The Australian economy stalls + what’s happening to resource stocks?

Hi everyone,

Well, winter has certainly arrived this week! I know it happens every year, but it still comes as a bit of a shock, doesn’t it?

We’re packing up the MG HS (very luxurious, great value and PAFC major sponsor) and doing a road trip to Canberra this weekend to watch Port Adelaide against GWS in the AFL ... it’s going to be around 2°C for the game so we’re packing the winter woollies. It’s good weather for snuggling up with a book and a glass of red wine. I’ve just finished Kristin Hannah’s The Great Alone, which I enjoyed although it was harrowing and confronting at times.

In this week’s newsletter:

• The Australian economy stalls

• Resource stocks are no longer our biggest companies - now they’re the banks

• 10 great stock tips from 10 top share experts, and why you need to subscribe to the ausbiz streaming network

• Why the RBA decided to cut rates by only 0.25 per cent

• How that rate cut is feeding into a revived property boom …

• Which is bringing more properties onto the market - but they’re taking longer to sell

• The year-to-date US share market report and the changing cycle

The economy continues to stall

Thank goodness, once again, for Australia’s migrant intake. It is the only reason the economy is growing. Elsewhere, consumers are staying in the bunker, government spending is slowing and exports are falling.

On top of this, Australian households and businesses are really cautious about the future.

On Wednesday, the Bureau of Statistics (ABS) reported that real gross domestic product (GDP) rose just 0.2 per cent in the March quarter, which was half the 0.4 per cent expected by markets. Annual economic growth was steady at only 1.3 per cent - below the expected 1.5 per cent and almost half of the 2.5 per cent which is regarded as a normal growth rate.

To put it in a bit more perspective, the annual 1.3 per cent growth rate is only slightly above the 32-year low (outside of COVID). Insipid would be the word I’d use to describe the economy.

Take away population growth from migration and, on a per capita basis, Australia's GDP fell by 0.2 per cent in the March quarter. The economy, on a per capita basis, has contracted for 9 of the last 11 quarters and has shrunk 1.7 per cent over the period. It is broadly the longest negative run of GDP per capita since the 1981-1982 recession. 

What it means is new customers are boosting growth as inbound migration rose 0.4 per cent during the quarter, which boosted population growth by 1.7 per cent over the year.

Despite falling interest rates, household spending remained subdued in the March quarter and is growing by a very sluggish 0.4 per cent. Discretionary spending rose by 0.3 per cent, driven by the purchase of new vehicles (up 2.5 per cent), clothing and footwear (up 1.1 per cent), and recreation and culture (up 1 per cent). But spending on furnishings and household goods dipped 1.3 per cent.

Exports (down 3 per cent) were hit because of a lower-than-average increase in international student numbers and reduced spending per student leading to a decline in travel services exports. Yes, international students are one of our biggest exports and bring a lot of money into the economy.

Exports of goods (down 0.3 per cent) fell, led by coal and liquefied natural gas (LNG) exports as production and shipments faced disruptions from bad weather conditions. Export demand for coal was also weak due to high portside inventories in China and weaker demand for steel manufacturing from Japan. The falls were partly offset by a large increase in non-monetary gold exports.

Australia’s biggest companies are no longer miners ... they’re banks

During the week, CommBank shares hit yet another record high which pushed its total value (market capitalisation) to almost $300 billion. It is the most expensive bank in the world and has had incredible growth in the last two years.

Virtually every stockbroker in Australia has had a sell recommendation on the stock for the last two years but it just keeps going up. 

What is fascinating, I think, is just how valuable all the big banks have become. Traditionally, the big resource stocks have dominated the Australian market ... but now it’s the banks.

Look at this list of Australia’s top 10 most valuable stocks from the middle of the week. CBA is now worth $100 billion more than BHP, which comes in as the second most valuable company.

Resource giant Rio Tinto comes in third, followed by healthcare giant CSL, and then more banks ... NAB and Westpac, while ANZ and Macquarie both make the top 10. Half of the 10 most valuable companies in Australia are banks.

A real changing of the guard.

10 great stock tips ... and why you should be an ausbiz subscriber

If you’re interested in share investing, you really must be a subscriber of the ausbiz streaming network. It’s Australia’s only live business and investment news network: www.ausbiz.com or watch through the ausbiz app or on SevenPlus and Samsung smartTVs.

I’m biased, as I helped Kylie Merritt co-found the network which now has 130,000 registered subscribers.

Apart from the live coverage of breaking investment news, interviewing our top corporate CEOs and picking the brains of Australia’s best share market analysts and investment managers, ausbiz also has special online events for subscribers.

For example, last week there was a huge response to the online event, 3 Stocks For which quizzed 10 share experts on the three stocks they would buy right now. It was jam-packed with recommendations from the experts.

You can watch the event on demand (as all ausbiz interviews and events are) here: https://info.ausbiz.com.au/3stocksfor

Remember, each expert made three stock recommendations, so as a bit of a teaser I’ll share one from each expert ... You can click the link for the rest of the recommendations.

