Daily : At The Moment News
11 January 2016
Equity markets were mixed on Friday, as the US share market experienced its largest weekly drop in 4 years.
The US market was unable to hold on to early gains despite the release of strong US payrolls data. Our view is the US employment picture remains solid with 292,000 jobs created last month, and unemployment was steady at 5.0%. We remain focused on bigger picture and continue to have a positive medium term outlook,
looking through the current noise in markets. Sell-offs create opportunities and we stress the importance of investing in high quality stocks with solid business models. In today’s daily we discuss our portfolio
positioning and reiterate our views on our only mining position, BHP Billiton (BHP.AX).
US Boom vs China Gloom
China Suspends Trading Halt System
After the Chinese equity market was placed into a trading halt on multiple occasions last week, the Chinese
authorities decided to suspend the circuit breakers after only 4 days of implementation. We believe this
is a positive development as it removes the concerns around panic selling in the Chinese share market (as
herd behaviour saw investors rush to sell to avoid getting stuck in positions after the market was closed).
The Chinese and Hong Kong markets traded higher on Friday post the announcement.
Relief for Resources Sector
The materials and energy sector have been hit particularly hard in the recent selloff. We are significantly
underweight these sectors compared to the general Australian market index (ASX 200) and currently only
hold BHP. Sentiment is extremely negative on these companies and over the past 2 years they have
significantly underperformed the general market. However, it is said the darkest hour of the night comes
just before dawn. On Friday, despite a global market and oil selloff, the major miners BHP and Rio Tinto traded higher and Australian energy company Woodside Petroleum was up 4.6%. When companies rally with all indicators pointing to the opposite, it is generally conceived to be a positive sign and indicates that perhaps the worst case scenario has already been accounted for in the current share price.
US Economy Powers Ahead
The fact that almost 300,000 jobs were added in the US in December indicates that the economy is
continuing to grow at a solid pace. With more people employed, there is more money in the economy
that can be spent. This drives economic activity and spurs further growth.
Not only did the job creation in December surpass expectations, but the jobs figures from the previous
two months were revised up significantly. November figures were revised from 211,000 to 252,000 and
October’s from 298,000 to 307,000. The US economy has added 2.65m jobs in 2015. Last year trails only
2014 as the best year for job creation since 1999.
Opportunities as Markets Fall
We believe that although China may be experiencing some economic headwinds, the world’s largest
economy still appears to be doing well. Investors should take a balanced approach when assessing the tone and the strength of the global economic environment. Scare mongers will have you believe the world is ending, but when you assess the facts there are a multitude of positives that also must be considered.
’s portfolios have been constructed to account for both sides of the coin. We are aware of the
downside and have attempted to take measures to protect our investments. Conversely, we hold a number of solid companies that are benefit from underlying core growth themes. We see the events in China as more of a transition stage (from manufacturing to a consumer driven economy) rather than an all-out collapse.
Chart of the Moment:
In the first week of trading for 2016 BHP has fallen -8.1% while Rio Tinto was also down sharply (-6.2%). We are significantly underweight these sectors compared to the general Australian market index (ASX 200) and currently only hold BHP in our Australian portfolio. Given our outlook on markets we are now looking to take advantage of the recent price declines and make further investments for our portfolio
Five Things Markets Will be Watching this Week
1) Following a horrendous start to 2016 trading, will global equity markets reverse recent losses this
2) The Oil price will remain a focus – investor concerns are shifting to the prospect of weaker energy
company profit results dragging on overall earnings.
3) China trade data will be released later in the week, and may drive further moves in China’s
4) Australian employment data out on Thursday could provide an indication as to the effectiveness
of interest rate cuts.
5) German GDP released late in the week will provide an insight into how well the powerhouse of
Europe is faring.