The Australian Market Still Feels Like It’s 2015

The Australian market doesn’t seem to know that we have entered a new year. Markets are still acting like they were last year, nervous. China’s economic slowdown is affecting markets globally. Commodity prices aren’t getting any better. And Australian banking stocks are dragging the market down as we start 2016.

It only took one full trading session. The market has decided to carry over its poor performance from last year. The S&P/ASX 200 has dipped from its Monday high, dropping 2.75%. It sure does seem 2016 won’t be any different from 2015.

ASX 200 16 Jan

Source: Yahoo finance

China’s slow down is affecting us all

China is our biggest trading partner. We supply China with all sorts of goods and services but mostly minerals. Which is a problem in itself, I’ll get to that later.

A slowing Chinese economy is bad news for Australia. Some analysts believe the Chinese economy is slowing more drastically over the last year. At the start of this week, Chinese manufacturing PMI missed their forecasted value of 48.9 by 0.7.

What does this mean?

Manufacturing PMI (Purchasing Managers Index) is an indicator of economic health within the manufacturing industry. But knowing the definition isn’t all that important. It’s more important to know what the numbers imply.

China has been the biggest manufacturer since 2010. So if Chinese PMI beats forecasts then higher growth is expected for their economy.

If PMI figures above 50 equal desired growth. If PMI figures are below 50, this may indicate reactionary periods.

The recent PMI figures seem to be proving the comments true. China could be slowing faster than we thought. And this has our market scared.

Great Britain and the US also posted Manufacturing PMIs lower than forecasts, which might indicated this problem is not just limited to China. The US Federal Reserve just lifted interest rates last year in December. The rate hike symbolised that Federal Reserve feeling positive about US economic growth. But they may have lifted rates too soon. The chain effect of poor economic indicators could be the thing pushing our market down. Will we ever be rid of the 2015 curse?

Commodity prices aren’t getting any better

Commodities took a big hit last year. Thermal coal, iron ore and copper all had it rough. By the end of December last year coal was down 32% from its 2014 prices. Iron ore was down 24% and copper down 25%. And guess what? Things haven’t gotten much better.

Coal and copper have remained somewhat unchanged going into the New Year. Only iron ore has experienced a minor lift off their 11 year low. Yet many believe it will stay below $45.

Our two biggest mining companies BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] know all too well of the commodity decline. BHP and RIO both watched their profits dwindle, while shareholders sold off their holdings. BHP’s shares declined 35.36% last year, and Rio declined 23.35%.

Even the start of 2016, a new year, couldn’t change their downwards trend. Both BHP and Rio are off their Monday highs, down almost 3%. And poor Chinese economic indicators aren’t helping.

BHP and RIO may yet turn to different minerals to keep profits alive. One thing is almost looking certain however, their performance could be much like that of last year.

Banking stocks lack security

A lot of investors believe that bank stocks are stable. Banks are an investment that can’t lose. Yet if you bought and held the big four banks over the course of last year, you wouldn’t have much to show for it. Australian biggest four banks all either trended down or sideways last year.

Westpac Banking Corporation [ASX:WBC] and Commonwealth Bank of Australia [ASX:CBA] both were helped by a Christmas surge to finish almost even for 2015. But National Australia Bank [ASX:NAB] and ANZ Banking Group [ASX:ANZ] weren’t so lucky.  NAB traded down 8.73% while ANZ finished down 13.61%.

But what about this year? Well If I was asked to name a sector to be cautious of this year, it would be banks.

ASX Banks 16

Source: Yahoo finance

Investors don’t seem to have much confidence left in what used to be the benchmarks of security. And for now, investors seem happy to sell off bank shares to start 2016.

Härje Ronngard,

Junior Analyst, Money Morning

 


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read. Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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