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All Ords Report 10 November 2015

The Reserve Bank of Australia (RBA) has once again elected to leave the cash rate on hold, and with the festive season right around the corner you may be wondering what this may mean for Australia’ big retailers?

This time of year the financial industry is watching the retail sector closely, particularly retail spending, for an indication of the health of consumer spending and whether the coming festive season means celebrations or commiserations for retail traders.

A cut to the cash rate may provide just cause for some consumers to spend more, however others in the economy would feel the pinch; namely borrowers win, term deposit holders lose. Term deposit rates are currently tight with financial institutions typically offering interest returns between two and three per cent.

According to the banking sector, with interest rates already so low, borrowers are way ahead in their loan repayments, which provided the majors justification for a rate rise recently. The move was independent of changes to the cash rate by the RBA.

While the banks may have their reasons, this flies in the face of pressure the banking sector has placed on the RBA to do the opposite, and cut rates to provide necessary support to the Australian economy; including to foster higher levels of consumer spending. But is it acceptable to have one rule for the RBA and another for the banks who aim to support their bottom lines?

Banks must be of the view that consumer sentiment will withstand any small changes they make. However, perception is everything when it comes to consumer spending. If times are good, there are plenty of jobs, and generally consumers are not feeling the pinch; they have enough money to pay bills and live well, then they are likely to spend more. If sentiment is negative, the opposite is true. So how are consumers feeling right now?

In October, Australian consumer confidence jumped significantly and was ahead of analyst forecasts. The main reason attributed for the change has reportedly been around a change in government, with Malcolm Turnbull taking the leadership from Tony Abbott. Further, a boost to the value of the Australian dollar (AUD) and an improvement in employment numbers also assisted the shift.

So does this mean that retailers will do well this season, given confidence is heading up? I’m not so sure that we will see a bumper retail season. Many Australians I speak to have changed their spending habits at Christmas to either restrict present giving to the children, or they partake in good old ‘Kris Kringle’, which requires each family member to purchase one present up to an agreed value for another family member. How prevalent is this type of behaviour?

The Australian Bureau of Statistics has released data which indicates that consumer spending continued to rise each quarter for the past few years, exceeding $220 billion this year. What does this say for Kris Kringle? Given the data, and the view held by our big financial institutions about our ability to withstand a small lending rate rise, I believe that it is likely for the spending trend to continue to the year’s end. The question though is whether the number will be high enough to appease those looking for a negative story. Only time will tell.

Keep an eye on the numbers. Sales in November will provide a good early indication of the true state of affairs as to whether the retailers are likely to do well in the last quarter. This will also indicate whether the direction the banks have taken with lending rates is having a negative effect. That said the official spending figures are not released until January, so it will be a while before the truth is revealed. I believe this will have a material influence on our market in the first half of 2016.

The share price direction of a number of retails stocks, including Woolworths, which has been battling increased competition and issues with its Masters chain, will be relying on a strong result this year. Particularly as the share price is sitting at a critical level. More on this in a recent Talking Wealth podcast on Woolworths.

What do we expect in the market?

My analysis indicates that a turn in the XAO was probable for September/October, however, the market appears to have made the low in August, given the recent strong rise to around 5400 points. I was also looking for a strong close above 5350 points, as an early indication that the low may be in, which occurred on the 23rd October. Therefore, the way the market has unfolded over recent weeks is positive.

Given the strength of the 5400 level, the analysis also indicates that short term weakness is likely before the XAO can attempt a move higher, therefore the current decline is to be expected. However, a strong fall below 5150 points would be cause for closer scrutiny, and is an important level to watch as the market is currently pulling back. Typically, around the time of the Melbourne Cup, a decline of between one to five weeks can occur. Given this, the current fall is typical for this time of year, and therefore I am watching for a repeat of the pattern.

The next turn up will provide a clearer view of the most probable trajectory for 2016. Therefore we need to be patient while the market makes the current move. Provided the All Ordinaries (XAO) holds above 5000 points we are likely to see a rise into late December, increasing the probability of a further rise to between 5600 and 5800 points in the first half of 2016. The alternate situation would first see a fall to around 4750 points before the next rise commences.

In either scenario, the coming year will bring some great opportunities in the market to pick up many of your favourite stocks at lower prices, therefore now’s the time to prepare to take advantage of what lies ahead. History shows how eventually sectors that have been sold off heavily will stop falling.

Now for those of you who manage your own Self-Managed Super Fund (SMSF), or perhaps you’re thinking of starting one, as a SMSF trustee investing in direct shares, it’s so important that you acquire the knowledge to buy and sell shares. The recent decline in the Financial sector is proof that even the big four Australian banks, paying above market average dividends, are not immune from a significant sell-off, which recently caught many SMSF trustees by surprise. Wealth Within provide a number of different courses to meet your individual needs.

In my opinion, the most important part of your education is in learning how to preserve your capital, and this ought to be your first consideration, ahead of the profits you will make from the share market, when managing your superannuation.

Dale Gillham is Chief Analyst at Wealth Within

All Ords Chart 10 November 2015

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