Announcement PDF CONTANGO MICROCAP LIMITED INVESTMENT COMMENTARY QUARTERLY UPDATE - DECEMBER 2015 TABLE OF CONTENTS A WORD FROM THE CHIEF INVESTMENT OFFICER……………………………..3 GLOBAL OVERVIEW ...........................................................................................4 GLOBAL INTEREST RATES / CREDIT MARKETS ...................................................6 EXCHANGE RATES ..............................................................................................6 COMMODITIES ....................................................................................................6 DOMESTIC ECONOMIC DEVELOPMENTS ........................................................7 AUSTRALIAN EQUITY MARKET ............................................................................8 EQUITY MARKET – OUTLOOK .............................................................................9 SMALL COMPANIES REVIEW ............................................................................10 SMALL COMPANIES OUTLOOK .......................................................................11 KEY STOCK CONTRIBUTORS .............................................................................11 PORTFOLIO CHANGES .....................................................................................12 PORTFOLIO SECTOR DETAILS AS AT 31/12/15 ...............................................13 Contacts Sydney: Carol Austin, Investment Services Director, Level 16, 1 York Street, Sydney NSW 2000 Telephone 02 9251 6572, Fax 02 9251 6383 Melbourne: George Boubouras, Chief Investment Officer, Level 27, 35 Collins Street, Melbourne VIC 3000 Telephone 03 9222 2333, Fax 03 9222 2345 Contango Asset Management Limited believes that the information contained in this document is correct. However, no warranty is made to the accuracy or reliability of the statistical information contained in this document. Sources: Iress, Heuristic Investment Systems, JP Morgan, RBS, UBS, Citi, Macquarie Contango Asset Management Limited December 2015 – Page 2 A WORD FROM THE CHIEF INVESTMENT OFFICER CIO Monthly Note January 2016 Volatility welcomes in the New Year Unfortunately, news headlines in the first week of the New Year have been dominated by volatility in financial markets. The recent market volatility has been caused mainly by developments in China including the depreciation of the renminbi. To put the volatility into some context, it is important to recognise that the Chinese economy is going through a major transition. China’s old model of growth relied on exports and debt-fuelled investment. For a long time this model worked with real GDP growth averaging over 10% in the 2000s. So why has this model of growth broken down? Firstly, demand for China’s exports is dependent on economic conditions in the broader global economy, including in developed economies. The problem is that economic conditions in developed economies have been weak with low growth and not much demand for exports from China. This is reflected in the latest export data from China which shows export growth turning negative in late 2015. Secondly, China’s debt financed investments have become less productive over time. Generally, projects with high benefit-cost ratios like welltargeted public infrastructure add to economic output. But the debt and investment increasingly found its way into less productive means such as on speculation and into already oversupplied industrial capacity. Contango Asset Management Limited This has left the Chinese economy in a vulnerable position with slowing growth, excess capacity and an elevated debt burden. Moving to a more sustainable growth model requires reversing these trends. The good news is that the Chinese government is aware of the problem and has set out a reform agenda. But we shouldn’t overestimate what the Chinese authorities can do and we should also expect some policy errors along the way. The handling and communication of the recent renminbi depreciation can be viewed in this light. While it is true that the renminbi is expensive, seemingly random depreciations of 1%-2% are too small to effectively stimulate the economy but large enough to cause financial market disruption. Looking