Are We Heading Towards Downturn For The Coming Months?

  • Apr 03, 2019 AEDT
  • Team Kalkine
Are We Heading Towards Downturn For The Coming Months?

If S&P/ASX 200 Index is looked upon for the past two years, it can be realized that in the year 2017, the index increased by 5.79% from $5,733.2 on January 3, 2017, to $6,065.1 on December 29, 2017. However, in the year 2018, index saw a decline of 6.85% from $6,061.3 on January 2, 2018, to $5,646.4 on December 31, 2018. This year, the index has shown a positive return of 13.13% from $5,557.8 on January 2, 2019, to $6,287.3 on April 3, 2019.

The S&P/ASX 200 comprise major weightage from the industries, such as financials, materials and health care. The top stocks of the aforesaid sectors in term of market capitalization are Commonwealth Bank of Australia (ASX: CBA), BHP Group Limited (ASX: BHP), and CSL Limited (ASX: CSL), respectively.

Factors impacting the financial sector are Federal election, Royal Commission recommendations, Fintech disruption, etc.

There is a differing view in policies of the two major parties over franking credits, which will have an impact on the investments market.

Royal Commission recommendations were formed to check the misconduct in the banking and financial services. It recently released a report, where around 76 recommendations and 24 referrals were made majorly addressing the concern of borrowers/consumers.

Some of the recommendations are:

  • Mortgage brokers must act in the interest of the borrower rather than bank providing the loan.
  • Lenders should be banned from providing trailing commissions to mortgage brokers for 2 to 3 years.
  • Same law should be applicable for mortgage brokers as for the financial advisors, etc.

The implication of the recommendations can be mixed as it would help in the improvement of corporate governance in the financial industry. However, it may also increase the borrowing guidelines for consumers.

Reserve Bank of Australia has kept its interest rate at the lower side (1.5%) as the inflation rate remains low and stable. The low cash rate is yet to see the improvement in the buying behaviour of the consumer.

Increase in the adoption of green energy sources along with zero emission electric vehicles worldwide, especially in Asian markets, will promote the use of minerals, such as lithium, copper, cobalt, etc. Therefore, the metal and mining industry is expected to see good growth in the forthcoming year. The current trade-war has impacted the global demand, but once the headwind is over, a fresh ramp up can be seen in the border market.

Health Care sector continues to see the global demand for innovative drugs to treat rising diseases and the hygienic needs of health-conscious consumers. Huge investments in research and development by the industry is expected to boost earnings in the domestic and global markets. It will also help in the reduction of operating expenses, boosting the bottom-line for the industry.

Financial sector company, Commonwealth Bank of Australia (ASX: CBA) is currently trading at PE multiple of 13.91x with a dividend yield of 6.04%. It is expected that the Australian economy will continue to perform well with near full employment and growing wages, due to rapid growth in urbanization and infrastructure boom. It will help CBA in catering the credit requirement of the growing population.

Metals and mining company, BHP Group Limited (ASX: BHP) is currently trading at PE multiple of 26.71x with a dividend yield of 4.27%. It expects Chinese economic growth to slow in CY2019, however, weaker import would be offset by easing regulatory policies. It expects strong demand for oil in the Asian market and gas demand in Japanese and Korean markets. The group further expects an increase in demand for copper, potash, steel production, etc.

Health Care company CSL Limited (ASX: CSL) is currently trading at PE multiple of 34.99x with a dividend yield of 1.24%. Its plasma, as well as recombinant products, continues to be strong, and the company expects to outpace the market in growing plasma collections. CSL is planning to open new collection centres in the range of 30 & 35 this financial year. It expects its net profit after tax to be in the range of $1,880 to $1,950 Mn (constant currency).

The major change in the above-mentioned industries and stocks will drive the movement of ASX 200 index in the forthcoming time. However, the global investors are in dicey position when it comes to global equity markets, it is important for the Australian investors to note that the broader market might be sensitive towards overall health of the global economy. Recently, RBA had kept the cash rate unchanged at 1.50% and stated that outlook with regards to the global economy is reasonable. However, as per the statement, it is worth noting that growth had slowed, and the downside risks have also increased.


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