Economy shows signs of improvement

The outlook for the banking sector has improved as the regulatory backdrop looks more favourable and competition for pricing has become more rational. While we didn’t see the upgrades we were looking for particularly in the more cyclical parts of the economy, we think the foundations have been laid for better growth throughout the year.

Australian shares have generally followed the pattern of global equities, following a wave of President Trump induced optimism. The US equities market is now pricing itself very fully on the prospect of better earnings in the future. Part of the reason for that optimism is the prospect of much lower corporate tax rates, however these tax rates are guaranteed a noisy passage through the US Senate. With elevated valuations, this noisy passage could give equity markets a scare and we don’t discount further volatility in the coming months.

This week while reporting season is still fresh in our mind, we thought we would share key outlook comments below made by large market capitalisation companies which offer insights into the health of the Australian economy and investing conditions.

Coles highlighted that the market dynamics in food retailing have changed over the past year, where total market growth is below its long-term average and competitors have made price adjustments. This highlights that top line revenue growth will be hard to come by and with competitors getting more aggressive on pricing this could weight on company gross margins.  Woolworths has also reaffirmed the dialog from Coles, “We expect trading conditions to remain competitive for the remainder of financial year 2017”.  This is the new normal – we are in a low growth environment for some time to come (Coca-Cola Amatil  Aug-16).

In the retail space Stockland has highlighted that consumer sentiment continues to fluctuate around neutral and retail per capita spending is growing in NSW and VIC.  Mirvac also highlighted with retail that trading performance is challenging on a macro level, with some traditional anchors such as discount department stores under performing.  Wesfarmers and department stores highlighted that retail sales’ momentum in the second half is expected to remain challenging.

Sydney Airport has highlighted the strong traffic growth throughout 2016 and continued in the New Year. International passengers were 9.7pc higher in January 2017 compared to the prior  corresponding period (pcp), and 20pc above January 2015. Qantas has underlined that cheaper oil has led to strong capacity growth on international routes – pushing fares down and impacting all major airlines.

Within the healthcare sector Ramsay Healthcare suggested that they are seeing solid half year-on-half year admissions growth in our major markets, particularly in Australia.  Demographic factors are driving an inevitable increase in demand for health care services.

Medibank outlined that industry volume growth continued to slow, which is indicative of challenging conditions.  NIB Health Insurance addressed that affordability is clearly a factor but so too is a relatively weak retail environment generally with high competition for discretionary consumer spending.

Boral outlined with the US market that they are expecting housing starts to grow by 10pc in line with the market improvement trajectory of the past three years.  Brambles Pallets US has highlighted that a combination of market-driven cost factors, customer destocking and increased competition has resulted in overall performance well below our expectations.

Construction and downstream industrial activity has picked up, and housing inventories have normalised. Fixed asset investment growth has moderated but manufacturing is picking up after a long slump. The early 2016 market recovery was supported by a surge in credit growth and the purchasing managers index (PMI) indicates that manufacturers remain optimistic about early 2017 (RIO Tinto).

Monadelphous has highlighted that capital expenditure levels remain at low levels as the rate of major investment in new production slows.  Worley Parsons has outlined that customers are informing us that their activity levels are not expected to deteriorate further.  Markets in Australia remain challenging despite a recent improvement in commodity prices.