Shares

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EXPERT OBSERVER
After sharp share market falls when headlines scream about the billions wiped off the market the usual questions are: what caused the fall? what’s the outlook? and what does it mean for superannuation? The correct answer to the latter should be something like “nothing really, as super is a long-term investment and share market volatility is normal.”
But that often sounds like marketing spin. However, the reality is that - except for those who are into trading or are at, or close to, retirement - shares and super really are long-term investments. Here’s why.
Super funds and shares Superannuation is aimed (within reason) at providing maximum (risk-adjusted) funds for use in retirement.
So typical Australian super funds have a bias towards shares and other growth assets, particularly for younger members, and some exposure to defensive assets like bonds and cash in order to avoid excessive short-term volatility in returns.
The power of compound interest
These approaches seek to take maximum advantage of the power of compound interest.
As return series for commercial property and infrastructure only go back a few decades I have used residential property as a proxy. Because shares and property provide higher returns over long periods the value of an investment in them compounds to a much higher amount over long periods.
So, it makes sense to have a decent exposure to them when saving for retirement.
The higher return from shares and growth assets reflects compensation for the greater risk in investing in them – in terms of capital loss, volatility and illiquidity – relative to cash &amp; bonds.
But investors don’t have 90 years?
Of course, we don’t have ninety odd years to save for retirement. In fact, our natural tendency is to think very short term. And this is where the problem starts. On a day to day basis shares are down almost as much as they are up. See the next chart. So, day to day, it’s pretty much a coin toss as to whether you will get good news or bad.
So, it’s understandable that many are sceptical of them. But if you just look monthly and allow for dividends, the historical experience tells us you will only get bad news around a third of the time. If you go out to once a decade, positive returns have been seen 100% of the time for Australian shares and 82% for US shares. On a rolling 12 month ended basis the returns from shares bounce around all over the place relative to cash and bonds.
However, over rolling ten-year periods, shares have invariably done better, although there have been some periods where returns from bonds and cash have done better, albeit briefly. Pushing the horizon out to rolling 20-year returns has almost always seen shares do even better, although a surge in cash and bond returns from the 1970s/1980s (after high inflation pushed interest rates up) has seen the gap narrow.
Over rolling 40-year periods – the working years of a typical person – shares have always done better.
This is all consistent with the basic proposition that higher shortterm volatility from shares (often reflecting exposure to periods of falling profits and a risk that companies go bust) is rewarded over the long term with higher returns.
But why not try and time short-term market moves? 
The temptation to do this is immense. With the benefit of hindsight many swings in markets like the tech boom and bust and the GFC look inevitable and hence forecastable and so it’s natural to think “why not give it a go?” by switching between say cash and shares within your super to anticipate market moves.
Fair enough if you have a process and put the effort in. But without a tried and tested market timing process, trying to time the market is difficult. A good way to demonstrate this is with a comparison of returns if an investor is fully invested in shares versus missing out on the best (or worst) days. The next chart shows that if you were fully invested in Australian shares from January 1995, you would have returned 9.7% pa (with dividends but not allowing for franking credits, tax and fees).
If by trying to time the market you avoided the 10 worst days (yellow bars), you would have boosted your return to 12.4% pa. And if you avoided the 40 worst days, it would have been boosted to 17.3% pa! But this is very hard, and many investors only get out after the bad returns have occurred, just in time to miss some of the best days.
For example, if by trying to time the market you miss the 10 best days (blue bars), the return falls to 7.6% pa. If you miss the 40 best days, it drops to just 3.6% pa.
The following shows the difficulties of short-term timing in another way.
Portfolio 1: A fixed balanced mix of 70 per cent Australian equities, 25 per cent bonds and five per cent cash; 
Portfolio 2: A “switching portfolio” which starts off with the above but moves 100 per cent into cash after any negative calendar year in the balanced portfolio and doesn't move back until after the balanced portfolio has a calendar year of positive returns. We have assumed a two-month lag.
Over the long run the switching portfolio produces an average return of 8.8% pa versus 10.2% pa for the balanced mix. From a $100 investment in 1928 the switching portfolio would have grown to $218,040 compared to $705,497 for the constant mix.
Key Messages
First, while shares and other growth assets go through periods of short-term underperformance relative to bonds and cash they provide superior returns over the long term. As such it makes sense that superannuation has a high exposure to them.
Second, switching to cash after a bad patch is not the best strategy for maximising wealth over time.
Third, the less you look at your investments the less you will be disappointed. This reduces the chance of selling at the wrong time or adopting an overly cautious stance.
The best approach is to simply recognise that super and investing in shares is a long-term investment. The exceptions to this are if you are really into putting in the effort to getting shortterm trading right and/or you are close to, or in, retirement.
DR SHANE OLIVER is the Chief Economist and Head of Investment Strategy at AMP Capital
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Why super and shares really are long-term investments: Shane Oliver

