We ran out live stream event last night. During the session we discussed our revised scenarios, taking account of the complex local and international backdrop.
Using a baseline of July 2018, and looking ahead this is how it plays out. The risks from an international crisis have risen, the RBA itself is now projecting higher unemployment so lower wages growth, and the iron ore price is falling. Business and consumer confidence is being eroded, and the fall-out from the high-rise construction fiasco are only just starting to play out.
There is a path to property values rising, but we think this is relatively short lived.
You can watch the edited edition of our show, complete with some behind the scenes views.
Or watch the original streamed version with the pre-show, and live chat.
The deceleration in the world economy has begun to make an impact on dividends, according to the latest Janus Henderson Global Dividend Index. The total paid to shareholders broke a new record of $513.8bn in the second quarter, but the rate of increase was the slowest for more than two years. In headline terms, payouts were 1.1% higher, held back by the strength of the US dollar.
Underlying growth of 4.6% was the slowest in two years but was only slightly below the long-run average. This slowdown was in line with Janus Henderson’s forecast, which had already factored in a lower rate of growth this year.
With slower growth come
fewer records. Japan, Canada, France and Indonesia were the only countries to
set records in the second quarter. Emerging markets saw the fastest growth,
propelled higher by Russia and Colombia, while Japan registered the best
performance among the developed regions. The rest of Asia Pacific, and Europe
ex UK underperformed the global average, while the US came in a touch weaker
than Janus Henderson anticipated. Dividends from financials and energy stocks
saw the fastest increases, but technology and consumer basics lagged.
Asia Pacific ex Japan
lagged slightly behind the rest of the world in the second quarter, with the
total $43.2bn distributed 2.2% higher on an underlying basis.
In a seasonally quiet
Australia, dividends only rose 5.7% on an underlying basis, continuing the
five-year trend of stagnant dividend growth. The rise was down to just one
company, QBE Insurance, whose rebounding profits enabled a big increase in its
dividend, which is now almost back to levels last seen two years ago. Westpac
held its dividend flat for the eighth consecutive quarter.
For seasonal reasons,
Hong Kong dominates Q2. Underlying growth was just 2.5% and a quarter of Hong
Kong companies in our index cut their dividends, including China Mobile. This
is a larger proportion than in all the other large markets, reflecting a
slowing Chinese economy.
Record dividends in
Japan, up 6.8% on an underlying basis, reflected rising profitability and
expanding payout ratios. Almost three quarters of companies raised their
dividends. Japanese dividend growth has been outperforming the rest of the
world for four years, reversing a long period of relative stagnation. Japanese
dividends have now caught up with Asia Pacific and North America, the two
fastest growing regions in the world, with all three having seen payouts rise
close to 130% since the end of 2009.
Investors receive seven
tenths of their annual European dividend income in Q2. Growth in Europe has
lagged behind the rest of the world over the last few years, and the second
quarter of 2019 was no exception. Payouts fell 5.3% year-on-year on a headline
basis, thanks in large part to a weak euro, and took our index for Europe to
134.0, its lowest level in over a year. In underlying terms, European dividends
were just 2.6% higher. A small number of big dividend cuts held back the total,
but the proportion of companies raising payouts is also in decline. Spain, the
Netherlands, Switzerland and France were ahead of the European average, but
Germany and Belgium lagged behind.
US dividends rose at
their slowest pace in two years, up 5.3% on an underlying basis to $121.7bn.
The pace of dividend growth in the US slowed across a range of sectors with
most seeing single-digit increases. More than four fifths of companies raised
their payouts, however, keeping the US near the top of the international
rankings. The banking sector continued to show strong dividend growth, but auto
manufacturers all held their payouts flat, reflecting growing global structural
challenges for the sector.
In the UK, underlying
growth was 5.3%, similar to the global average, though very large specials
boosted the headline total. The largest contribution to underlying growth came
from the banking sector.
The Q2 figures were in line with Janus
Henderson’s expectations, and therefore there is no change in the 2019 forecast
for $1.43 trillion in dividends, equivalent to 4.2% growth on a headline basis,
and 5.5% in underlying terms
This is the edited high quality and tidied up version of our live session, where we walked though our scenarios once again and answered viewers questions.
