The market participants entered the year 2019 on the back of the economy printing poor set of numbers, but with uptrend in stock market.
The 2018 September quarter saw the economy growing at 0.3 percent (seasonally adjusted). However, the economy had expanded by 0.9 percent in the same quarter in the previous year. The market was expecting a 0.6 percent growth in the GDP number.
The 0.3 percent growth resulted in the Aussie economy registering its lowest growth in the last two years. The slowdown in the September quarter was mainly attributed to the slowdown in non-residential construction and a poor private consumption.
The S&P/ASX 200 reacted sharply and gashed by around 11% from its year high made in August 2018 to end the year 2018 at 5646. However, fast forward to March 2019, the Australian Index has managed to surpass the gloom and registered a hefty 9.5% returns from the December closing price. In-fact, ASX200 was amongst the world’s best performers in the month of February 2019.
The surprising factor is that this market performance came post the Q4 December quarter GDP print. The GDP numbers were not impressive with growth coming in at 0.2% in December quarter. The economy slowed down sharply in the second half of 2018 from a four percent annualised growth in the first half to one percent annualised growth in the second-half.
Poor Australian second half print was mainly attributed to the slower global growth, especially demand slowdown across Europe, China, and the USA.
There is a marked divergence between economic performance vs. the stock market performance. The consumer and business confidence numbers that were announced last week also pointed towards a slowing economy.
The Westpac Consumer Sentiment Index came in down by 4.8 percentage on a month-on-month basis at 98.8 in March 2019 vs. 103.8 in the last month. This further cemented the slowdown momentum that was witnessed in the second-half of 2018.
The NAB Business Confidence Index in Australia declined from 4 in Jan’19 to 2 in Feb’19, as against market expectation of 3.
Westpac is now predicting the economy to slowdown even further.
The stock market performance is usually considered to be an indicator of the economic performance; However, it is not necessary that both go hand in hand since the market participants tend to overreact to the short-term news and try to price in the short-term views. On this backdrop, it is clear that the market participants are now anticipating monetary support in the form of a rate cut from the reserve bank post the poor set of economic numbers.
The market outperformance could also be attributed to the construct of ASX, which is heavily tilted towards the finance and resource sectors. The contribution from these sectors’ workforce and economic output is relatively lower. The financial stocks gained traction post the Royal Commission Report release with mining sector particularly gaining from rising commodity prices in the backdrop of uncertain global economic environment.
All the indicators seem to point towards market expecting monitory policy support from the RBA to arrest the economic slowdown. However, on the back of already low global rates, it is difficult to predict the RBA policy.
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