Domestically, investors locked in profits from top 50 stock holdings and sold the rest for tax losses. No sector escaped punishment.
After a three to four-year period of massive outperformance since 2011, well-performing banks, retailers, property stocks and the occasional utility such as Telstra have been trimmed, and like the main market index, they have fallen through their 200-day moving averages. Valuation in many cases had been stretched by a solid four-year run, so investors have been seeking temporary cover in cash or joining the merry-go-round in an overheated housing market.
Underperforming midcap and small-cap stocks were sacrificed at the altar of tax minimisation. Loss-making resource stocks were thrown out ahead of June 30 to offset considerable profits being locked in on sales of top 20 stocks. This action offers opportunity for those willing to take on the commodity price risk to buy downtrodden metals producers and mining service companies that trade close to book value.
Globally, the rolling Greek economic crisis has become an endogenous feature of the market. It’s the never ending story and stands as a stark warning to all nations about the perils of over-borrowing and overspending to finance current spending. StockAnalysis thinks that a study of France or Italy might show the same sort of malaise. In some sense, Greece is simply a whipping boy for the sins of all.
The other main ‘worry’ is an imminent removal of ridiculously low interest rates as the US economy continues to show some positive form. For some years, stocks in the US have been priced against a background environment of very low interest rates. While most investors understand that interest rates are set to rise towards more ‘normal’ levels that accurately reflect risk, the day that it actually happens is likely to signal a significant market pricing readjustment downwards, especially in the US.
In anticipation of higher US interest rates and in response to European turmoil, the US dollar is strengthening against its trading partners, which is likely to see the Australian dollar continue to fall towards US75c or lower. A higher US dollar has mixed implications for Australia. In the absence of any independent price adjustment, commodities that are priced in US-dollar terms will be stronger in Australian-dollar terms, but Australia maintains a considerable trade deficit with the US, so imports of vital manufactured goods, transport and engineering equipment from the US will become more expensive. A stronger US will also provide headwinds to the US economy, making it less competitive globally over time, especially when energy prices recover.
In addition, newly awakened Russian and Chinese militarism is also rocking the boat. Russia is using conscripted labour to rearm itself, boosting domestic activity in a sanction-weakened economy and it has massed troops on its border with the Ukraine, threatening an all-out invasion.
Meanwhile, China is creating another environmental disaster in an area of international waters between Vietnam, the Philippines and Malaysia, by dredging up square kilometres of pristine reef to construct islands, complete with airstrips and harbours. The problem appears to be that the area is called the South China Sea, and China appears to be taking that name literally, unilaterally declared the region to be part of greater China, or at least a Chinese economic zone! Other nations have begun overflying the seafloor grab, much to China’s annoyance, but StockAnalysis is concerned that all this activity will not end well.
Commodity prices are always a key indicator for the pace of the Australian market, with the medium-term outlook remaining generally bleak. All bets are off however if tanks roll into Europe from Russia. That is likely to send the price of oil and gold ballistic (if you’ll pardon the pun).
Bulk commodities (iron ore, coal and mineral sands) remain steady at weak levels with ample supply in a stagnant market. Bauxite is trying to replace iron ore as the new bulk commodity de jour, but industry reconfiguration could negatively impact exports to China by the end of the decade. In most cases, base metals are trading well below their marginal cost of production, but there is little sign that prices will improve before 2016. At a price of $5.35/lb, the price of nickel is probably within 20c/lb from an absolute base with some high cost producers under pressure. The big issue for nickel is that any recovery above about $7.50/lb is likely to draw in new supplies from Chinese pig iron processors, limiting upside in the medium term.
StockAnalysis remains positive on the outlook for zinc into 2016, with the current price of just under $1/lb offering incentive to producers and exploration companies like Independence Group and Peel Mining.
StockAnalysis thinks that the long-term outlook is supportive for gold, especially in Australian-dollar terms. The price of gold has been holding strongly above $A1500 per ounce since the beginning of 2015, but there is a technical risk to the downside in the short term that could take gold to $1300/oz. The current cost curve indicates that most miners require +$US1000/oz ($A1300) to sustain operations, so that should form a base.
Instability on the Chinese market, which is beginning to unravel as phantom companies tumble in value by billions of dollars in a day, is symptomatic of the top of a bubble in that market. This action, combined with potential for military action in the Ukraine and currency instability in Europe should support the price of gold, but so far, this has not happened.