The past week’s developments…
As at 1.30pm on 19th August 2011
After stabilising over the past week, global sharemarkets experienced another bout of downward pressure overnight with major markets down in Italy (-6.1%), Germany (-5.8%), France (-5.5%), Spain (-4.7%), UK (-4.5%), the US (-4.5%) and Canada (-3.1%). Half way through the Australian trading session, the local market is down by 2.8%, with resilient performances from consumer staples companies (-1.6%), Telecommunication Services (-1.4%) and utilities (-1.2%) providing some protection for local investors.
The newsflow overnight was mostly negative and this sparked a return to concerns from the past few weeks, namely, the stability of the European financial system and the global economic outlook. Both of these concerns reflected the impact of the US Philadelphia Fed Manufacturing Survey which plunged to -30.7 in August from +3.2 in July, with investors noting that the US outlook had deteriorated. The weakness in the report was widespread with the diffusion Index, shipments, new orders, manufacturing employment and inventories all down. The outlook from the report also softened, as did planned capital investment spending.
The decline in the Phili Fed suggests the national ISM Manufacturing Survey (which assesses the state of US
industry by surveying executives on expectations for future production, new orders, inventories, employment and deliveries) will move below 50 in coming months, which signals contracting activity in this sector. Although this does not necessarily signal an immediate US recession, markets closely follow this data point and will be concerned about its rapid decline over recent months (see Chart 1). However, US spending is currently holding up well (retail sales are growing at 8.5%), employment is still growing (albeit at a modest pace) and the US economy has been able to grow with the ISM Manufacturing Survey at 45. At present US industrial production is still fairly robust (as is Japan’s), but there is little doubt that if this eventually contracts, then this will impact the US labour market and flow onto US spending growth and economic growth.
A key for markets over the next few weeks will be the policy response by central banks. The US Federal Reserve will consider another round of quantitative easing to support growth, but evidence is scant that QEII supported activity much. In addition, the hurdle rate for using QEIII is higher as US inflation has risen in the past three months at an annualised rate of 3.1%, relative to 0.4% in October 2010 (just prior to QEII). Quantitative easing is known to be highly inflationary.
Perpetual continues to closely monitor this situation, maintaining our investment approach, which has served clients well in this sort of environment. That is, investing in quality listed companies with consistency in cash flow generation, reliable dividend income growth and good management are likely to find favour with investors and should outperform in a more challenging trading environment. The key is avoiding ‘value traps’ and taking advantage of ‘value gaps’. This may require wisdom and patience, but these characteristics have always rewarded investors well in the long-run. These developments will be discussed in more detail in the August edition of Perpetual Perspective.
Disclaimer
This information has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not intended to provide you with financial advice. The views expressed are the opinion of the author at the time of writing and do not constitute a recommendation to act. Any information referenced is believed to be accurate at the time of compilation and is provided by Perpetual in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.