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Westpac shares are down nearly five per cent in early morning trading after they returned to the ASX.
The share price decline came after Westpac announced its profits slid 16 per cent over FY2019.
Shares slipped from $27.88 to $26.50 per share.
Prior to the market opening, Westpac announced at 8:00am their $2 billion capital raising, announced only yesterday, has been completed.
Some 79 million new fully paid ordinary shares have been issued at $25.32 per share
Westpac Group CEO Brian Hartzer said 2019 has been a disappointing year.
"Financial results are down significantly in a challenging, low-growth, low interest rate environment," he said, adding that 2020 will "continue to be challenging".
"However, we believe our service led strategy, disciplined growth and solid portfolio of businesses will deliver for shareholders and customers," Hartzer added.
Westpac's mortgage portfolio looked relatively healthy <a href="https://www.urban.com.au/news/106024-small-uptick-in-westpac-s-mortgage-arrears-as-profits-slip-16-per-cent" target="_blank">despite an uptick in arrears</a>.
They continued to reduce their number of interest only loans, which now make up around a quarter of their loan book.
Their total home loan portfolio grew, albeit at a slow rate.
 
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Westpac shares fall on ASX capital raising

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Perpetual Investment Management Limited, McGrath's biggest institutional shareholder, has continued to scale back its investment in the estate agency.
They are now no longer noted as a substantial shareholder, following the recent further sale of 568,000 shares.
Perpetual's sell-off initially began last year when they sold almost 2.5 million shares in McGrath to reduce its stake from 14.2 percent to 11.6 percent.
During May this year they <a href="https://www.urban.com.au/news/99308-mcgrath-s-biggest-institutional-backer-perpetual-reduces-its-shareholding" target="_blank">offloaded a further 2.6 million shares</a>, taking its stake down to 9.04 percent.
Perpetual's latest dump was a further 2.2 million, taking them from 10.81 million shares to 8.6 million. Their share holding was just 5.15%, then further reduced by the latest 568,000 sales.
The 2.2 million pull out equated to around $450,000 worth of shares at around 20 cents a share. 
McGrath is currently trading at ¢24.
McGrath began public life as a company worth $282 million, which has dipped, along with property prices and fewer star agents, to closer to $47 million.
They opened on the ASX at $2.10 per share in 2015.
McGrath shares slumped to $1.72 on its second day of trade with Perpetual taking so-called advantage to increase its shareholding to nine percent from its initial holding of about six percent. 
Perpetual further strengthened their position in McGrath in September 2017, buying six million shares when they were trading at ¢64.
That took their share to 14.16 percent.
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Perpetual further reduces McGrath Estate Agency shareholding

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Shares at all of the big four banks have jumped in the first few hours of share trading this morning, which also saw the NAB boss Andrew Thorburn decide to return from his proposed extended leave.
The share price rise on the ASX follows the not too damaging Royal Commission final report released yesterday.
It should be noted however the share prices across the banks took a major hit in the build up to the Royal Commission release.
Each of the banks recorded declines of between 3% to 5%.
However, following the announcement of the Royal Commission findings, shares jumped back higher.
Westpac shares rose the highest, up 5.8% in early morning trading to $26.54.
ANZ shares were up 5% to $26.59 and the CBA share price up 4.2% to $73.40.
The NAB rise was more modest at 3.7%, mainly due to the specific criticism directed at NAB CEO Andrew Thorburn and chair Dr Ken Henry by banking royal commissioner Kenneth Hayne.
The NAB shares now sit at $25.01.
Hayne said that having heard from both Thorburn and Henry, he said he is "not as confident as I would wish to be that the lessons of the past have been learned.
"More particularly, I was not persuaded that NAB is willing to accept the necessary responsibility for deciding, for itself, what is the right thing to do, and then having its staff act accordingly."
NAB's Andrew Thorburn released a statement this morning, in response to Hayne's criticism.
"As the CEO, this is very hard to read, and does not reflect who I am or how I am leading, nor the change that is occurring in our bank," Thorburn's statement read.
“While we have made mistakes, I believe there is a lot of evidence that we are making sustainable and serious change to once again regain the trust of all of our customers.”
Thorburn, who has been on long service leave, said he is cancelling the remainder and returning to the NAB.
AMP were another significant mover in the share market.
Their share price jumped 8.6% to $2.44.
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Big four banks see share price rise following Royal Commission findings