forward, our basecase is still for no hardlanding in China although demand for commodities will be weak as trend growth moderates. As a result, all of Contango’s portfolios are underweight resources and are likely to remain that way throughout 2016. Although it may be tempting to exploit ‘value’ opportunities in some beaten up resource stocks, investors should be cognisant of the larger economic backdrop and the still subdued outlook for commodity prices. George Boubouras Chief Investment Officer Contango Asset Management Limited (this note was written 12 January 2016) December 2015 – Page 3 AUSSIE BATTLERS EKES OUT POSITIVE GAIN IN 2015 GLOBAL OVERVIEW Following three consecutive years of solid growth, the Australian equity market managed a modest total return (including dividends) of 2.8% in 2015. The local market’s subdued performance was consistent with weak markets across the globe. The global MSCI ACWI index declined -4.3% over the year, driven by weakness in key US markets (DJI -2.2% and S&P 500 -0.7%) coupled with aggressive selling in emerging markets (-17.0%). Europe (3.8%) and Japan (9.1%) bucked the trend, both delivering positive returns and the US NASDAQ (5.7%) enjoyed better fortunes than the S&P 500 and DJI. In Europe, the ECB cut its deposit rate 10 basis points to -0.3% and announced a six-month extension to its QE programme, taking the programme out to March 2017. Domestically, the RBA left the cash rate on hold, with the statements announcing the decisions largely unchanged, save for a few words. Global Indices 1 mth 3 mth 12 mth Dow Jones Industrial -1.7% 7.0% -2.2% S&P 500 -1.8% 6.5% -0.7% NASDAQ Index -2.0% 8.4% 5.7% Euro Stoxx 50 Price Index -6.8% 5.4% 3.8% FTSE 100 -1.8% 3.0% -4.9% Not surprisingly, it was the Energy and Materials sectors that weighed on markets given the poor performance of key commodity prices over the year. German Aktien Index (DAX) -5.6% 11.2% 9.6% France CAC40 -6.5% 4.1% 8.5% Nikkei 225 Index -3.6% 9.5% 9.1% Hang Seng Index -0.4% 5.1% -7.2% The Energy sector finished down -27.7% over the year and the Materials sector finished down -15.2%. Outside of these sectors, the majority of the ASX 300 Index finished up with the standout being the more defensive Utilities (22.8%) sector. Consumer Discretionary (18.7%) and Industrials (16.7%) also performed well. Shanghai Composite Index 2.7% 15.9% 9.4% India BSE 200 Index 0.4% 0.8% -1.5% MSCI ACWI (US$) -1.9% 4.6% -4.3% MSCI ACWI Ex Aust (AU$) -2.9% 0.5% 7.8% ASX 300 2.7% 6.5% 2.8% Following a dismal showing in the third quarter of 2015, world equity markets did finish the year of relatively well with a 4.6% return in the fourth quarter. Emerging markets even managed to eke out a small gain (0.3%). Despite the Fed raising rates for the first time since 2006, the US DJI (7.0%) and the S&P 500 (6.5%) both managed to deliver strong returns in the December quarter. During the quarter, the Fed raised interest rates for the first time in almost ten years. The Fed’s target rate range increased by 25 basis points to 0.25%0.50%. The increase was widely anticipated by the market with little reaction on the day. The FOMC statement was notably dovish with the word “gradual” emphasised on more than one occasion. Looking forward, the FOMC’s ‘dot plot’ is consistent with four hikes in 2016. In the quarter, the local market also delivered a strong return of 6.5%. Consumer Discretionary (13.0%) was the best performer, followed by Healthcare (12.3%) and Financials. Materials (-6.9%) and Energy (-1.3%) continued to underperform. United States On growth, US third quarter GDP was revised down one-tenth to a sluggish 2.0%. But a slowdown in inventory accumulation masked a solid increase in domestic final demand. During the December quarter, the market’s main focus was on the Fed which raised rates for the first time since June 2006. Despite some volatility, markets generally received the news well with US long bonds only selling off 1-4 basis points on the day of the decision. During the quarter, the US labour market data was undeniably strong, partly supporting the call for Fed lift-off. Non-farm payrolls increased 654k in the quarter, initial jobless claims declined to 267k, the unemployment rate