Global asset manager AllianceBernstein (AB) yesterday warned Australians against becoming complacent about the country’s economic outlook, even though 2015 is ending the year on a stronger note than many economists had foreseen a year ago.
“There are four key areas, in our view, where Australian investors need to tread carefully during 2016,” said Guy Bruten, AB’s Senior Economist—Asia. “These are resources and housing, inflation, and the potential for more market volatility as the global monetary policy landscape changes.”
Bruten said that the downturn in the resources sector during 2015 played out largely in line with expectations, but the offsets from a weaker Australian dollar and a resilient residential construction sector turned out to be greater than predicted.
While this meant that the overall outcome for the year was shaping up to be relatively positive, Bruten warned that this pattern would not necessarily continue through 2016. One of the risks for next year is that the downturn in resources intensifies just as housing activity peaks.
“In its latest statement on monetary policy, the Reserve Bank of Australia highlighted that we’re only about halfway through the adjustment in capital spending in mining,” said Bruten. “It’s gone from 8% of GDP to around 5%, and the central bank thinks it could fall to below 3%.”
This suggests that more job losses will flow from the sector. There are concerns, too, about the tax revenue benefits of some resource projects as they move from the investment and construction phases to become fully operational.
The Australian Taxation Office, for example, recently noted an “emerging concern” about the potential for tax avoidance within multinational oil and gas companies in Australia, because of the scope that exists to attribute sales and profits from Australian resource projects to offshore affiliates.
“Against this background, we need to ask ourselves whether housing in 2016 will come to the economy’s rescue in the way it did in 2015,” said Bruten. “I am not among those who see a possible housing crash, but I don’t think we can afford to be complacent.
“The last time it looked as though we might be heading for a housing crash was in 2003, when the background was very different—there was a very strong boost to the economy coming from commodities and from tax cuts, too.”
Bruten noted that inflation in Australia had remained relatively sticky during the last five years, when other economies had stepped down to core inflation rates of 1% or less.
“The headline Consumer Price Index reading for the September quarter was surprisingly soft—down from 0.7% in the June quarter to 0.5%, compared with an expected 0.7%. It raises the question as to whether we’re following other countries toward ultra-low inflation rates.
“At the very least, it suggests inflation could emerge as an additional complicating factor in the setting of policy—as it has in other economies such as Sweden and New Zealand,” said Bruten.
The fourth area where AB thinks investors shouldn’t be complacent concerns the potential for market volatility as the global monetary policy landscape changes next year.
“We’ve been expecting the US Federal Reserve to raise rates for some time now and to some extent that’s been factored into markets. But we don’t think that investors are sufficiently factoring in the possibility that the Bank of Japan might move next year to taper its quantitative easing policy.”
Bruten added that the European Central Bank (ECB)—which recently stepped up its quantitative easing programme—was supposed to end the programme in September next year. When that happened the focus would turn on what the ECB would do once it moved beyond quantitative easing.
“The only certain thing about 2016 at this point is that it’s going to be another year of uncertainty,” said Bruten. “The best way for investors to navigate that uncertainty will be to avoid becoming complacent about any aspect of the economy, monetary policy or local and global financial markets.”