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EXPERT OBSERVER
Key points
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<div class="column">1. The current pullback in shares has been triggered by a range of things – but most notably worries about rising US interest rates and the US/China conflict.</div>
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 2. Shares may still have more downside, but we are of the view that it’s just another correction.</div>
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 3. Key things for investors to bear in mind are that: corrections are normal; in the absence of recession, a deep bear market is unlikely; selling shares after a fall locks in a loss; share pullbacks provide opportunities for investors to buy them more cheaply; while shares may have fallen, dividends haven’t; and finally, to avoid getting thrown off a long-term investment strategy it’s best to turn down the noise during times like this.</div>
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Rough Patches
Every so often shares go through rough patches. We saw this most recently around February on the back of US inflation and interest rate concerns and the start of US tariffs which saw US shares and global shares fall roughly 10% and Australian shares fall 6%. Shares mostly recovered – even getting through the seasonally weak months of August and September surprisingly well – with US shares making new records and Australian shares hitting a ten-year high, but the worry list has returned again with US, global shares and Australian shares now down around 7% from their recent high. This note looks at the issues for investors and puts the falls into context.
What’s driving the latest plunge?
The recent plunge reflects a range of factors.
<ul>
<li>Investors have started to worry again that the very strong US economy will push the Fed into tightening a lot more and that this will cause a further sharp rise in bond yields which will threaten growth and share market valuations.</li>
<li>The trade conflict between the US and China is continuing to intensify and spilling over into other areas.</li>
<li>Technology shares, which have been key drivers of the US share markets rally (and outperformance) have been vulnerable – being somewhat overvalued and facing increased regulation in the US (which is something that President Trump has been threatening).</li>
<li>Rising oil prices due to strong global demand and threats to supply have added to concerns about inflation and growth.</li>
<li>Problems in the emerging world partly due to rising US interest rates poses a threat to global growth as reflected in a recent downgrade to the IMF’s global growth forecasts.</li>
<li>Nervousness remains in the US around President Trump and the Mueller inquiry and the upcoming US mid-term Congressional elections.</li>
<li>Tensions in the Eurozone regarding the Italian budget are weighing on European shares.</li>
<li>October is also known for share market volatility and this October is the 31st anniversary of the 1987 crash which often seems to create a bit of apprehension.</li>
</ul>
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Because shares have fallen rapidly they are technically oversold and so could have a short-term bounce. But given that many of these issues could get worse before they get better the risk is that the pullback has further to go.
Considerations for investors
Sharp market falls with headlines screaming that billions of dollars have been wiped off the share market (funny that you never see the same headlines on the way up!) are stressful for investors as no one likes to see the value of their investments decline. However, several things are worth bearing in mind:
First, periodic corrections in share markets of the order of 5- 15% are healthy and normal. For example, during the tech/dot. com boom from 1995 to early 2000, the US share market had seven pull backs greater than 5% ranging from 6% up to 19% with an average decline of 10%. During the same period, the Australian share market had eight pullbacks ranging from 5% to 16% with an average fall of 8%. All against a backdrop of strong returns every year. During the 2003 to 2007 bull market, the Australian share market had five 5% plus corrections ranging from 7% to 12%, again with strong positive returns every year. More recently, the Australian share market had a 10% pullback in 2012, an 11% fall in 2013 (the taper tantrum), an 8% fall in 2014, a 20% fall between April 2015 and February 2016 and a 7% fall earlier this year all in the context of a gradual rising trend. And it has been similar for global shares, but against a strongly rising trend. See the next chart. While they can be painful, share market corrections are healthy because they help limit a build-up in complacency and excessive risk taking.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/12/AMP%201.jpg" alt=""> 