fell to 5.0% and the labour force participation rate increased to 62.5%. Also of note, the IMF added the Chinese Renminbi to the list of reserve currencies which make up the SDR. This was the first change since the Euro replaced the Deutsche mark and the French franc in 1999. On the consumer, the University of Michigan consumer sentiment index rose from 87.2 in September to 92.6 in December. Consumers are likely benefitting from lower petrol prices and the steady improvement in the labour market. The Contango Asset Management Limited December 2015 – Page 4 Conference Board Consumer Confidence Index increased 3.9 points in December to 96.5, reversing some of the declines reported in October and November. reserve ratio (RRR) and M1 money supply growth increased from 11.4% in September to 15.7% in November. Although, M2 money supply growth was relatively unchanged at around 13%. On housing, the Case-Shiller 20-city composite index ended the quarter up 5.5% over the year. Building permits increased 16.7% in the quarter, but Housing starts decreased from 1,207 in September to 1,173 in November. The implementation of the “Know Before You Owe" loan disclosure rules weighed on loan and construction demand during the quarter. China’s CPI inflation remained subdued rising only 1.3% in October and 1.5% in November. The uptick in November was driven by food prices which were affected by rain and heavy snow. On manufacturing conditions, the Markit, Philadelphia Fed and Empire State surveys all showed a deterioration in conditions over the quarter. The Empire State survey posted its fifth consecutive contractionary reading. The weakness is likely attributable to lower energy prices, the stronger dollar and a continuing inventory drag. The Markit Services PMI fell to 53.7, the lowest reading since last December. All of the components within the services PMI moved lower, with the largest declines in new business and business expectations. China During the quarter, the Chinese Renminbi became the fifth currency to be included in the IMF’s Special Drawing Rights (SDR). This is the first alteration to the basket of currencies comprising the SDR in over 15 years. Europe & Japan In Europe, the ECB cut the deposit rate 10 basis points to -0.3% and announced a six-month extension to the duration of its QE programme, taking the programme out to March 2017. The Markit Eurozone PMI was remarkably resilient given the string of unfortunate events in the Europe including a terrorist attack. The Manufacturing PMI increased 0.8 points to 53.1. Notably, the manufacturing sector reported increased exports and production expectations, consistent with the PMI, although the Services PMI did fall -0.5 points to 53.9, yet it remained solid. In Japan, the economy rebounded in the third quarter after a soft second quarter. Growth picked up from -0.5% to 1.0% annualised. However, inflation remained weak at only 0.3% in November. The BoJ kept the rate of QE at 80 billion yen despite some expecting them to do more. On the policy front, China's policymakers held the annual Central Economic Work Conference (CEWC) in December. The conference emphasized proactive fiscal policy and prudent monetary policy to support new sources of growth and tackle overcapacity, high debt and financial risk. The economic data remained subdued in China. Third quarter GDP growth came in at 6.9% compared to 7.0% in the second quarter. Industrial production growth slowed to 5.6% in October before picking back up to 6.2% in November. Fixed investment growth increased over the quarter as newly started investment projects picked up. The PMI data showed some stabilisation with the seasonally adjusted Caixin China Composite PMI index rising from 48 in September to 50.5 in November. The Caixin China Manufacturing PMI increased from 47.2 to 48.6. There was also some evidence that central bank easing is starting to flow through the economy. During the quarter, the PBoC lowered the regulated Contango Asset Management Limited December 2015 – Page 5 GLOBAL INTEREST RATES / CREDIT MARKETS COMMODITIES Over the year, the US yield curve ‘bear flattened’ with the spread between the 2 year and 10 year bond rates narrowing by 29 basis points. At