• While tensions regarding Ukraine saw shares dip and safe haven assets like bonds and gold rally early in the week, this reversed as Ukraine tensions receded somewhat and markets returned to focussing on mostly favourable economic data. This saw most markets gain with US shares making new record highs and Australian shares rising to their highest since June 2008. The return of confidence also saw bond yields mostly up, except in Spain and Italy where they continue to fall, and modest gains in commodity prices. The Euro and the $A rose to their highest levels for the year with the latter pushed up by much better than expected Australian economic data.
• Tensions regarding Ukraine have settled a bit after President Putin provided some moderate and constructive comments. However, the risks remain, as highlighted by Crimea’s decision to have a referendum on joining Russia. Ukraine’s perilous economy is not a major threat to the global economy as it’s too small. Rather the main concern relates to the 25% of Eurozone gas supplies that come from Russia, half of which via Ukraine. Right now gas stockpiles are ample, but if a descent into civil war in Ukraine and/or a Russian attempt to punish Europe for supporting Ukraine threatens these supplies for any length of time then it could adversely affect the Eurozone economy when it is still vulnerable. Much will depend of how far the US and Europe are prepared to go in supporting Ukraine and hence in antagonising Russia. On this front recent offers of emergency aid from the US and EU don’t help. But with Europe and the US caring less about Ukraine than Russia does I suspect they will remain wary of getting too heavily involved, particularly at a time when the Eurozone recovery remains fragile. My suspicion remains that Ukraine is just another distraction with some sort of negotiated solution likely. But of course at the moment there is no sign of that and we may not know for several months and there may be a few more bumps along the way so it will likely remain a risk for markets for a while yet.
• There were no surprises from Chinese Premier Li’s announcement of 7.5% as the growth target for this year with 3.5% inflation. 7.5% was also the target for 2012 and 2013 and the outcomes were 7.8% and 7.7% so it looks like more of the same. While some fret that the target is “about 7.5%” and so 7.2% or 7.3% could still be seen as consistent with the target I would argue that this is just normal statistical noise and the key is that  Premier Li is continuing to see 7% as the floor to growth. With inflation at risk of undershooting the 3.5% target there is potentially some scope to provide stimulus if growth looks like undershooting in a meaningful way. Premier Li also announced various reforms including reducing business red tape, redressing the spending/revenue imbalance between the central and local governments, further deregulation of interest rates and plans to urbanise 300 million people in the next few years. The priority remains growth though as the reforms are contingent on growth remaining around target.
• Meanwhile, talk of a “Bear Stearns moment” in China flowing from the threatened interest payment default by a company that makes solar cells seems a bit overdone. It seems everyone is on the lookout for such “moments” in China right now. Yes there is a risk of defaults – and there have already been several in relation to trusts – but the authorities are unlikely to allow a snowballing loss of confidence and the absence of layers of leverage and complexity suggests the risks of a GFC style event are low.
• Australia is almost starting to look like it’s going from gloom to boom. That may be a bit premature, but the run of mostly positive data over the past week indicates the economy is weathering the mining investment slump well. Against this backdrop it makes sense that Governor Steven’s Parliamentary Testimony implied a degree of comfort regarding the economic outlook with the RBA continuing to signal a period of stability in the cash rate. This is likely to continue into the second half, although if the economic data remains as solid as seen over the past week the debate will soon shift till when rates will start rising. Meanwhile the RBA has rightly returned to applying jawboning to the $A, describing it as “high”. Ideally it needs to fall to around $US0.80.

Major global economic events and implications

• US economic data continues to be weather affected – with soft services conditions indicators but improved readings for manufacturing sector conditions with gains in both the ISM and Markit PMIs. There was also a decent gain in mortgage applications for purchasing properties after a long weak period and a stronger than expected decline in jobless claims. The overall impression remains that while poor weather is continuing to play havoc with US economic data, underlying conditions are ok.
• There was more good news in the Eurozone with manufacturing and services conditions PMIs revised up for February with the rising trend telling us the recovery is continuing and better than expected January retail sales and German factory orders. While the ECB yet again left monetary conditions unchanged, with President Draghi siting the mostly positive data flow since the last meeting, it retains a clear easing bias and is likely to move again if inflation and lending does not pick up.
• The recovery in Japan was highlighted by the continuing fall in Tokyo’s office vacancy rate to 7%, from a peak of 9.5% in 2012.

