US economic data was generally okay with a strong rise in consumer spending in July, consumer confidence remaining strong, regional manufacturing conditions indexes for August actually improving, jobless claims remaining low, the goods trade deficit narrowing a bit and core durable goods orders continuing to trend up gradually, albeit shipments were soft. Core private final consumption deflator inflation remained low at 1.6% in July which along with the trade war threat to US growth keeps the Fed on track to ease again in September.

 

The Eurozone saw some mixed data with a slight rise in economic confidence, the French INSEE business confidence survey holding up reasonably well and a slight pick-up in bank lending, but the German IFO business index fell further in August, unemployment was flat in July at 7.5% and core inflation was unchanged at 0.9%yoy. All of this keeps the ECB on track for significant easing (with a likely combination of rate cuts, tiering of negative rates on bank reserves and quantitative easing) despite pushback by some ECB hawks (Lautenschlager, Knot and Weidman).

 

China’s composite business conditions PMI fell just 0.1 point to a still reasonable 53 in August. Services sector conditions continue to hold up but manufacturing softened and is vulnerable to further weakness given the tariff war, so further policy stimulus is likely.

 

Australian data releases were a mixed bag. A broad-based plunge in construction activity and a fall in business investment will act as another drag on June quarter GDP growth. Against this business investment plans point to modest growth in this area over the year ahead led by mining investment. Meanwhile new home sales were soft in July according to the HIA, credit growth remains soft (with owner occupier credit up but investor credit still falling) and building approvals continue to plunge with another sharp fall in July.

 

The Australian June half reporting season is now complete. Reporting season was the worst since 2015 as credit crunch/ weak household incomes continue to bite.  Offset by the lowest bond yields in Australian history. Stocks with good Franchises Models & exposure to sub-sector growth delivered convincing robust surprises.

 

Key negative themes were that the domestic credit crunch continues to hit Bank & Industrial Earnings & margin pressures emerging on rising costs. Infrastructure spending has been insufficient to offset housing build slump.

By market cap/EPS weight downgrades 85% vs upgrades 15%: on a market cap basis the differences were even more stark with downgrades dominating 90% to downgrades 10%, driven by ASX Banks (CBA -4,7%), Resources (BHP/ RIO), Telstra and Insurers in particular. 

 

As a result, 2018-19 earnings growth has come in around 1.5% from around a 2% consensus expectation at the start of August. Resources stocks are seeing earnings growth around 13% compared to a 2% decline for the rest of the market, but with healthcare stocks also seeing double digit earnings growth. Downgrades have been greatest amongst energy stocks, financials, telcos and industrials. The good news though is that some retailers were upbeat about interest rate cuts and tax cuts boosting spending and property related companies pointed to signs of increasing housing demand. While Australian shares fell 3.1% in August this was due to global trade war concerns, with investors reasonably forgiving of the soft profit reporting season overall thanks to low interest rates and hopes for a stimulus boost to come. While consensus earnings expectations are for a pick up in earnings growth to 7.5% this financial year, the slowdown in economic growth, cautious outlook statements and falling commodity prices suggest some downside risk to this.

 

Share markets remain at high risk of further weakness in the months ahead on the back of the ongoing US/China trade war, Middle East tensions and mixed economic data as we are in a seasonally weak part of the year for shares. But valuations are okay – particularly against low bond yields, global growth indicators are expected to improve by next year and monetary and fiscal policy are becoming more supportive all of which should support decent gains for share markets on a 6- to 12-month horizon.

 

Low yields are likely to see low returns from bonds once their yields bottom out, but government bonds remain excellent portfolio diversifiers.

 

The combination of the removal of uncertainty around negative gearing and the capital gains tax discount, rate cuts, tax cuts and the removal of the 7% mortgage rate test are leading to a rise in national average capital city home prices driven by Sydney and Melbourne. But beyond an initial bounce, home price gains are likely to be constrained through next year as lending standards remain tight, the supply of units continues to impact and rising unemployment acts as a constraint.

 

Cash and bank deposits are likely to provide poor returns as the RBA continues to cuts the official cash rate.