Thursday, December 15th, 2016
The Christmas period is approaching and as this is our last video before the break, we wanted to leave you with three trends to watch over the December/January period.
The first and most obvious is that bond yields continue to rise! The expectations of large scale issuance of government debt in the US and expectations of US inflation, have routed the bond market, sending yields up and up. Making matters worse, the US Federal Reserve is likely to raise its official interest rate target on December 14, intensifying existing headwinds. Anyone invested in bonds or defensive stock categories such as infrastructure and property should be wary of further increases to yields. Names such as Sydney Airport, Westfield and Amcor, some of the biggest and most widely held in the market, continue to be sold off as bond proxies.
Figure 1. 10 Year Government Bond Yields – Australia, USA, Japan, Germany
The second is that the market tends to perform well on a whole over this period. Over the last 20 years, the period from mid-December to mid-January has seen 17 positive returns. In other words, 85% of the time, the market rose during this period with a median return of 2.8%. A cynical investor might think this phenomenon could be due to large institutions bidding up prices in advance of the end of year performance calculations. The fact so many investors are on holiday during this period may also play a role. Of course, there is no guarantee it will happen again this year, but still, it is something investors should be aware of.
Figure 2. S&P ASX 200 – Price Index
One final trend to keep track of is perhaps the most exciting, which is the retail spending over Christmas is actually shaping up to be quite strong. The seemingly inexhaustible housing boom combined with low interest rates, a more competitive currency, and strong employment figures have buoyed retailers in 2016. Ahead of Christmas, they are feeling more upbeat than they have in years. A recent survey from Deloitte found that more than 90 per cent of retailers expect consumer confidence to hold steady or increase next year, and almost two-thirds expect their earnings to increase by at least 5 per cent. Add to that more than 70 per cent of retailers plan to increase their store footprint in FY17 in the face of greater competition from foreign invaders, according to the survey. Sifting through recent retail data from the ABS, hardware and furniture appear to be particularly strong.
All in all, Christmas may well be a mixed bag for the Aussie share market. Yield pressures are likely to mount on large defensive stocks, but retail spending may be stronger than expected and it is likely that come mid-January, the market has risen from where it is today.