When writing on subjects that are close to home, it is often hard to be as objective as you would like. However, as a trader, the whole business is seeing things as they are, not as you think they are.
The great news for the Australians is that there are better signs of economic activity – not locally but over in China. Eight month highs, in retail sales growth and exports, being examples. Industrial output for November was 10.1% higher than the previous year (which may of course be later revised) but points to the tail wagging in the world’s second largest economy. That has to be good news for Australia and in particular, the resources sector. Much has been made of iron ore shipments being returned etc – but ultimately, even if things are slower, China remains very much in growth phase (As an aside, the shipments weren’t actually returned, there was a renegotiation of the delivery price).
Given the above, we suspect we may see more optimism return to the resources sector, but with a slower level of growth on offer, not to mention the massive cost increases for those companies, stability rather than aggressive growth may be what is on offer stock wise, and a ripe environment for selling call premium (see our view on BHP). This may not be such a bad thing, in terms of reining in inflation and particularly Wage pressure.
One thing that is clear, for the time being, manufacturing in Australia is a tough gig – be that One Steel or Blue Scope, or more recently Rosella Sauces, with high wages and a high dollar making the prospect of export sales extremely tough, not our preferred sector for stock holdings.
Officially, inflation is only around 2% but in reality, a quick trip to Coles or Woolies may suggest a higher level than that.
Price of Oil
Interesting, despite oil being more than $60 lower than its peak and with the Aussie dollar moving up from 64c to 104c vs the US dollar, we are still stuck at $1.50 a litre at the petrol bowser – something which I struggle to understand. Elsewhere, $4.50 for a coffee is simply the wrong price – compare that to anywhere else in the world – even Vienna! Just today I saw some research comparing Cab fares in various Australian cities vs overseas – benchmark used, being a 20km cab ride:
Economically, if we look at some of the benchmarks: This ongoing pricing pressure is a major day to day factor and is hitting hard, everyday people, be that through higher power bills (thank you Carbon Tax), ridiculously expensive cars and fuel, food, coffee, taxis and even on a micro level, iTunes (less than $1.00/song in the US, $2.19 here in Australia – which must be down to the transport costs!!!) are building up. This, more than anything, is where the pain is being felt – grass roots everyday people that are seeing a cost of living rise above and beyond what the statistics are saying. What’s more, this is genuinely impacting on the affordability of the decent lifestyle that any hardworking family deserves.
Lower Interest Rates
We would expect to see lower interest rates – to help keep the wheels turning in the economy. In reality, the RBA’s decision to cut rates (and they are likely to) will at least provide some impetus and no doubt support for the real estate market. In addition, lower interest rates may discourage the higher levels of savings we are seeing. Getting people out there and spending, being a key priority. With the above scenario, lower rates, and perhaps a stabilised property sector, the banks may be able to breathe a sigh of relief, given their exposure to the property markets. That said, lower occupancy rates in many commercial and retail properties may well be a precursor to further write downs in valuations.
Please bare in mind, life hasn’t been bad for the banks – record profits, and amongst the most profitable in the world – not bad for a country with such a small population – and this is a critical component to our equity market forecast. With the prospect of dividends continuing at current levels, and perhaps the absence of growth in the resources sector, banks may continue their robust performance, particularly with the volume of superannuation money invested. One risk to this is of course the property market and any revaluation – so very much keep on this on your radar if you are a bank stock holder.
Our outrageous predications for the Australian Economic Outlook 2013 include:
Lower interest rates – as the RBA continues to provide stimulus to the economy, with the possibility of rates to be cut by as much as a further 75bps over the next 12 months.
Australian dollar –a range of 0.96 to 1.01 vs the US – a big range and in spite of our view of falling rates may seem a little out of step. We continue to expect cost pressures to remain a problem here, in spite of the low “headline” inflation level.
We expect to see further political instability, as the current Government’s tenuous grip on parliament is further tested. With an array of scandals throughout this parliament, and the fragile coalition under strain, there could be a blow up here, which is of course an enormous variable for markets. That said, we would be of the view that any such event would most likely be a major positive for both the economy and more specifically, the market.
Like all Forecasts
Like all forecasts or predictions given at any time, these can very quickly become out of date. This is a critical point when it comes to successful trading and investing. It is not really about successfully predicting what may happen – the real money is made by responding to what is actually happening and by taking the necessary action accordingly. For many, joining the dots between theory and practise can seem daunting and perhaps confusing so, to make that journey so much easier and one that caries confidence, why not check out one of our free online training sessions. CLICK HERE TO REGISTER
We are blessed to live in what is often described as the “lucky” country. However, is it really luck?
No, not really. Australia is a proud land – a Nation and Country that has been built on the kindred spirit of those dreamers who sought and made for themselves, a better life – through hard work, not entitlement. Provided those values remain true, then so too will the bright future and outlook for our sunburnt country, and its land of sweeping plains.