Australian economic events and implications

• Australian economic data was surprisingly impressive. December quarter GDP growth showed the economy growing stronger than expected and consumer spending, housing investment and trade helping to fill the gap left by falling mining investment. More timely indicators helped add to optimism on the economic outlook with January building approvals rising to their highest since 2002, retail sales up for the ninth month in a row and annual growth of 6.2% being the strongest since late 2009, the AIG’s manufacturing and services conditions indicators rising solidly in February, ANZ job ads starting to trend up and the trade surplus rising to its best since August 2011. The improvement in the trade balance highlights a silver lining from the end of the mining investment boom, ie rising export volumes from completed projects and less imports of mining related equipment. The bottom line is that the Australian economy looks to be weathering the mining investment slump well with reasonable prospects for a modest strengthening in growth through the year ahead.

What to watch over the next week?

• In the US, it will be a relatively quiet week on the data front but retail sales (Thursday) are expected to show continued modest growth and consumer sentiment data (Friday) will be watched for further modest improvement.
• The Bank of Japan is unlikely to make any changes to monetary policy when it meets Tuesday, preferring to hold its fire power till it gauges the impact of the April sales tax hike. Further easing is likely to be needed around mid-year though, in part to encourage a further leg down in the value of the Yen.
• Chinese activity data for the January-February period (Thursday) is likely to show a modest slowing in industrial production, fixed asset investment and retail sales. Lending and credit growth is likely to have slowed after the usual January surge.
• In Australia, the NAB business survey (Tuesday) will be watched for a continuation of the improvement in conditions seen in recent months, consumer confidence (Wednesday) might have a slight bounce on the back of somewhat better economic news this month, housing finance (Wednesday) is likely to continue its rising trend but employment (Thursday) is likely to see only a modest 5000 bounce after two weak months with the unemployment rate remaining at 6%.

Outlook for markets

• Investors should allow for more volatility in share markets ahead – including the likelihood of a 10 to 15% correction at some point along the way this year – and somewhat more constrained returns than seen over the last two years. However, the broad trend in share markets is likely to remain up reflecting a combination of reasonable valuations, better earnings on the back of improved economic growth and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. With the just concluded earnings reporting season in Australia and improving economic data confirming that the market is on track for good earnings growth this year, the ASX 200 is on track to meet our year-end target of around 5800.
• The recent decline in global bond yields should be seen as a correction against the backdrop of a slow rising trend in yields on the back of gradually improving global growth. This will mean subdued returns from government bonds. Cash and bank deposits also continue to offer pretty poor returns given low interest rates/yields.
• The broad trend in the $A remains down on the back of softer commodity prices, a reversion to levels that offset Australia’s relatively high cost base and a decline in Australia’s growth relative to that in the US. However, short positions in the $A remain excessive and so it could still have more of a bounce before the downtrend resumes.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

———-

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update: week ending 7 March, 2014 appeared first on AdviserVoice.

