Santa Claus arrives early for investors as markets rally in 2017

Santa Claus investors stock market iron ore Trump tax ASX 2017
WEEKLY MARKET REPORT

Share market investors don’t need to look under the Christmas tree this year – their present has already been neatly wrapped up and delivered in their share portfolios.

It has been one of those rare Goldilocks years when just about everything in the world has been “just right” which has delivered some exceptional returns to almost all investors.

If anything the Australian market has been a bit of a laggard compared to its international peers with Yardeni Research showing our market’s 6.2 per cent return one of the lower ones around the world.

Of course, the market has strengthened in the couple of days since that calculation and measured in US dollars the gain improves to 12.9 per cent, which gets the overall return much closer to the 20 per cent mark once you include Australia’s higher dividend yields.

You would happily accept in advance that sort of index result for 2018, especially when you consider much higher gains have been possible with some judicious stock selection.

Yardeni’s research shows it has been a stellar year overall, particularly in the emerging markets which returned some impressive results measured in US dollars such as Argentina (78 per cent), Brazil (17.6), Chile (37.6) and Mexico (13.1).

China has been exceptional with 48.1 per cent and India’s 34.5 per cent is nothing to sneeze at while the really big markets of the United States (19.7 per cent), Europe (20.6) and Japan (21.4) were all very strong.

You have to look hard for weak spots – Pakistan had a bad year (minus 30.9 per cent) and Russia dipped 1.7 per cent but they are very much the tiny exceptions to an overall rule that saw world markets return 20.9 per cent for the year.

Of course as they say in the fund management advertising, past performance is not a guarantee of future results but many of the trends that have been driving returns higher in 2017 remain intact for 2018 – including lower US taxes, low interest rates, improving employment and economic growth, rising oil, metal and mineral prices and a generally stable geo-political environment, with the odd exception such as North Korea.

Interest rates might be starting to rise and bonds are selling off but except for the unforeseeable “X’’ Factor that can always come when you least expect it, the environment still looks positive for equities.

RBA worries about sluggish consumers

Our Reserve Bank put a slight dampener on that sort of rosy outlook this week when it again pointed to the sluggish Australian consumer as a risky issue.

It sees sluggish consumer spending as a continuing trend due to high household debt levels which tend to bring forward spending but despite that the central bank remains fairly upbeat about the economy, with global conditions improving and full-time employment in Australia growing at its fastest pace in a decade.

Wages growth remains weak but with business investment improving and public infrastructure investment also providing a boost, the picture is far from all gloomy.

What the RBA minutes do show is that the bank is unlikely to raise official interest rates for a while, at least until some strength has returned to consumer spending.

Trump this

Love him or loathe him President Trump this week delivered on his signature tax cuts and the result should be a considerable stimulus to the corporate sector in the US and thus to the rest of the world economy.

It will be interesting to watch what happens to tax receipts in the US with at least some chance that the Federal Government will collect more money even as rates are lowered due to the build-up in activity and the predicted massive repatriation of billions of dollars of offshore funds by large US multinationals.

Many large Australian companies have US operations so it won’t be a surprise to see them benefit from lower tax rates as well.

The Trump tax cuts also deliver dollars into the pockets of middle-class Americans and the real hope behind the cuts is that these consumers will recycle the money in the form of higher spending, further boosting the stimulatory effect of the tax cuts.

One extra factor is the effect on international competition, with other governments such as our own now forced to take a good, hard look at their corporate tax rates to avoid companies moving to access more tax-favourable domiciles.

Bonds selling off

The Trump tax cuts were also a big contributing factor to the long awaited bond market sell off this week in the major markets of the US, Europe and Asia.

Markets were reacting to the idea that the tax cuts would stoke economic growth to such as extent that that the US Federal Reserve would be forced into accelerating its planned series of interest rate rises.

They are also concerned with the Fed’s plans to reduce its bond buying programs and begin to sell down its massive bond holdings built up during the GFC.

That pushed bond yields higher – and bond prices lower – as they adjusted to the expected new environment.

US Treasuries were particularly hard hit, with 30 year bonds suffering their worst sell off in a year after the tax package became law and 10 year bond yields climbing to their highest level in nine months.

Iron ore back on the boil

Another sign that the world economy is back in business is the sight of ships starting to line up outside some of Australia’s main ports.

Iron ore and coal demand has been rising and the maritime super highway between Australia and China is once again getting clogged as ships wait longer to load and unload.

Part of the problem is port maintenance after cyclones and poor weather at the Chinese end but waits of up to six weeks to load are a sign that Chinese demand for steel ingredients is really hitting its straps following the 19th National Congress Meeting in China.