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Related to this, shares climb a wall of worry over many years with numerous events dragging them down periodically, but with the long-term trend ultimately up &amp; providing higher returns  than other more stable assets. Bouts of volatility are the price we pay for the higher longer-term returns from shares.
 <img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/12/AMP%202.jpg" alt="">
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Second, the main driver of whether we see a correction (a fall 5% to 15%) or even a mild bear market (with say a 20% decline that turns around relatively quickly like we saw in 2015-2016) as opposed to a major bear market (like that seen in the global financial crisis (GFC)) is whether we see a recession or not – notably in the US. The next table shows US share market falls greater than 10% since the 1970s. I know it’s a bit heavy – but I like this table! The first column shows the period of the fall, the second shows the decline in months, the third shows the percentage decline from top to bottom, the fourth shows whether the decline was associated with a recession or not, the fifth shows the gains in the share market one year after the low and the final column shows the decline in the calendar year associated with the share market fall. Falls associated with recessions are highlighted in red. Averages are shown for the whole period and for falls associated with recession at the bottom of the table.
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Several points stand out. First, share market falls associated with recession tend to be longer and deeper. Second, falls associated with recessions are more likely to be associated with negative total returns (ie capital growth plus dividends) in the associated calendar year as a whole. Finally, as would be expected the share market rebound in the year after the low is much greater following falls associated with recession.
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So whether a recession is imminent or not in the US is critically important in terms of whether we will see a major bear market or not. In fact, the same applies to Australian shares. Our assessment remains that US/global recession is not imminent:
• Still high levels of business and consumer confidence globally are only just starting to help drive stronger consumer spending and business investment.
• While US monetary conditions have tightened they are far from tight and they are still very easy globally and in Australia (with monetary tightening still a fair way off in Europe, Japan and Australia). We are a long way from the sort of monetary tightening that leads into recession.
• Fiscal stimulus will boost US growth into next year, partly offsetting Fed rate hikes.
• We have not seen the excesses – in terms of debt growth, overinvestment, capacity constraints and inflation – that normally precede recessions in the US, globally or Australia.
Reflecting this, global earnings growth is likely to remain reasonable providing underlying support for shares. So, for all these reasons its likely that the current pull back is more likely to be a correction rather than a major bear market.
Third, selling shares or switching to a more conservative investment strategy or superannuation option after a major fall just locks in a loss. With all the talk of billions being wiped off the share market, it may be tempting to sell. But this just turns a paper loss into a real loss with no hope of recovering.
Fourth, when shares and growth assets fall they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities the pullback provides. It’s impossible to time the bottom but one way to do it is to average in over time.
Fifth, while shares may have fallen, dividends from the market haven’t. So the income flow you are receiving from a well- diversified portfolio of shares remains attractive, particularly against bank deposits.
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Sixth, shares and other related assets often bottom at the point of maximum bearishness, ie just when you and everyone else feel most negative towards them. So the trick is to buck the crowd. “Be fearful when others are greedy. Be greedy when others are fearful,” as Warren Buffett has said.
Finally, turn down the noise. At times like this, negative news reaches fever pitch. Talk of billions wiped off share markets and warnings of disaster help sell copy and generate clicks and views. But such headlines are often just a distortion. We are never told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market. Moreover, they provide no perspective and only add to the sense of panic. All of this makes it harder to stick to an appropriate long-term strategy let alone see the opportunities that are thrown up. So best to turn down the noise and chill out – yeah, I agree it’s sometimes easier said than done, but still!
Dr Shane Oliver Head of Investment Strategy and Chief Economist AMP Capital
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The pullback in shares - seven things investors need to keep in mind: Shane Oliver 

