FYI | Dec 04 2018
By Peter Switzer, Switzer Super Report
Are things looking up?
A subscriber emailed me and asked if I could explain why our stock market has done so badly for a decade. This question comes when things could be about to change and we might have Donald Trump, Xi Jinping and Bill Shorten to thank for it!
Let’s leave Bill’s positive role for stocks until later and start off looking at what positives came out of the G20 get together for the leaders of the world’s biggest economies.
Obviously, the news out of Buenos Aries (Argentina) that the Presidents of the USA and China have agreed to call a truce for 90 days, ahead of wide-ranging talks, is going to be well-received by the markets.
Clearly, this isn’t the best news possible but was always the most likely, positive scenario, with the negative version looking like a blow up walkout affair from Donald’s and Xi’s dinner date after the G20 meeting.
In last Saturday’s Report, I pointed out the views of Eleanor Creagh, Saxo Capital Markets strategist, who said: “I think the tone for trading heading into December will be heavily reliant on the outcome of this weekend’s much anticipated dinner. The most optimistic outcome we are hoping for is a tariff ceasefire and commitment to continue negotiations, but even this could be misplaced optimism.”
That’s what she predicted and that’s what we got, so I reckon stock markets should respond positively to the news. I can’t imagine a full blown offsetting market rebound to wipe out the memories of what has happened to stocks since the start of October but the news out of Argentina should help stocks beat gravity.
Driving our market down were external issues, such as Trump trade war talk, Fed rate rise concerns, re-revaluation of US tech stocks, a China slowdown, an oil price slump and other worries linked to Brexit, the EU and Italy and so on. Locally we’ve had house price collapse hype, the Royal Commission beating up on the banks and other financial businesses, which make up 30% of the S&P/ASX 200 index and this happened in concert with lower commodity and energy prices, which were linked to global growth and demand not helped by trade war and OPEC turmoil talk.
It has been a perfect storm of bad stuff to hurt stocks but we could see circumstances soon change. And the decision by Presidents Trump and Jinping to hose down the heat in the trade war could be a positive circuit breaker.
There has been some good news out of the EU regarding Italy and its budget blow up and we should keep our fingers crossed that on December 11, the UK Parliament doesn’t create a Brexit bomb. But this is one threat to stocks that still looks like a worry, with Labour expected to vote down PM May’s exit deal.
The importance of a bad Brexit vote to global stock markets isn’t clear but I really wish the Poms would swallow their medicine and get on with it. Uncertainty hurts stock markets and this Brexit story has been one great balls up that hasn’t helped stocks.
OPEC is due to meet in Vienna this week and hopes are rising that an oil supply cut will arrest the fall in prices that always hits the US stock market negatively. “Oil prices bounced back late in the day on Friday on reports that the OPEC committee had suggested a 1.3 million barrel per day cut from the October level,” said Fawad Razaqzada, market analyst at futures brokerage Forex.com. “The pressure has certainly been building as prices continued to fall amid ongoing concerns over excessive supply and lower demand growth … If no action is taken, oil prices could certainly drop further, while a production cut should lead to a sizeable rebound for these severely oversold levels.”
As you can see, the lay of the land for stocks coming out of overseas is looking better in December than they did in September to November. And remember, as the Fed chief, Jerome Powell pointed out, the US stock market doesn’t look too expensive now.
And now for Bill Shorten and his potential positives for stocks. Ahead of the expected May election, the threat of Labor with changes to franking credits and tax refunds for SMSF retirees, negative gearing reforms and a lower capital gains tax discount from 50% to 25%, could all be negatives for stocks. And the financial stocks could feel the heat from the Government’s and Bill’s plans to make our financial businesses better corporate and consumer-friendly citizens.
However, it’s not all bad Bill news for stocks. The promised franking credit changes and the likelihood of Labor becoming the Government means that a lot of public companies sitting on a pile of franking credits could get on the line started by Rio and BHP to offer share buyback opportunities.
The likes of Woolworths and Caltex are often named as operations with tax riches, which could easily be disposed of to SMSF and other low-tax paying Australians ahead of the May election.
And this not only will give stock players money that they could easily put back into stocks, which could help the market trend higher. Also, the very action of a buyback reduces the number of shares on the market and leads to higher share prices, all things being equal.
WAM’s Geoff Wilson was quoted in the AFR arguing the case for companies to return tax credits to shareholders. “They belong to the owners and if Labor is going to diminish their value, it’s incumbent on boards to distribute them.”
If the improving external threats to stocks going higher meets a run of buybacks, along with an Aussie economy that continues to show good growth potential, it doesn’t look too courageous to expect an overdue uptick for equity markets.
Who would’ve thought Bill Shorten would have been an accessory to Donald Trump and Xi Jinping in driving stocks higher?
I guess he’s like an elf helping create a possible Santa Claus rally that could roll into the new year and be an offset for the negativity that is bound to persist until we see the Royal Commission recommendations to our bank share prices.
On that subject, could the banks do a buyback play? Probably not, as they might need to keep some ammo until they see what their punishment looks like.
PS: To my subscriber who’s wondering why our market “has done nothing in 10 years”, if you consider all the above and throw in the GFC, the important end of the mining boom to a revolving door of PMs in Canberra to our lack of FANG-like companies, you have a really good idea of why our stock market, as a whole, has had a shocker.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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