the long end, the US 10-year bond yield rose 10 basis points to 2.27%. The reaction to the Fed rate announcement was relatively modest on the day of the decision with yields rising only 1-4 basis points. The Australian yield curve ‘bull steepened’ over the year, with the spread between the 10 year bond yield and 3 year bond yield widening by 26 basis points. The Australian short end rallied on speculation of more RBA rate cuts while the long end sold off on the back of the Fed’s decision. Interest Rates Level 1 mth 3 mth 12 mth AUS UBS Composite Bond 8,561 0.3% -0.2% 2.6% AUS UBS Bank Bill Index 8,365 0.2% 0.5% 2.3% % basis point change AUS Cash Rate 2.00 0 0 -50 AUS 90 day Bank Bill rate 2.35 9 19 -42 AUS 10 year Bond yield 2.81 -5 21 8 US Federal Funds rate 0.50 25 25 25 US 30 year Bond yield 3.02 5 16 27 US 10 year Bond yield 2.27 6 23 10 EXCHANGE RATES Over the year, the USD rose 9.25% against a basket of major currencies. The index was supported by the Fed’s rate decision but also by weakness in the Euro (-10.3%) which largely reflected the ECB's decision to cut the deposit rate and extend its QE programme. Over the year, the AUD was weak depreciating 10.7% against the USD and 5.7% in trade weighted terms. However, since its low of 69 cents in September, the AUD has climbed over 3% on the back of strong employment data and strengthening business conditions. Therefore, the AUD outperformed most other commodity currencies despite the weak commodity price environment (CAD 8.0%, BRL 4.2% and ZAR 15.9%). It was a very tough year for global commodity prices as subdued global growth and excess supply weighed on markets. The crude oil price declined -31.0% over the year with most of the selling occurring in the second half. Subdued global demand, an unseasonably warm start to the northern hemisphere winter and excess supply from the US all combined to drive the price lower. The trend decline in price continued in the December quarter with no production cuts from OPEC to stabilise the market. Over the year, base metals lost almost a quarter of their value with the LME Metals Index down -24.4%. The decline was driven by slowing demand from China and the global economy. All of the constituents in the index fell with zinc down -26.5%, copper down -26.1%, tin down -24.9%, aluminium down -17.7% and lead down -2.5%. Notably, the LME nickel price declined -42.0% with the weakness partly attributable to China’s anti-dumping duties. On iron ore, the hangover of the mining super cycle persisted through the year, with the price falling -36.5% to US$43.5 a tonne. Soft demand from China and additional supply from Australia combined to drive the ore price lower. This trend continued throughout the year with the price falling over 20% in the December quarter. Precious metals fared marginally better than other commodities with spot gold declining by only -10.4% over the year. The gold price was driven by speculation regarding the timing of the Fed rate hike and geopolitical tensions in the Middle East. The Fed’s deferral in October increased holdings of physically backed gold ETFs and lengthened net money manager positioning which supported the price somewhat. Commodities Level 1 mth 3 mth 12 mth Gold (US$/oz) 1,061 -0.3% -4.8% -10.4% Oil WTI (US$/bbl) Aluminium (USc/lb) LME Copper (USc/lb) LME Nickel (USc/lb) LME 37.1 -11.0% -18.2% -31.0% 68.4 4.5% -3.5% -17.7% 213.3 2.3% -7.7% -26.1% 1 mth 3 mth 12 mth CRB Commodities 0.729 0.9% 3.9% -10.7% Iron Ore Price 87.72 -1.4% 4.3% -10.2% 1.085 2.7% -2.9% -10.3% 0.672 -1.9% 6.9% -0.5% 62.70 1.5% 4.7% -5.7% Exchange Rates Level AUD/USD AUD/YEN EURO/USD AUD/EUR AUST TWI Contango Asset Management Limited 393.0 -0.8% -14.0% -42.0% 176.1 -3.5% -9.1% -23.4% 43.5 -1.1% -21.6% -36.5% December 2015 – Page 6 DOMESTIC ECONOMIC DEVELOPMENTS The Australian economy continued its transition from mining to non-mining during 2015. As a result, growth was below trend and the RBA was forced to cut rates twice early in the year. A key drag on the economy was the slowdown in mining capex. The third quarter private capex survey revealed that Australian firms cut capex by a substantial -9.2% (consensus -2.9%). The forward looking component was also weak