Best-Ever Start Still No Victory for Aussie Shares

(Bloomberg) -- Australian shares are off to a record start for the year. But, it’s still a disappointment.

The A$1.8 trillion ($1.3 trillion) benchmark S&P/ASX 200 Index rallied 9.5 percent in the past three months, its best-ever performance to begin a year in data going back to 1992. That’s also the best quarter overall in almost a decade, according to data compiled by Bloomberg.

While that might sound impressive, it comes in the context of a red-hot global rally, leaving Australia’s performance an unspectacular 31st in a global ranking of major gauges. The Shanghai Composite Index, which tops the leader board, more than doubled Australia’s results with a 24 percent advance in the same period, the data show. Even among developed markets, Australia comes closer to the end of the list, ranking in the bottom 10.

There are two major events happening Down Under Tuesday shaping the market’s action.

The Reserve Bank of Australia left its key cash rate target unchanged at 1.5 percent for a 29th consecutive meeting, as widely expected ahead of the decision. In a statement, RBA Governor Philip Lowe noted the central bank “will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.”

And in the evening, the government will unveil its latest budget, poised to end the longest stretch of deficits since 1970, according to the median estimate of economists surveyed by Bloomberg.

The S&P/ASX 200 climbed 0.6 percent 3:01 p.m. in Sydney, for a sixth straight day of gains, the longest stretch since November.

“In equities, low rate expectations are driving bond proxy strength, whilst stimulus expectations are supporting the performance of both the index and the ability of some sectors to stare down growing domestic weakness,” Morgan Stanley analysts led by Chris Nicol wrote in a March 29 report.

While Australian Treasurer Josh Frydenberg will have strong commodity prices and a hiring spree on his side when he presents the budget, there have been multiple constraints holding back the nation’s economy and stock market over the past year. Top of mind is its housing slump, which remains a major drag on consumer lending and economic growth.

With the worst property slump in decades, household wealth has dropped to the lowest level in seven years. That’s seen private consumption -- which accounts for almost 60 percent of GDP -- decelerate sharply.

While there are signs of stabilization, “house prices continue to fall and the monthly drop remains sizable,” Tamara Mast Henderson, an economist with Bloomberg Economics, wrote in an April 1 report. “This suggests uncertainty about the next direction in monetary policy will persist.” Even so, an interest-rate cut is unlikely as labor market indicators remain otherwise solid, she said.

That’s all led to consumer staples and financials, the single largest industry within the Australian benchmark with an almost one-third weighting, performing the worst this year. The sectors have gained only about 6 percent each.

Financials got a modest bump after the results of a 13-month inquiry into rampant misconduct at the nation’s largest banks and financial firms was unveiled in February, with one of the key findings being a recommendation against structural separation. The study hung like a cloud over the shares for more than a year, and earnings at lenders going forward may be impacted in multiple ways as they face potential increased compliance, customer-compensation costs and recommendations for lower fees.

That said, Australian stocks look fairly cheap, with the gauge trading at 15.7 times estimated earnings in the next year, near the lowest since June relative to the MSCI Asia Pacific Index multiple, data compiled by Bloomberg show. And there are some bulls out there.

Australia’s benchmark has more room to rally, as earnings growth for the companies is on the upswing thanks to strength in the commodity markets, according to a March 27 note from Citigroup Inc. strategists led by Tony Brennan.

Elements that had caused weaker results at the nation’s companies recently could also dissipate if there’s a pickup in global growth, assuming no major disruption in expected outcomes from trade negotiations and Brexit, the report said.

Stock-Market Summary

• MSCI Asia Pacific Index little changed
• Japan’s Topix index little changed; Nikkei 225 up 0.2%
• Hong Kong’s Hang Seng Index little changed; Hang Seng China Enterprises up 0.1%; Shanghai Composite up 0.4%; CSI 300 up 0.1%
• Taiwan’s Taiex index up 0.5%
• South Korea’s Kospi index up 0.3%; Kospi 200 up 0.4%
• Australia’s S&P/ASX 200 up 0.6%; New Zealand’s S&P/NZX 50 up 1.1%
• India’s S&P BSE Sensex Index little changed; NSE Nifty 50 little changed
• Singapore’s Straits Times Index up 0.5%; Malaysia’s KLCI up 0.5%; Philippine Stock Exchange Index up 0.5%; Jakarta Composite up 0.2%; Thailand’s SET up 0.5%; Vietnam’s VN Index up 0.4%
• S&P 500 e-mini futures down 0.1% after index closed up 1.2% in last session

--With assistance from Jackie Edwards.

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Divya Balji, Cecile Vannucci

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