Investment Matters

What Matters this week

It was a busy week for markets. President Trump toasted to another victory on Monday, renegotiating the “worst trade deal ever”: NAFTA. By all accounts it was a somewhat hollow victory– the deal has negotiated only marginally better terms than those outlined in the TPP under Obama; with the biggest beneficiary being the automotive sector.

Still, in some people’s eyes (particularly his own) a win is a win and more importantly, he has lived up to one of his more dogmatic campaign promises - important with mid-term elections just around the corner. The agreement still needs to be ratified by all three countries to come into effect.

The RBA met on Tuesday and (unsurprisingly) decided to keep rates unchanged. As we have signalled before, this does not necessarily mean a reprieve for businesses and homeowners alike - banks’ cost of funding have risen significantly since the start of the year (as represented by the rise in BBSW) and could potentially continue to rise. 

Miners South32 and Alumina Ltd rallied spectacularly on Thursday (7.3% and 10.7% respectively) as the price of alumina soared. They had the closure of one of the world’s largest refineries in Brazil, (responsible for 5% of the global alumina supply) to thank.

BOQ announced $372m full-year cash profit. This figure excluded $9m in legal costs associated with the royal commission and was partly attributable to a lift in rates as well as lending. The market reacted negatively with BOQ down 1.5% on the opening.

Shares in the banks rallied briefly last Friday after the release of the Royal Commission’s interim report but slid this week as the market digested it.  The Big 4 (NAB, ANZ, Westpac, CBA) were down 1.3%, 0.4%, 0.4% and 0.7% respectively.

There were three key issues at the heart of the report:

  1. Poor culture and governance
  2. The capability and effectiveness of regulators in meeting their duties
  3. How the industry should manage conflicts of interest that arise from conflicted incentives

The report put the behaviour highlighted during the commission down to “greed”, a short-term pursuit of profit and a lack of honesty.

Surprisingly, Commissioner Hayne did not issue any recommendations in the interim report, posing several (almost 700) questions instead.

This cautious approach may represent an awareness of the impact recommendations could have on the economy (particularly if they lead to a significant contraction in credit).

Treasurer Frydenberg echoed this point: reiterating on Sunday that any recommendations will be framed within their broader implications and avoid precipitating a credit squeeze.

Despite a lack of recommendations, the report (and the commission that preceded) has already had an impact, with several developments occurring over the last few days:

  • Telesales insurance company Freedom Insurance (yes, the same company that was admonished for selling insurance over the phone to a man with Down syndrome) announced it was ceasing all direct sales of insurance and parting ways with its CEO, CFO and 110 staff.
  • Westpac announced it was provisioning $235 million for payouts to customers who have been charged excessive fees by its planners since 2012.
  • ASIC launched legal action (for a change) against AMP over the fee for no service fiasco.

It remains to be seen what recommendations will be made in the final report and the impact they will have.