1. Munro Partners - Clean Harbours (NYSE:CLH)

2. Seneca Financial - Catapult Group (ASX:CAT)

3. Ellerston Capital - Megaport (ASX:MP1)

4. Magellan Financial - Intercontinental Exchange (NYSE:ICE)

5. Medallion Financial - GQG Partners (ASX:GQG)

6. TMS Private Wealth - Macquarie Technology (ASX:MAQ)

7. Ten Capital - Light & Wonder (ASX:LNW)

8. RiverX Investment - DroneShield (ASX:DRO)

9. NAOS Asset Mgt - COG Financial (ASX:COG)

10. Cyan Investment Mgt - Acusensus (ASX:ACE)

Why the RBA decided to cut rates by just 0.25 per cent

A couple of weeks after every Reserve Bank board meeting, they release the minutes of that meeting which records the discussion surrounding the decision.

Minutes of its 19-20 May monetary policy meeting were released this week, which showed the RBA Board debated holding rates unchanged at 4.1 per cent but saw strong arguments both domestically and globally for a 0.25 per cent cut. However, they did argue the possibility of a double rate cut of 0.5 per cent.

This is what was said.

Arguments favouring a 0.25 per cent cut: 

The RBA Minutes noted "there were concerns about the strength of the supply side of the Australian economy: for example, productivity growth so far had shown no signs of increasing, and uncertainty about the extent of tightness in the labour market was two-sided. It was also possible that the forecast increase in aggregate demand would facilitate a recovery in profit margins, which would provide more momentum to inflation than expected." ... "it could be challenging for households and firms if the Board subsequently sought to reverse a loosening in policy that, in hindsight, proved to be too rapid."

Arguments in favour of a 0.5 per cent: 

The Minutes noted "monetary policy would need to move to an expansionary setting" in an adverse global scenario and "there were also downside risks to the outlook stemming from the domestic economy, including that household consumption does not pick up as quickly as envisaged in the baseline forecast, or that wages growth slows by more than forecast alongside a softening labour market."

Rate cuts feed into another emerging property boom  

Sydney and Melbourne property values started to tick back up after the recent interest rate cuts, while momentum in the smaller capital cities remained strong.

According to property research group Cotality (formerly CoreLogic), Australian dwelling values rose 0.5 per cent in May, taking their National Housing Index 1.7 per cent higher over the first five months of the year. The gains were broad-based, with every capital city posting a rise of at least 0.4 per cent through the month.

Despite the recent momentum, in annual terms, the pace of gains in the national HVI slowed to 3.3 per cent, the slowest twelve-month change since the year ending August 2023.

Only Melbourne (-1.2 per cent) and Canberra (-0.7 per cent) have recorded an annual decline in dwelling values.

Alongside the broad-based rise in home values, the capital city trends have shown a clear convergence. The range between the highest and lowest annual change in dwelling values, at 9.8 per cent, hasn’t been this narrow since March 2022 because of a slow-down in value growth across mid-sized capitals. 

The rise in housing values continues to be led by lower-priced properties across most cities, however, more expensive properties have started to accelerate off the back of the rate cuts. Across the state capitals, Sydney and Canberra are the only capital cities where the upper quartile is showing a stronger quarterly growth trend than the lower quartile of the market.

And more properties are coming to market

While values are starting to kick back up following the rate cuts, according to data released by SQM Research, total residential property listings across Australia increased by 5.9 per cent in May ... a 1.5 per cent rise compared to the same period in 2024. Sellers are trying to capture that renewed buyer enthusiasm.

Sydney recorded a significant rise, with listings climbing by 8.9 per cent for the month and 9.8 per cent for the year. Even subdued Melbourne rose by 8.6 per cent, but still -0.6 per cent for the year.

Booming Brisbane and Perth also saw strong monthly growth of 8.6 per cent and 8.1 per cent, respectively. Perth listings are up a massive 20.5 per cent for the year. Adelaide and Canberra monthly listings were up 10.2 per cent and 8.3 per cent.

I also think a good barometer of the health of the property market is the number of new listings and how long properties are taking to sell. Both new and old listings are rising, which means while sellers are wanting to take advantage of the demand that’s resulted from the interest rate cut, there may not be as many new buyers out there as sellers are hoping for. 

According to the SQM data, national new property listings (properties listed for less than 30 days) rose 4.2 per cent from April and remain 8.2 per cent lower than May last year.

Older property listings (listed for over 180 days) jumped by 8.8 per cent nationally in May and 13.5 per cent annually. Sydney and Melbourne again led the charge, rising 5.7 per cent and 6.2 per cent, with annual growth at 29.5 per cent and 15.8 per cent respectively.

That’s a big increase in the number of properties taking a lot longer to sell.

The cycle is certainly changing in US stocks

This time last year we were all fixated on the Magnificent 7 US technology giants (Tesla, Apple, Alphabet, Microsoft, Meta, Amazon, Nvidia) whose share prices were surging. Since the start of this year, the focus has been on the wild gyrations of the market reacting to the policies of President Trump.

It has been a wild ride.

So, at the end of May, how has the US market fared year-to-date?

Would you believe, despite all the gyrations, the market capitalisation of the US market is down just 0.2 per cent - and the biggest drag has been some of those big technology stocks of the Magnificent 7, while others have continued their growth.

You often read in this newsletter about Warren Buffet, who I regard as the world’s best investor. That’s his Berkshire Hathaway leading all other US stocks in terms of performance this year.