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EXPERT OBSERVATION
Economic and Financial market perspectives
<ul>
<li>Cash payouts: Since mid-February, ASX 200 companies have paid out around $3.3 billion in dividends to shareholders. But dividend payouts really start to ramp up from today. Overall, around $22 billion will be paid to shareholders over coming weeks.</li>
<li>Dividends still in vogue: The majority of companies reporting half-year earnings results (87%) chose to pay a dividend and 91.5% of these companies lifted or maintained dividends.</li>
<li>Injection into the economy: Dividends totalling $18 billion will be paid out by listed companies to their shareholders in the next four weeks.</li>
</ul>
What does it all mean?
Dividends remain in vogue. But as has been apparent for the last few reporting periods, companies are seeking better balance between paying out dividends and investing in their businesses. The world has seemingly become a smaller place with companies across the globe competing with one another for the affection of consumers. Businesses need to invest in the brands, their businesses and their futures. That was certainly the response by Coca Cola Amatil which plans to spend $40 million in promoting brands Coke, Mount Franklin and Pump. The aim is to lift sales, profits (earnings per share) and ultimately support the share price and dividends.
Of the ASX 200 companies reporting for the six months to December, around 87% of firms elected to pay a dividend, up from the long-term average of 86%, but down from the record level of 92% in the 2015/16 full-year results.
There is certainly plenty of cash available to firms. Of the 135 companies reporting half-year results, a record 94% reported a profit. Aggregate cash holdings rose by 6% over the year to $87 billion. Adding in the 32 companies reporting full-year earnings, cash stood at a record $115 billion.
Over the period from February to May, over $22 billion will be paid to shareholders as dividends. A year ago dividend payouts were also around $22 billion, while in the full-year earnings season in August 2017, dividend payouts totalled around $26 billion. So shareholders continue to be well rewarded.
Some shareholders will receive the dividends as cash and others will employ the proceeds through dividend reinvestment schemes. While the majority of the funds will be paid to domestic investors, other funds will go offshore to foreign investors. And while some of the dividends are paid to ordinary investors, other payments are paid to superannuation funds, thus with more limited short-term consequences for the economy.
While dividends flow at this time every year, the dollars potentially could lift spending. However, April tends to be a good month for the Australian sharemarket and part of the reason is that investors are keen to put their dollars to work in listed companies.
The Profit Reporting Season
Regular readers would be aware that each six months CommSec undertakes a detailed review of the profit reporting season – the time when companies report half-year or annual results for the period to June or December. (A far smaller proportion of companies have a different reporting period, such as March or September). 
To recap, the recent earnings season – for companies largely reporting half-year results to December 2017 – can be described as solid, not spectacular. Effectively, companies seem to be laying the groundwork for the future.
A record share of companies reported a profit. But aggregate statutory earnings were down 1.5% on a year ago. A smaller percentage of companies issued a dividend, expenses outpaced sales and cash earnings were up only modestly on a year ago.
Some of the themes of the season:
<ul>
<li>Department stores remain under pressure but less so Specialty Retailers.</li>
<li>TV and Radio Broadcasters have benefitted as advertisers drift away from social media.</li>
<li>There were more reports of companies being able to lift margins.</li>
<li>Agricultural and export-focussed consumer good companies benefitted from strong demand in Asia.</li>
<li>Companies dependent on home construction and development have benefitted from strong activity levels in south-east Australia.</li>
<li>Technology and Telecom companies have struggled.</li>
<li>Transport and Infrastructure companies have out-performed.</li>
</ul>
Of all companies reporting half-year earnings, 57% reported a lift in profit and 43% a decline (long-term average 61.4%). Of those 94% of companies reporting a profit, 56% lifted profits and 44% reported a decline.
Of all the half-year reporting companies, 87% issued a dividend and 13% didn’t. Of those reporting a dividend, 74.5% lifted the dividend, 8.5% cut and 17% left dividends unchanged.
