By -Kaivalya Kandarpa & Simon Herrmann.
The Australian stock market posted its first annual decline since 2011 after three consecutive years of gains. Whilst the ASX200 looked like it would break through the 6,000 mark back in March and April, it subsequently followed a downtrend to finish the year 2.1% lower.
The Reserve Bank of Australia (RBA) slashed the interest rate twice during 2015. The first rate cut of 25 basis points was announced in January, which boosted stock market returns at the beginning of the year. The RBA then reduced the interest rate by a further 25 bps to 2.00% in May. Governor Glenn Stevens stated that the cut aimed to encourage borrowing and spending activities in the economy and stimulate an increase in household demand.
Energy and Resource Stocks Tumble amid Commodities Selloff
Global commodity prices across the board slumped to multi year lows in 2015 amid slowing demand from emerging economies and surplus supply. Crude oil prices fell to ten year lows as oil producers around the world, especially members of OPEC, failed to lower production levels. Gold prices continued to ease throughout the year as stronger USD as well as declining physical demand weighed on the commodity.
Both resource and energy stocks significantly underperformed the broader market as investors continued to reduce exposure from volatile mining and exploration companies.
Regulatory Changes Weigh on Bank Valuations
The financial regulator Australian Prudential Regulation Authority (APRA) increased the risk weight attributed to home loans from 16 percent to a minimum of 25 percent. The regulatory change is only applicable to the Big Four banks and Macquarie Group (ASX:MQG), and will come into effect on July 1, 2016. As a result, the banks were forced to raise capital in order to comply with the changes.
The Big Four banks steadily increased cash profits which resulted in healthy dividend growth for investors from the year 2012 until 2014, but were not able to extend the gains to the subsequent year. Whilst CBA and WBC managed to recover considerably since the ‘August selloff’, ANZ and NAB struggled from downward pressure.
Small-Mid Cap Stocks Back on the Radar
Wise-owl favours the growth potential of small and mid-cap companies as we consider the current market environment to be favourable for these stocks. The Small Ordinaries have gained 2.8% in 2015, significantly outperforming the ASX200.
Moreover, investors seem to favour small and mid-cap companies which may be attributed to the so called ‘Turnbull effect’. Malcom Turnbull, appointed as Prime Minister in September 2015, actively encourages start-ups and promised financial support for entrepreneurs.
Business Confidence reached a two-year high in November, according to the report released by Nab. The bank attributes the 8.3 percent surge of the index to Turnbull’s leadership. In the latest mid-year budget, the prime minister allocated $1.1 billion to boost innovation and encourage small businesses. The Nab business report also pointed towards a shift from mining to non-mining companies as the cheaper Australian dollar and lower commodity prices make investors wary of the mining sector.
Small cap companies such as Bulletproof (ASX: BPF) or Freelancer (ASX: FLN) have enjoyed a strong buying pressure in 2015. Meanwhile, high yield stocks like Telstra (ASX: TLS), Woolworths (ASX: WOW) or Wesfarmers (ASX: WES) ran out of favour as investors pursued growth opportunities elsewhere.
Investors Worry about Contracting Chinese Manufacturing Activity
As China’s economy transitions to a more service based economy, manufacturing activity contracted throughout the year. The country’s GDP dropped 1.4% in 2015 compared to the previous year. The country’s imports fell more than 13% compared to 5 years ago.
Australia is significantly impacted by the slowing economy, as China remains Australia’s most important trading partner. Whilst the slowdown sparked a selloff in commodities, Australia is also heavily dependent on Chinese demand for its iron ore exports and other resources. The disappointing manufacturing data from China has also been causing broad-based declines in the Australian resource sector.
Australian Dollar at 6-Year Low
The Australian dollar slumped to a six year low in 2015, a level that was not seen since the GFC. As many investors consider the local currency to be a ‘mining currency’, lower commodity prices and falling interest rates put pressure on the value of the currency. At the same time, the weakness in the AUD can be contributed to a strong USD, which gained against most other major currencies as the US economy continues to strengthen and the FED started tightening monetary policy.
Kaivalya Kandarpa is an Equity Analyst and Client advisor at Wise-Owl and is an active member of the Australia India Business Council in NSW.
Simon Herrmann is a financial advisor and an Equity analyst at Wise-owl providing general advice on Australian equities to retail clients. Simon is RG146 compliant in the areas of general knowledge, securities and derivatives. He has an extensive knowledge on how to analyse and trade securities and the principles of risks associated with investments. As an analyst Simon has compiled numerous research reports for ASX200 and small-mid capitalization stocks for Wise-owl. His area of expertise includes fundamental and technical analysis.
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