with estimates of a -20% contraction for the coming year. Stopping the RBA from undertaking additional easing were the potential risks to the housing market. The risks were identified and discussed in the RBA’s Financial Stability Review. As a result, APRA implemented additional supervisory measures to reinforce sound housing lending standards. This had a negative impact on investor lending which declined to 35% of new loans which is the lowest level since 2012. change in Prime Minister. Importantly, the business conditions measure, which has the strongest correlation with domestic activity, ended the quarter 10.2. During the quarter, the Reserve Bank of Australia left the official cash rate on hold. The RBA had to juggle a number of competing forces, but the risks were biased towards further easing. The central bank lowered its inflation forecast based on the assessment that “the latest reading contained some signal, not just noise”. The RBA also noted that the beneficial effects of a weaker A$ are proving slow to manifest through the real economy. At the annual Long Run address, RBA Governor Glenn Stevens highlighted the impending economic adjustment to the very large and longrunning terms of trade event. This is coinciding with a household sector which no longer has a major role to play in leading growth by significantly increasing its leverage. In addition to concerns around investor housing, the economic data did improve in the second half of the year prompting the RBA to take a wait-and-see approach on interest rates. Indicator Economic growth surprised on the upside in the third quarter coming in at 0.9%. However, the major contributor was net exports which masked a sobering quarterly contraction in domestic demand (-0.6%). Outcome Employment change, persons, mth, Nov 71 400 Unemployment rate, %, Nov 5.8 Consumer confidence, index, Dec 100.8 NAB business confidence, Nov +5 RBA cash rate, % 2.00 Credit growth, %, yoy, Nov 6.6 The Australian labour market, as reported by the ABS, was red hot in 2015. The economy allegedly added 302k jobs in the 11 months to November. The unemployment rate fell from 6.4% to 5.8% in November with the participation rate increasing from 64.7% to 65.3%. However, the ABS has come under scrutiny for its labour force data with sample rotation adding significantly to the growth numbers. Consumer inflation was subdued over the year with the headline rate averaging around 1.5%. The index was weighed down by the decline in energy prices. Core inflation moderated from 2.3% to 2.1% over the year but remained within the RBA’s target band. In the December quarter, the economic data was generally solid. On the consumer front, retail sales were up 0.5% in November and 0.6% for the September quarter. The Westpac Consumer Confidence index rose (7.4%) over the quarter to 100.8. The NAB business confidence survey rose from 1.3 in September to 4.8 in November, following the Contango Asset Management Limited December 2015 – Page 7 AUSTRALIAN EQUITY MARKET Sectors in detail The ASX 300 Index returned a modest 2.8% in 2015. This was driven by a 2.1% return in the large cap ASX 100 Index and a strong 10.2% return in the Small Ordinaries Index. The Consumer Discretionary sector (13.4%) was the best performer over the quarter. The sector was driven by strong performances across the board including in Consumer Services, Media and Retailing. The standout stock performance was Domino’s Pizza (43.5%) with Crown (26.3%), APN Outdoor (58.4%), OOH! Media (51.8%) and Myer (35.8%) also performing strongly. The sector was buoyed by the strong employment data, strong housing market and improvement in consumer confidence. Resources continued to underperform with the ASX 300 Resources Index down 24.9% over the year and the Small Resources Index down 14.7%. In the December quarter, the market returned a strong 6.5% driven by a 9.1% return from the Industrials which offset the -8.7% decline in Resources. Accumulated Australian Indices 1mth 3mth 12mth All Ordinaries 2.6% 6.6% 3.8% ASX 100 2.6% 6.1% 2.1% ASX 100 Industrials 3.4% 8.8% 7.7% ASX 100 Resources -2.6% -10.0% -25.8% ASX 200 2.7% 6.5% 2.6% ASX 300 2.7% 6.5% 2.8% ASX 300 Industrials 3.4% 9.1% 8.3% ASX 300 