Of all companies reporting half-year earnings, 58% lifted cash holdings over the year and 42% cut cash levels. Cash holdings of both full-year and half-year reporting companies stood at $115 billion at December 31.
The Dividend Timeline
IRESS provides data on the dividends declared by companies, the number of shares on issue and the pay date of the dividends. So it is possible to derive a dividend timeline. The ASX 200 companies were assessed.
As always there are complications to the analysis such as where the shareholders are based, whether dividend reinvestment plans operate, special dividend payments and currency translation effects for foreign investors. But the aim is to get a broad idea of the timing and magnitude of dividend payouts.
CommSec estimates that around $22 billion will be paid to shareholders from mid-February to early May 2018. The key period for dividend payments is the three-week period beginning March 26 and ending April 13. Over that three-week period, $16.6 billion will be paid out as dividends by listed companies: in the week ending March 30, dividends totalling $10 billion will be paid; in the week ending April 6, $4.1 billion will be paid out as dividends; in the week ending April 13 dividend payments totalling $2.5 billion will be made.
The importance of dividends
If you indexed the All Ordinaries index and the All Ordinaries Accumulation index at January 2004 it would show share prices (All Ords) up 84% while total returns have risen by around 339%. The differential (dividend growth) has especially widened from the low point for shares after the GFC in February 2009.
So dividends have taken on greater importance.
There are a few reasons for this. Investors have been more cautious about buying shares, despite the fact that Australian companies have been making money and strengthening balance sheets. So share prices have not fully captured the stronger fundamentals.
The economy has also continued to mature and the “potential” growth rate has eased from around 3.5% to 2.75%. Many of Australia’s biggest companies operate in mature industries. So while companies continue to generate good returns, growth options are more limited. Add in the fact that inflation has also slowed from around 2.5% to just below 2%.
In recent years Australian companies have also had to compete with heady property markets to secure the affection of investors. With share prices seemingly constrained by a range of influences, that puts more onus on companies to offer attractive dividends or to support share prices with buybacks.
Until recently there has been some reluctance by companies to plough back cash into the business. And expansion, renewal, replacement or efficiency measures have boosted the funds that can be made available as dividends.
What are the implications for investors?
Investors have the usual choice over the next few weeks. Those investors who still elect to receive dividend payments direct to their accounts can choose to spend the extra proceeds, save the proceeds (leave it in the bank) or use the funds in combination with other savings and reinvest into shares or other investments.
For companies, retailers and financial firms, the dividends flowing through to shareholders clearly represent opportunities. The Reserve Bank will also monitor the trends in the next few weeks: stronger confidence and an inflow of funds represent a potential spending boost.
Of the major bourses across the globe, Australia is the largest payer of dividends. In part this reflects the maturity of Australia’s industry sectors. It also reflects the stability of the companies that dominate the ASX20 and ASX50 indexes. And it also reflects the on-going growth of the Australian economy and corporate profitability.
Over the past couple of years many companies took the “safe option” of paying out dividends and buying back shares – in other words, keeping shareholders happy. But many companies are now opting for greater balance.
Adequate cash must be maintained to pay out dividends. But cash levels as well as modest borrowings are important for reinvestment in the business and applied to new opportunities – entering new markets or engaging in mergers and acquisitions.
Aussie companies have been successful in recent years in trimming costs and improving efficiencies. But the path to higher profits and retained earnings is also growth of revenues. And that objective is more difficult in a globalized world, affected by disruption and technology-driven innovation.
Shareholders increasingly realize that it is important to select companies with good potential for solid, sustainable growth in total returns – share price plus dividends. And that means paying attention to all aspects of the business.
Craig James is chief economist at CommSec.
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Dividends top $22 billion, but have they peaked? CommSec's Craig James