We updated our scenarios once again.
The original live recording, with live chat, which you can watch in replay is here:
The Council just updated their charter, and published their latest minutes. At least there is some minimal disclosure now, though high-level. Note the fact that Treasury is one of the members, alongside the RBA, ASIC and APRA.
The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.
The updates charter says:
The Council of Financial Regulators (CFR) comprises APRA, ASIC, the RBA and Treasury. It aims to facilitate cooperation and collaboration between member agencies, with the ultimate objectives of promoting stability of the Australian financial system and supporting effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the CFR recognises the benefits of a competitive, efficient and fair financial system.
The CFR provides a forum for:
identifying important issues and trends in the financial system, with a focus on those that may impinge upon overall financial stability;
exchanging information and views on financial regulation and assisting with coordination where members’ responsibilities overlap;
harmonising regulatory and reporting requirements, paying close attention to regulatory costs;
ensuring appropriate coordination among the agencies in planning for and responding to instances of financial instability; and
coordinating engagement with the work of international institutions, forums and regulators as it relates to financial system stability.
The CFR will draw on the expertise of other non-member government agencies where appropriate for its agenda, and will meet jointly with the ACCC, AUSTRAC and the ATO at least annually to discuss broader financial sector policy.
Their latest minutes:
At its meeting on 5 July 2019, the Council of Financial Regulators (the Council) discussed systemic risks facing the Australian financial system, regulatory issues and developments relevant to its members. The main topics discussed included the following:
Financing conditions and the housing market. The Council discussed credit conditions and ongoing adjustment in the housing market. Housing credit growth has stabilised at a relatively low level, with lending to investors remaining weak, particularly from the major banks. Demand for housing credit has been subdued, though there has also been some tightening in credit supply. Business credit growth has weakened recently, with lending to small businesses declining over the past year. Lenders are themselves applying stricter verification of expenses and income to small businesses, and lending may be affected by declining collateral values as housing prices decline.
Council members discussed the signs of stabilisation in the Sydney and Melbourne housing markets, evident in both housing prices and auction clearance rates. They observed that the adjustment over the past two years has been sizeable and conditions in most other capital cities continue to be soft. Risks to lenders from housing price falls have to date been limited by the strength of the labour market, low interest rates and the improvement in lending standards in recent years. Housing loan arrears have continued to edge higher, but with significant variation between regions.
Members were updated on ASIC’s public consultation on its responsible lending guidance. The responsible provision of credit is a cornerstone of consumer protection and is important to the Australian economy. It was noted that the consultation is not about increasing requirements; but rather, clarifying and updating guidance on existing requirements. For example, ASIC may further clarify areas where the law does not require responsible lending requirements to be applied (e.g. in small business lending). The Council agencies will continue to closely monitor developments in financing and the housing market.
ASIC’s product intervention powers. ASIC updated the Council on its proposed approach to the new product intervention power, legislation for which passed in April 2019. This gives ASIC the power to proactively intervene where a financial product has resulted or is likely to result in significant detriment to consumers. ASIC has launched a public consultation on its approach. Council members discussed possible applications of the new power given it is now available for use.
Product design and distribution obligations. The Council also discussed the implications of new product design and distribution obligations for retail holdings of bank-issued Additional Tier 1 (AT1) instruments. Members encouraged issuers to review their practices for issuing AT1 instruments ahead of the commencement of the new obligations in April 2021. They noted that APRA would continue to treat all AT1 instruments as regulatory capital, capable of absorbing losses in the unlikely event of a bank failure. Members discussed the importance that all holders of AT1 instruments, particularly retail investors, recognise that AT1 instruments could be written down or converted to equity.
Policy developments. Members discussed a number of policy developments, including the implementation of the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. APRA provided an update on its policy work, including changes to its guidance on the minimum interest rate used in serviceability assessments for residential mortgage lending (announced on the morning of the meeting). APRA also updated the Council on its planned increases in the loss-absorbing capacity of ADIs to support orderly resolution. Members discussed proposals by New Zealand authorities to significantly increase Tier 1 capital ratios for banks in New Zealand.