• It’s been another somewhat mixed week for global and Australian shares as indexes flirt with post GFC highs and the situation regarding Ukraine remains uncertain, economic data continues to be rather confusing and Fed Chair Janet Yellen left the door open for a pause in slowing its monetary stimulus if needed. US shares saw good gains with the S&P 500 making a new record closing high, Japanese and European shares were little changed and Australian shares fell slightly not helped by poor business investment data. Most share markets, bar China and Japan, had a solid February though making up for the declines seen in January.
• Reflecting mixed economic data and worries about Ukraine, bond yields mostly fell over the last week and commodity prices were soft. The $A was little changed.
• Despite the demise of the Yanukovych government, Ukraine remains a source of uncertainty for markets. It’s way too small and its problems too specific to be a threat to global economic growth. The main risk worth keeping an eye on though is that it triggers some sort of conflict between the West and Russia, as Russia sees it as a brotherly country and does not appear happy at its recent swing back to the West, as evident by troop exercises along its border. That said while there may be a lot of bluster from Russia its doubtful that it can afford to do anything too drastic (like an invasion).
• Is the PBOC easing? Falling Chinese money market rates and a decline in the value of the Renminbi (RMB) seem to have created a bit of confusion over the last week. Both of these could just be normal market noise, eg the RMB  is only down around 2%, and the People’s Bank of China could just be providing a reminder that it can be volatile and is not a one way bet higher. Then again it could signal a slightly easier stance on monetary policy, which may be consistent with recent mixed economic data and clear signs that Chinese home price growth is cooling down. Time will tell.
• More jobs layoffs in Australia. News that Qantas will lay off 5000 workers adds to the sense of gloom hanging over the Australian jobs market. But it’s worth noting that the layoffs do not reflect a lack of demand but rather competitive pressures Qantas is facing, that they will be spread out over the next three years and that the coming housing construction recovery, the lower $A and improved business confidence and general hiring plans all point to a strengthening in jobs growth most likely during the second half of this year. So it’s not all doom and gloom.
• Hot internet start-ups and takeovers of such stocks with little revenue or earnings along with talk that the “number of users is the dominant driver” is all very reminiscent of 1999 in the tech space. Fortunately while there may be pockets of 1999 around, the broader US market is a long way from late 1990s valuations or euphoria with the forward PE today at 15 times compared to 24 at its tech boom peak and Nasdaq valuations around one third of tech boom peak levels.

Major global economic events and implications

• US economic data remained messy with soft readings for the Markit services conditions index, consumer confidence, regional manufacturing conditions surveys, mortgage applications (although falls here may be partly seasonal) and jobless claims but a surprisingly strong gain in new home sales, continued strength in home prices which rose 13.4% last year and slightly better than expected durable goods orders after allowing for volatile aircraft orders.  Fed Chair Yellen essentially repeated her message that tapering remains on track but indicated the Fed is trying to get a handle on whether the weather is driving recent soft data or something more worrying, with the implication being that the taper could be delayed or slowed if needed.
• Eurozone confidence indicators confirmed the ongoing economic recovery but weak lending and money supply data highlight the case for more ECB stimulus.
• Japanese activity for data for January was a good with very strong industrial production, a solid PMI pointing to more gains ahead, stronger than expected retail sales and household spending, unemployment remaining down at 3.7%, the job vacancy to applicants ratio rising a bit and core inflation remaining at 0.7% year on year. The main uncertainty though is around to what degree the approaching sales tax hike has pulled demand forward.
• While emerging market uncertainties still linger, it was good to see Brazilian GDP growth come in stronger than expected in the December quarter leaving it up 2.3% for the year. That said Brazil’s growth isn’t what it used to be and structural challenges remain and with the central bank raising interest rates yet again there are still downside risks to Brazilian growth.

Australian economic events and implications

• Australian construction and business investment data was depressingly soft pointing to a broad based fall in investment in the December quarter and intentions data pointing to sharp fall in business investment in 2014-15 as mining investment really starts to wind down. Comparing intentions for 2014-15 with those made a year ago for 2013-14 suggests a 17% fall in investment led by a 25% fall in mining and a 20% fall in manufacturing. However, the final outcome may not be that bad as such an approach looks to have exaggerated weakness this financial year. Secondly, investment intentions in industries outside of mining and manufacturing are starting to stabilise and improve. Thirdly, the impact on overall economic growth of the slump in mining investment will be partly offset by a slump in related imports, just as the mining investment boom was partly offset by surging mining related imports. Finally, while residential investment looks to have fallen in the December quarter, the strength in building approvals points to a strong upturn in dwelling related construction ahead.
• The Australian corporate earnings season has now wrapped up. As is often the case the companies with great results often go first followed by those not doing so well. That said, overall results remain pretty good and confirm the profit cycle has now turned up with large companies, notably the resources and banks, playing a bigger role than normal in driving growth. 54% of companies exceeded expectations (compared to a norm of 43%); 65% of companies have seen their profits rise from a year ago (compared to a norm of 66%); 64% of companies have increased their dividends from a year ago (which is up slightly from around 62% in the last two years); and 56% of companies have seen their share price outperform the day they released results. Key themes have been a massive turnaround for the resources stocks (notably Rio and BHP) leaving the sector on track for circa 40% earnings growth this financial year, banks doing very well (with good results from CBA, ANZ and NAB), help coming through from the lower $A, ongoing cost control making up for still soft revenue growth, signs of improvement from some cyclicals (like Boral, JB Hi Fi, Fairfax and Seek) and strong growth in dividends. A 14% surge in dividends from a year ago was mainly driven by big companies such as Rio, CBA and Telstra. At 64% the dividend payout ratio is still not excessive for the overall market and higher dividends are usually a sign that companies are confident about the outlook. The bottom line is that Australian earnings look to be on track for growth of around 15% this financial year, with a 40% surge in resources’ profits, a 10% rise in financials’ profits and a 6% rise in profits for the rest of the market.

