Eco growth, is it slowing?

Eco growth, is it slowing?

In the past few months, we have noted that retailing – among other sectors that make up the Australian economy – slowed dramatically in the June quarter of 2014. The September quarter reports from many companies over AGM season saw a continuation of that trend.

Further to our recent observations, Australia GDP just printed at 0.3 per cent for the September quarter. By contrast, 0.5 per cent for the June quarter 2014, confirms that economic growth is waning in Australia and the RBA might be forced to cut rates further.

 You can also read some comments here from GoldmanSachs and Deutsche Bank about rate cuts posted on Bloomberg.

To add fuel to our thinking, below are some notes recently published by Deutche Bank on the recent oil price with our emphasis in bold:

“Just a thought: Oil price, traders were too busy selling to ask questions after the OPEC meeting yesterday. But the obvious one to ask is why are oil prices falling? If a shale driven supply glut is to blame then other commodities should be unaffected. However, oil’s four-year low is mirrored by iron ore, cotton, gold and copper’s monthly average price. Lower demand from weak economies could explain this pervasive slump across different commodities…” 

It’s not uncommon in a slowing environment to see material price to earnings (P/E) compression as growth assumptions are paired back for many companies, given economic headwinds.

An example of this can be found in the prices of many of our retailers, which we spoke about recently here. Whilst this appears to have largely already played out – although it may still have more to run if growth fails to recover – we have more reason to be worried about some of the markets glamour sectors.

In recent times, we have witnessed a significant shift of investment into internet, telecommunications and healthcare, for example, as an attempt to avoid the commodity rout. This increased investment has led to many businesses trading on record earnings multiples at a time when growth may be beginning to slow.

Whilst we are not attempting to, nor do we have any ability to predict what sectors may experience a contraction in what investors are willing to pay for its future earnings, a potentially slowing growth outlook and history proving that at economic turning points the risk of price corrections becomes heightened, this is something to be mindful of when making key portfolio investment decisions.