Resources -2.0% -8.7% -24.9% Small Ordinaries 3.9% 11.3% 10.2% Small Industrials 3.8% 11.9% 15.0% Small Resources 4.5% 7.2% -14.7% As at 31 December 2015. Source: Bloomberg * Total return Not surprisingly, it was the energy (-27.7%) and Materials (-15.2%) sectors that weighed on the local market over the year given the sharp decline in commodity prices. Outside of these sectors, the majority of the index finished higher. The standout performers was the more defensive Utilities (22.8%) sector, Consumer Discretionary (18.7%) and Industrials (16.7%). In the December quarter, the story was much the same with Materials (-6.9%) and Energy (-1.3%) continuing to underperform. The outperformers were the Consumer Discretionary (13.4%) and Healthcare (12.4%) sectors. Australian Sector * 1 mth 3 mth 12 mth Materials Consumer Discretionary 1.3% -6.9% -15.2% 6.3% 13.4% 18.7% Consumer Staples 7.1% 6.2% 1.0% Energy -7.5% -1.3% -27.7% Financial 3.7% 10.6% 6.1% Financial (ex LPT's) 3.6% 11.5% 4.7% Healthcare 0.6% 12.4% 16.2% Industrials -0.5% 5.6% 16.7% Information Technology 3.8% 9.2% 11.9% Property Trusts 4.0% 6.0% 14.4% Telecoms 4.3% 0.9% 1.8% Utilities 3.0% 2.7% 8.6% 6.5% 22.8% 2.8% S&P/ASX300 As at 31 December 2015. Source: Bloomberg * Total return Contango Asset Management Limited Healthcare (12.4%) also outperformed over the quarter despite a bounce in the currency. Sectro performance was driven by a strong performance from CSL (18.1%). CSL flagged new products due for release in 2016 which will support earnings growth. Mayne Pharma (37.6%) and Ramsay Health Care (16.2%) also performed well. The Financials ex-REITs (11.5%) outperformed on the back of a solid performance from the Banks (12.8%). Of the majors, CBA (17.6%) and Westpac (17.2%) were the best performers on a flight to quality while NAB (4.2%) and ANZ (6.9%) underperformed. Outside of the banks, Diversified Financials (14.6%) performed well driven by Magellan (43.4%), Challenger (22.1%) and Macquarie group (10.1%). REITs (6.0%) had a solid quarter but underperformed the broader financials. Outperformers were Mirvac (17.8%) and Lendlease (13.6%). IT (9.2%) had a good quarter led by Technology One (31.4%), iProperty (34.4%) and Carsales.com (19.6%). SMS Management (-41.4%) was the clear underperformer as it continued to work through its restructure. The Utilities (8.6%) sector was driven by a solid performance from AGL Energy (13.2%) and a very strong performance from the smaller Infigen Energy (63.0%). ERM Power (-30.1%) underperformed after a downgrade following margin pressure. Consumer staples (6.2%) marginally underperformed the broader market. The sectors performance was driven by very strong returns from Bellamy’s (73.2%), Bega Cheese (56.5%), Metcash (53.8%) and Blackmores (49.4%). But the sector was weighed down by the relatively modest performance of Westfarmers (6.1%) and the outright weakness in Woolworths (-1.4%). Woolworth’s continued its search for a new CEO but Chairman Gordon Cairns said he “will not be rushed to any quick fixes” and it is likely the search could take some time. December 2015 – Page 8 Performance in the Industrials (5.6%) sector was mixed with strong gains in Professional Services (9.0%), modest returns in Transport (4.6%) and ongoing weakness in Capital Goods (-4.5%). Brambles (18.8%) had the largest impact on the sectors return. The outperformers were Broadspectrum (32.7%), Seek (28.2%) and Seven Group (26.3%). The Capital Good stocks continued to underperform including Bradken (-51.5%), Cardno (-48.8%) and Austal (-30.2%) on the back of falling commodity prices. Telcos (0.9%) underperformed following a flat result from Telstra (0.0%). The outperformers were Chorus (56.4%), Vocus (27.9%), and M2 Group (22.7%). Resources underperformed over the quarter dragged down by both Energy (-1.3%) and Materials (-6.9%). Within the Energy sector, Caltex (26.8%) performed well but this was offset by falls in Origin (-11.9%), Oil Search (-6.6%) and others. Within Materials, BHP (-19.6%) detracted the most from performance followed by Rio Tinto (-8.0%) and South 32 (-22.0%). Other underperformers included Kingsgate Consolidated (-48.6%), Arrium (-33.3%) and Sims Metal Management (-23.6%). In