Financial market infrastructure (FMI). The Council’s FMI Steering Committee provided an update on the design of a crisis management legislative framework for clearing and settlement facilities. This will ensure the necessary powers to resolve a distressed domestic clearing and settlement facility. A second consultation is now planned for late 2019. The Committee has also considered proposals for enhancements to the agencies’ supervisory powers and other changes to improve the regulatory framework in relation to market infrastructures. The results of the Council’s consultation findings will be provided to Government, to assist with policy design and the drafting of associated legislation (the draft of which would also be consulted on before being introduced to Parliament).
Stored-value payment facilities. The Council discussed elements of a potential regulatory framework for payment providers that hold stored value, following a public consultation in 2018. Discussion focused on suitable criteria to determine the regulatory regime that should apply to providers of stored-value facilities, along with the adequacy of consumer protection arrangements. Once completed, the conclusions of this work will be provided to the Government for consideration.
Competition in the financial system. Council agencies and the Australian Competition and Consumer Commission (ACCC) are developing an online tool to improve the transparency of the mortgage interest rates paid on new loans. This follows a recommendation of the Productivity Commission’s inquiry into Competition in the Australian Financial System. The tool relies on a new data collection and is expected to be available in 2020.
Climate change. Council members noted the work undertaken by regulators to address the implications of the changing climate, and society’s response to those changes, for the Australian financial system.
Updated Charter. The Council agreed to adopt an updated Charter, which is being published today. The Charter emphasises the Council’s financial stability objective, while also recognising the benefits of a competitive, efficient and fair financial system. It also highlights the Council’s focus on cooperation and collaboration to support the activities of its member agencies.
In conjunction with the Council meeting, the Council agencies held their annual meeting with other Commonwealth regulators of the financial sector. This included representatives from the ACCC, the Australian Taxation Office and the Australian Transaction Reports and Analysis Centre (AUSTRAC). Topics discussed included enforcement and data initiatives affecting the financial sector.
New
Zealand’s economic expansion lost momentum recently. The near-term
growth outlook is expected to improve on the back of a timely increase
in macroeconomic policy support. Downside risks to the growth outlook
have increased but New Zealand has the policy space to respond should
such risks materialize.
Macroeconomic
policy settings are broadly appropriate, while macroprudential policy
settings are attuned to macrofinancial vulnerabilities in the household
sector, which have started to decline but remain elevated.
Financial
sector reform in the context of the Review of the Capital Adequacy
Framework and the Review of the Reserve Bank of New Zealand Act should
provide for a welcome further strengthening of the resilience of the
financial system and regulatory framework.
The government’s structural policy agenda appropriately focuses on reducing infrastructure gaps, increasing human capital, and lifting productivity, while seeking to make growth more inclusive and improve housing affordability.
Within the statement they warn that:
Risks to the outlook are increasingly tilted to the downside. On the domestic side, the fiscal stimulus could be less expansionary if policy implementation were to be more gradual than expected, and the domestic housing market cooling could morph into a downturn, either because of external shocks or diminished expectations. On the external side, global financial conditions could be tighter and dairy prices could be lower. Risks to global trade and growth from rising protectionism have increased, and this could have negative spillovers to the New Zealand economy, including through the impact on China and Australia, two key trading partners. High household debt remains a risk to economic growth and financial stability, and it could amplify the effects of large, adverse shocks. On the upside, in the near term, growth could be stronger if net migration were to decrease more slowly than expected or if the terms of trade were to be stronger.
With regard to macroprudnetial they warn:
The scope for easing macroprudential restrictions is limited, given still-high macrofinancial vulnerabilities. The shares of riskier home loans in bank assets (those with very high LVRs, high debt-to-income, and investor loans) has moderated due to the combined impact of the LVR settings and tighter bank lending standards. However, with the RBNZ’s recent easing of the LVR restrictions, improvements in some macroprudential risk factors such as credit growth have recently stalled or started to reverse. Further easing of LVR restrictions should consider the possible impact on banks’ prudential lending standards, as well as the risks to financial stability from elevated household debt.
