Monthly economic e-news – December 2019
06 December 2019
By Craig Turnbull
Chief Investment Officer
Australian shares hit all-time high in November
Despite the ongoing market volatility, the Australian share market hit an all-time high in November, recovering all the value lost since the start of the global financial crisis way back in October 2007.
In a year of geopolitical tensions and trade wars, the ASX 200 finished November on 6,846 points, rewarding investors with a healthy 21% rise for the first 11 months of 2019.
Source: Yahoo Finance
Companies boosting the Australian share market this year
A spike in global commodity prices, particularly for iron ore, fuelled the share prices of our big miners BHP and Rio Tinto in 2019.
At the start of the year, the global spot price for iron ore was US$71.06 per tonne, surging to US$123.19 in early July. This was mainly due to a sharp reduction in global supply following the devastating dam collapse at the Córrego do Feijão iron ore mine in Brazil.
The share price for Rio Tinto peaked at $104 in early July but fell back to $97 by the end of November, a 29% rise for the calendar year to date. BHP’s share price gained a more modest 17% over the same period.
International demand for immunoglobulin blood products boosted the share price of biotechnology company CSL to $283.48 at the end of November, a remarkable rise of over 50% for the year so far.
CSL now has a total market capitalisation of around $125 billion, closing in fast on the Commonwealth Bank, currently the largest company listed on the ASX 200.
Despite continuing low levels of consumer confidence, the share prices of some of our larger retailers rallied strongly in 2019. Woolworths shares were up 39%, Wesfarmers rose 38%, and electronic goods retailer, JB Hi-Fi, surged an impressive 78% for the 11 months to November.
High dividends driving the market but are they sustainable?
Over the 12 years it took the ASX 200 to regain all that lost ground, the ASX 200 Accumulation Index increased by more than 70%. All of that net gain was down to dividends.
Australian investors have long been rewarded by generous dividends and franking credits. This income has become crucial for investors and self-funded retirees in the current low interest rate environment.
But with our GDP growth rate stuck in first gear, there’s a concern many companies may not generate the cash flow needed to maintain their high dividend payouts.
According to the Reserve Bank, the average dividend payout ratio of Australian listed companies has historically been around 65% of net income. However, some of big four banks and our larger retailers have dividend payout ratios up around 80% of net income.
This is in stark contrast to many other countries where dividend payouts are much lower. For US companies listed on the S&P 500, the average payout ratio is below 40%.
Overseas companies, particularly technology companies, commonly reinvest a larger proportion of their net income back into the business to boost long-term growth. This generally means higher capital returns but less dividend income for shareholders.
So what does this mean for you?
Despite the market volatility this year, investors and super fund members have benefited from rising share prices and strong dividends but there is a question mark over whether this is sustainable over the short to medium term.
Hopefully 2020 will bring some renewed vision and we’ll see an easing of geopolitical tensions, better news on global trade, and closer to home, a more confident economic outlook.
In the meantime, I wish you and your family a great Christmas and an even better new year..
Markets at a glance
for the month ending 30 November 2019
Australian shares1 up by 3.28%
Australian Government Bonds yield2 down to 1.025%
Australian dollar down to US$0.6777
Cash rate3 steady at 0.75%*
International shares4 up by 2.68%
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)