Europe, economic activity has been weak and inflation has been very low but, following the announcement of QE by the ECB and subsequent depreciation in the Euro, we expect growth and inflation to pick up somewhat in 2016. On Emerging Markets, our baseline forecast for China is for no hard landing although the risks have increased mostly around its financial markets. We envisage a gradual moderation in trend growth and a well-managed deleveraging with no major debt or credit crisis. So far, this scenario has played out mostly as expected with policymakers providing support as required including a modest devaluation of the Yuan. Under this scenario, demand for commodities should remain subdued and commodity prices will remain under pressure. Both iron ore and oil face unfavourable supply dynamics with additional oil supply likely to come on stream if the price rises aggressively. However, we remain on the look-out for any large-scale supply cuts that would have an impact on pricing. Locally, the outlook is for sub-trend growth as the economy EQUITY MARKET – OUTLOOK The outlook continues to evolve mostly as we have expected with sub-trend global growth driven by solid growth in the US, partly offset by weakness in emerging markets. We expect developed economies to perform somewhat better than emerging economies on the back of ongoing solid growth in the US, a modest recovery in Europe and weak but positive growth in Japan. Growth in Emerging economies however is expected to remain under pressure from weak commodity prices, tightening financial conditions and soft momentum. A key factor driving the outlook for growth and equity markets will be the evolution of US and global bond yields. Underlying activity in the US is solid and is driving a recovery in the labour market. Although the Fed began normalising rates in December, the future path of interest rate rises is likely to be very gradual and the terminal rate much lower than in previous cycles. The US economy is still deleveraging, inflation is subdued and the broader indicators of labour force excess capacity remain elevated. Therefore, it is likely that US bond yields will remain low which will help support growth and equity continues to transition from mining investment to non-mining investment, net exports and consumption. While this transition is slow, there is mounting evidence that it is underway. Employment growth has picked up driven by a recovery in NSW and Victoria centred on services and construction. This has stabilised the unemployment rate and has encouraged more people to enter the labour market. Although we don’t expect a cyclical upswing, this labour market strength will support national income growth and consumption. In this environment the RBA is likely to remain on hold. However, the recent independent rate hikes by the commercial banks will put pressure on the RBA to not let financial conditions tighten further. In summary, given modest but positive global growth and supportive monetary policy, global equity markets should continue to grind higher over the next 12 months. Equity valuations have improved recently following some volatility, but although valuations now look more attractive, we expect the volatility to continue into 2016 as the Fed raises rates and as Emerging Markets adjust. Despite this, equities are still expected to generate higher returns on an accumulation basis than either bonds or cash in 2016. markets. Contango Asset Management Limited December 2015 – Page 9 The Aussie market in particular will be supported by The Consumer Discretionary sector had a number the global equity rally but also the lower AUD which of outperformers. The outdoor media space saw will boost earnings growth for the trade exposed some strong performers in APN Outdoor Group Ltd industrials and resource companies. (60.2%) and Oh!media Ltd (51.77%) as digitalisation In this environment, we prefer companies that have solid growth profiles and high free cash flow yields. in the outdoor media space continues to grow strongly resulting in a series of earnings upgrades. Several of the retailers also performed well including Myer Holdings Ltd (35.8%), The Reject Shop Ltd SMALL COMPANIES REVIEW (32.4%