Anti-pollution policies in China are depressing local Chinese iron ore and coal production and favouring higher quality Australian coal and iron ore.

Rio Tinto ditches drivers

Big Aussie miner Rio Tinto is continuing to push the boundaries, greatly expanding its fleet of autonomous ore trucks.

Rio has signed deals with Komatsu and Caterpillar to retrofit 48 trucks with Autonomous Haulage System (AHS) technology.

That will bring the total number of autonomous trucks to 130 by the end of 2019 – almost a third of Rio’s 400 ore truck fleet.

The autonomous trucks are, on average, operating for an extra 1000 hours with unit costs 15 per cent lower than conventional vehicles.

Bitcoin deflates

What goes up must go down and that certainly applies to Bitcoin, which tumbled below the US$13,000 mark at the tail end of the week.

There are all sorts of theories as to why Bitcoin has got the wobbles with some pointing to the growing popularity of Bitcoin Cash, which is said to offer superior stability and transaction speeds.

The beginning of futures trading in Bitcoin futures on the Cboe and CME exchanges has also had a negative impact, with Bitcoin bears able to take positions more easily, halting the much vaunted move up to US$20,000.

That mark doesn’t look like being hit anytime soon with futures contracts for January, February and March all around the US$17,000 mark.

Apple comes clean

It may not be quite as scandalous as Volkswagen’s diesel-gate affair but the admission that Apple deliberately slows down its phones as their batteries deteriorate finally vindicates what many consumers instinctively felt.

Technology companies like Apple rely on the upgrade cycle for continuing profits and it is fairly obvious that by slowing down phones and making it expensive and difficult to replace the battery, the upgrade cycle gets a significant boost.

With Apple one of the big beneficiaries of the Trump tax plan and now able to repatriate a foreign cash pile of around US$252.3 billion at concessional rates, it seems the least they can do is allow their customers to keep their phones working well by economically replacing ailing batteries.

Small cap stock action

We may be heading into the holiday season but that didn’t stop the news flow in the small cap space.

Linius Technologies (ASX: LNU)

Linius announced plans to create a virtual video blockchain, which it claims will revolutionise the way video is distributed and consumed across the world and potentially eradicate piracy.

This follows on from recent news that Linius will incorporate Microsoft’s artificial intelligence services into its Video Virtualisation Engine, to transform video search capabilities.

Yojee (ASX: YOJ)

Another player in the blockchain space is logistics service provider Yojee that uses it’s technology, including artificial intelligence and machine learning to empower freight and logistics companies.

The company has experienced a staggering almost 700% growth in the last six months for its Singapore-based last mile logistics network.

Flamingo AI (ASX: FGO)

Following on from successfully raising $10m the week prior, artificial intelligence company Flamingo AI announced its cognitive virtual assistant ROSIE is now in live evaluation with three clients in Australia and the United States.

This phase involves consumer interaction with the platform which is designed to facilitate online sales of complex financial products such as insurance policies and loans.

Sky and Space Global (ASX: SAS)

Sky and Space signed a five-year network contract with African technology company BeepTool, worth around US$30 million.

BeepTool currently boasts more than 800,000 customers in Africa and internationally.

The agreement aims to bring messaging and payment services to BeepTool’s African markets located in remote regions.

Vector Resources (ASX: VEC)

Emerging from a trading halt on Friday, gold explorer Vector Resources announced it had secured an agreement to purchase a 60% stake in the Adidi-Kanga gold mine.

The mine is part of the gold major AngloGold Ashanti’s former Mongbwalu gold project in the Democratic Republic of Congo.

To partially fund the acquisition, Vector has signed a three-year US$10 million debt facility with a United Kingdom-based investor. The facility is expected to also fund exploration and feasibility expenses.

Titomic (ASX: TTT)

Continuing on its stellar run since listing on the ASX in September this year, Titomic put out two positive announcements in succession.

First a collaborative partnership with Callidus Welding Solutions in February 2018, which will see Titomic’s kinetic fusion process incorporated into Callidus’ rapid additive parts manufacturing to create titanium-coated components.

Initial prototypes will be developed for Callidus’ mining, oil and gas clients.

The other news being an initial 6 month collaborative agreement with a world leading bicycle brand to contribute to the development of a high performance Titanium bicycle concept.

The company also provided an update that the development of its new fully-automated manufacturing facility in Melbourne remains on schedule, with production trials set to commence Q2 2018.

Week ahead

As you would expect, there are no major Australian economic data announcements planned for the Christmas / New Year break but there are a swag of US releases, including personal income and spending, core inflation, durable goods, new home sales and consumer confidence.

There will also be a fair break from trading with the ASX closed on Christmas Day and Boxing Day and also on New Year’s Day.

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.