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Every time there is a sharemarket rout, the property market gathers momentum as nervous investors seek alternate investments.
So the wobbly Sydney property market might benefit from share investors who don't like the dynamic downturn emerging on local share markets coming out of the United States.
Our shares went down around 3 percent in day last week. It has taken about eight months for Sydney prices to do that, according to CoreLogic, with the median Sydney dwelling down around 3 percent to $884,000.
Last July marked the fifth anniversary of the housing market growth phase, which yes has petered out, but is still up slightly on the latest February annualised data.
At the end of the day property investors still have their bricks and mortar to drive past and admire. 
The Reserve Bank of Australia held rates again at its meeting last week, though lenders continue to make their own moves, both up and down.
The central bank's last move saw it go to 1.5 percent at the August 2016 meeting, so rates have been held steady over three years and for 17 meetings.
It is the longest run of steady rates ever. There were 16 meetings (inclusive) between their August 2013 meeting and December 2014 where they held at 2.5 percent. There was another run of 16 meetings between July 2002 and October 2003 where rates were held at 4.75 percent.
Almost all economists predicted a hold at the first meeting of the year and most don't foresee any change throughout much of 2018.
 
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Sharemarket turmoil will send investors to property

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The biggest news of the week was the <a href="https://theconversation.com/three-reasons-not-to-worry-about-the-stock-market-crash-91338" target="_blank">gyrations in the US stockmarket</a>. And the proximate cause seemed to be what one might think of as good news – average hourly earnings for workers in the United States <a href="https://www.bls.gov/news.release/empsit.nr0.htm" target="_blank">rose 2.9%</a> for the year to January.
This led to fears of a spike in inflation – as it could lead to more aggressive interest rate rises by the US Federal Reserve – and a big sell-off on Wall Street.
Regular readers of this column will know that something that has preoccupied the central bankers of the world’s advanced economies has been persistently <a href="https://theconversation.com/vital-signs-economics-cant-explain-why-unemployment-and-inflation-are-both-low-85824" target="_blank">low inflation and wage rises</a>. This has been bad news for workers and has kept interest rates from rising.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/2/9/data.jpg" alt="">
The 2.9% rise in US average hourly earnings is the strongest since the financial crisis. This, coupled with the <a href="https://www.bls.gov/news.release/empsit.nr0.htm" target="_blank">low 4.1% unemployment rate</a> in the US, has triggered inflationary fears. Of course, inflation was <a href="https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths" target="_blank">below the Fed’s target of 2%</a>.
This all reveals a fundamental economic truth: it is expectations of the future, not the facts of the past, that drive economic behaviour. That is one reason that the Fed (and the Reserve Bank of Australia) talk a lot about “inflation expectations” – or what people think inflation is going to be – not what it has been.
In domestic news, it was no surprise that the RBA <a href="https://www.rba.gov.au/statistics/cash-rate/" target="_blank">left the cash rate unchanged at 1.50%</a> when the board met this Tuesday. <a href="https://www.rba.gov.au/media-releases/2018/mr-18-01" target="_blank">In his official statement</a>, RBA governor Philip Lowe emphasised Australia’s low inflation and unemployment rates, saying:
The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.
There was some further positive news on the employment front from <a href="http://www.media.anz.com/phoenix.zhtml?c=248677&amp;p=irol-jobad&amp;nyo=0" target="_blank">ANZ’s job advertisements report</a>. It showed that ads were up 6.2% in January, and 13.8% on an annualised basis.
The big question, however, is about wages growth, which has proved very sluggish. We will have to wait until later in the month for new evidence on that in the form of fourth-quarter 2017 wages figures.
Cost of living figures <a href="https://www.propertyobserver.com.au/https://www.abs.gov.au/ausstats/abs@.nsf/mf/6467.0" target="_blank">released Wednesday by the ABS</a> showed what most people will tell you – that the cost of living has increased. The index is up by between 0.6% and 1.0% in the December quarter, depending on the type of household.
It is worth pausing briefly to discuss the difference between the Living Cost Index (LCI) and the Consumer Price Index (CPI). The ABS describes the purpose of the LCI as to answer the following question:
By how much would after-tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in the base period?
This is slightly different from the CPI, which measures price changes in a basket of goods and services. Perhaps the key difference is that the LCI includes mortgage interest and treats housing costs differently. For a more detailed description of the differences <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Products/6467.0%7EDec+2017%7EExplanatory+Notes%7EExplanatory+Notes?OpenDocument#2718121728189953" target="_blank">see this description</a>.
And for no group of households did the LCI come in lower than the CPI (0.6% for the December quarter) and for most it came in higher. For example, on an annualised basis the LCI rose by 2.0% for “employee” households and by 2.3% for “pensioner and beneficiary” households. By contrast, the CPI grew 1.9% in the year to December.
Moving from the micro to the macro, <a href="https://www.propertyobserver.com.au/https://www.abs.gov.au/ausstats/abs@.nsf/mf/5368.0" target="_blank">ABS data</a> showed a trade deficit of A$1.358 billion in December, after a small surplus in November. This was largely driven by a strong increase in imports of fuel and machinery.
In the US, consumer credit for December <a href="https://tradingeconomics.com/united-states/consumer-credit" target="_blank">increased by US$18.45 billion</a>, below expectations of a US$20 billion increase. On the other hand, November figures were revised higher from US$27.95 billion to US$31.02 billion, making the overall picture pretty much a wash.
All of the data in Australia and abroad point to a tricky balancing act for policymakers. Interest rates almost surely have to rise in the medium term, but acting too quickly can squash a recovery; acting too slowly risks overheating the economy.
<img src="https://counter.theconversation.com/content/91224/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">And, as the US stockmarket fluctuations in the light of wages figures show, to get the balance right policymakers need to have an accurate forecast of people’s expectations about inflation and other variables. And that is challenging.
<a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">Richard Holden</a>, Professor of Economics and PLuS Alliance Fellow, <a href="http://theconversation.com/institutions/unsw-1414" target="_blank">UNSW</a>
This article was originally published on <a href="http://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/vital-signs-future-expectations-causing-sharemarket-gyrations-and-interest-rate-doubts-91224" target="_blank">original article</a>.
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j.ballantyne1990-6AQqhLzZaK

