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Investment commentary September 2016

Quick overview

  • Defensive stocks are underperforming
  • The US economy has rebounded strongly and interest rates will probably rise
  • Australian companies reported declining profits in the year to June, but are expected to grow again in the 2017 financial year

Shifting appetites

We’ve started to see some rotation in equity markets during August with money moving out of defensive stocks. The best performing sectors over the last few years have been those that offer reliable earnings and stable dividend yields. Investors looking for income have favoured these defensive stocks as the long period of low interest rates since the financial crisis has meant yield from fixed income investments like term deposits and bonds has been exceptionally low. With the prospect of higher interest rates on the horizon we expect to see these defensive stocks continue to underperform.

Fed hikes

After a bit of a scare earlier in the year, current estimates of the US economy indicate that it grew at an annualised rate of 3.5% in the September quarter. Employment growth has also been quite strong and the jobless rate is at 4.9%. Core inflation is already at 2.2% and the Federal Reserve has been preparing the market for interest rate hikes. At this stage it doesn’t seem likely that rates are going to go up in September, but we’ll probably see them increase before the end of the year.

Weak Aussie profits expected to rebound

Australian companies reporting earnings for the year ending 30 June experienced a decline in profits of -8%. This was largely due to the resources sector where BHP wrote off nearly US$5bn in oil and gas assets and US$2.2bn in relation to an environmental disaster in Brazil. Share prices had already factored in the bad news, and the ASX200 index has actually risen 4.6% so far this financial year. Consensus is for a big rebound in resources earnings next year of +30%, while industrial companies are expected to record +9% growth and banks just +1%.


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