We are now in the full swing of reporting season with headline results coming in…
Politics and policy will dominate headlines over the next 8 weeks following the Prime Ministers announcement for an early election over the weekend. This capped an interesting week from the government where two government agencies seemed strangely at odds with their forward assumptions. The treasury forecasts in the budget painted a fairly rosy growth outlook but actions by the Reserve Bank seemed to suggest otherwise. On Friday the interest rate futures market reacted swiftly to a downgrade of inflation forecasts from the Reserve Bank. The RBA’s quarterly monetary policy statement (released on Friday) said that core inflation would not meet the 2 to 3% target for 2016 and that it is unlikely to meet this target until mid-2018. They left the estimated economic growth at 2.5 to 3.5% for 2016 and 2017 and predicted unemployment will remain stable. There was no guidance given on the interest rate outlook but futures markets are now pricing in a 66% chance of another cut before Glen Stevens rein as RBA Governor ends. In our mind low inflation is here to stay primarily because it is a function of low oil prices and low wage growth (neither of which are likely to disappear anytime soon) but the primary concern is that this round of monetary policy easing is not going to stimulate growth or inflation but it will force savers and retirees to push up the risk curve which may be the point.
Major bank reporting season (first quarter) kicked off last Monday with Westpac with the Commonwealth Bank of Australia completing the set this morning. Across the sector profit growth was mixed with both ANZ & the NAB’s headline Net Profit/Loss after Tax (NPAT) being effected by various one-off write downs. The below table highlights some of the key 1Q16 numbers for the major banks. Click here for our full wrap up.
Given recent company results and the lower interest rate environment its fair to say that the days of investment grade bonds producing a consistent 6% return are well gone. Equity markets will inevitably be much more volatile and credit will be used as a stepping stone for those moving out of deposits in the search for yield. This makes the asset selection process critical and quality of research even more important. A small deterioration in credit quality will erode any forecasted returns and that’s why it is essential to remain vigilant in your asset selection process.
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