Future expectations causing sharemarket gyrations and interest rate doubts

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Former Domain boss Antony Catalano, who unexpectedly stepped down from the recently listed company, will not apologise to the Domain shareholders after the exit announcement triggered a sharp downturn in the share price.
The share price initially plunged 17 percent after the Melbourne-based chief executive <a href="https://www.urban.com.au/news/79664-antony-catalano-departs-domain-as-family-role-demands" target="_blank">cited family reasons</a> for not wanting to continue the job.
When asked by the Herald Sun who interrupted his morning coffee run at Sorrento whether he though investors deserved an apology, Catalano replied "Why should I be sorry?"
Opening the back door of his car to show his children in booster seats, Catalano said "see those guys?"
His next words were "go away - seriously," before he made a swift exit in his four wheel drive.
Catalano was looking relaxed ahead of a planned trip to Aspen.
Catalano's resignation, which he said was because he didn't want to move to Sydney for family reasons, is reported to have cost him a possible $13 million.
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Remuneration details released to the ASX revealed showed Domain cancelled the 4.26 million share options Catalano would have received if he had hit targets, such as doubling Domain’s value by June 2021.
After the announcement, Domain chairman Nick Falloon called investors to assure them that Domain "have a deep bench of executives built up over the years," according to the Herald Sun.
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Fairfax Media, which holds 60 percent of Domain shares, were also hit hard.
They are down $90 million from the start of the week.
It was just last November when Domain was spun off Fairfax Media and floated on the ASX with a share price of $3.69. They now sit at $3.11 after crashing to $2.75.
The Australian has speculated Catalano had not embraced the new reporting requirements with Falloon as his new report, rather than his good mate, Greg Hywood.
Fairfax Media noted Catalano’s allies were disappointed he was not formally thanked for his contribution.
Gerard Delany, boss at Melbourne real estate agency Kay &amp; Burton, said he was surprised and thought he was “getting a bit jack of travelling.”
“I also noticed there was no [acknowledgement of Mr Catalano] made by the company when he left which surprised me a bit because he played a pretty big part in the establishment of that Domain offshoot, which was a pretty great achievement,’’ Delaney told Fairfax Media.
Despite not having spoken to Catalano, Delany said he doubted the travel was the "real reason'' for the departure.
''He is a bit of a character, he has got a big family, it has been a drain because he didn't want to move to Sydney, maybe to some degree he has achieved what he set out to achieve and now he has done it, I don't think he is an ongoing managerial type of character,'' he said.
 
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jonathanchancellor-7SQnKwU6yx

Former Domain boss affirms he's happy to put family first

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Wang Jianlin, the chairman of Chinese property group Dalian Wanda, plans to sell his majority stake in Wanda’s Hong Kong-listed arm to a privately held holding company fully owned by the business tycoon.
The proposed deal would mean the sale of Wang’s 3,055,043,100 shares or 65.04 per cent ownership stake in Wanda Hotel Development to Wanda Investment Holding Company (New Holdco) for HK$1.20 a share, or the equivalent in shares from New Holdco, the Financial Times reported citing a regulatory filing.
The two subsidiaries signed a legally non-binding letter of intent to complete the sale before January 31 of next year, the FT said.
Monday’s announcement is part of an ongoing asset reshuffling between Dalian’s remaining listed arm and Wanda’s unlisted holding companies. 
That reshuffle has decreased the overall transparency of the Wanda empire. 
Wanda Hotel Development has been transformed from a property developer to solely managing and designing Wanda’s tourism and hotel properties in an “asset light” approach the developer has taken to mitigate low property sales. 
The proposed sale could give Wang, the chairman, greater control over another piece of Dalian Wanda’s network of subsidiaries as he centralises assets under New Holdco and unlisted holding company Dalian Wanda Commercial Properties (DWCP). Mr Wang privatised DWCP last year. 
Dalian Wanda was one of the four Chinese companies regulators began probing this year for systemic financial risks after it embarked on an aggressive deal-making spree overseas. 
Wanda also sold its interest in its largest ski resort to a friendly company earlier this year, the FT reported.
The sale, uncovered by a search of corporate records, seems to be an effort by Wanda to rebuild its finances amid government pressure to rein in its dealmaking activities. 
Corporate registry information on the Changbaishan ski resort, in China’s north-west near the North Korean border, was changed in June to show that Dalian Yifang group holds 98.33 per cent of Changbaishan stock and Wanda is no longer on the shareholder list.
The price and the timing were not immediately available. 
Dalian Wanda declined to comment. 
Dalian Wanda have said from time to time they <a href="https://www.urban.com.au/news/78281-dalian-wanda-ascertain-interest-in-property" target="_blank">ascertain interest in its property projects</a>. But they deny this week's report by the South China Morning Post that Wanda were offering to sell five of its biggest overseas properties in the UK, US and Australia.
In August the group had to come out and deny rumours they were selling their Gold Coast and Sydney projects, which comprise $2 billion of the $6.6 billion portfolio.
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