, aluminium, iron ore and gold prices all slide.

Optimists will however point to a surge in merger and acquisition activity as an argument in favour of Aussie stocks, as the series of bids may suggest a lot of the bad news is already in the price.

Woodside Energy may have abandoned its play to buy Oil Search after the rejection of an initial A$11.6 billion (£5.5 billion) while fellow oil and gas producer Santos has rejected a $7.1 billion (£3.3 billion) approach from a sovereign wealth fund.

Ports and railroad operator Asciano has also drawn a $6.8 billion (£3.2 billion) offer from a consortium led by local logistics expert Qube, which is hoping to trump a rival bid from Canadian asset manager Brookfield.

AJ Bell’s top tracker for Australasia

AJ Bell’s free investment guidance service is based on our list of sixteen Top Trackers. One of these directly relates to Australasian markets.

The iShares Core MSCI Pacific ex-Japan ETF has the EPIC code of CPJ1 and a SEDOL of B580X30. It comes with a near-60% weighting toward Australasia. Leading sector positions include financial services, real estate, industrials and basic materials.

This tracker does not feature in the Cautious or Balanced portfolios but has a 6% weighting in the Adventurous portfolio.

These articles are for information purposes only and are not a personal recommendation or advice. All data shown is correct at the time of writing.

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