What to watch over the next week?

• In the US, the main focus is likely to be on February manufacturing conditions indicators (due Monday) and employment data (Friday), but unfortunately both are likely to present a confusing picture given poor weather in February. The manufacturing conditions PMIs are likely to present a divergent picture with the ISM index likely coming in around 52 but the broader Markit index remaining solid around 56.7 in line with its advance reading. With a snowstorm affecting some of the US when the February employment survey was undertaken, payroll growth is likely to have remained relatively soft at 150,000 and unemployment is likely to be unchanged at 6.6%.
• In the Eurozone, the ECB (Thursday) is likely to finally act on its easing bias, possibly cutting interest rates a bit further and maybe announcing a form of quantitative easing involving the purchase of bank loans. While GDP is growing again it is still gradual, lending growth remains depressed and there is a risk of deflation. The Bank of England (also Thursday) is likely to leave monetary policy unchanged.
• In China, the National People’s Congress (starting Wednesday) will likely set a growth target for this year of 7.5%, but the key focus will be on the approval and enactment of further financial deregulation and various fiscal, administrative and welfare reforms flowing from the 3rd Plenum last year. Chinese data for February will also start to flow with trade figures (due March 8th) likely to be looked at very closely to see whether the circa 10% growth in exports and imports reported for January continued in February.
• The Reserve Bank of Australia (Tuesday) is expected to leave interest rates on hold for the sixth meeting in a row. The RBA has clearly indicated that with growth remaining low but tentative signs of improvement in some indicators, a period of stability in interest rates is appropriate. Since not enough has really changed since the last meeting, this remains the case. Soft jobs news and the poor business investment outlook do suggest though that our expectation for rate hikes to commence later this year may be premature with the risk being that they won’t occur till next year. Governor Steven’s Parliamentary testimony (Friday) will be watched closely for his views on the jobs and investment front.
•  Meanwhile, there will be a data avalanche in Australia with the AIG manufacturing PMI, house prices, new home sales and ANZ job ads all due Monday, January building approvals likely to gain 1% (Tuesday), December quarter GDP (Wednesday) expected to show just 0.3% quarterly growth (or 2.1% year on year) thanks in part to solid retail sales and trade offsetting poor investment, and retail sales (Thursday) expected to have fallen slightly after eight months of gains.

Outlook for markets

• This year will likely see returns from shares a bit more constrained and volatile than was the case last year, but the trend for share markets is likely to remain up nonetheless reflecting a combination of reasonable valuations, better earnings on the back of improved economic growth and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. With the just concluded earnings reporting season in Australia confirming that the market is on track of good earnings growth this year, the ASX 200 is on track to meet our year-end target of around 5800.
• The recent decline in global bond yields should be seen as a correction against the backdrop of a slow rising trend in yields on the back of gradually improving global growth. This will mean subdued returns from government bonds. Cash and bank deposits also continue to offer pretty poor returns given low interest rates/yields.
• The broad trend in the $A remains down on the back of softer commodity prices, a reversion to levels that offset Australia’s relatively high cost base and a decline in Australia’s growth relative to that in the US. However, short positions in the $A still remain excessive and so it could still have a bit more of a bounce before the downtrend resumes.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

———-

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 28 February, 2014 appeared first on AdviserVoice.

• The US economy is yet again reinventing itself. This has been helped along by a determination to get the US economy moving again after the global financial crisis but the real drivers are an energy boom, a manufacturing renaissance and American innovation.
• Together these drivers could add as much as 0.5% to annual US economic growth in the decade ahead.
• For investors, while a return to the sustained double digit share market returns seen through the 1980s and 1990s is unlikely, the turn for the better in the US is likely driving a new secular bull market in traditional global shares.

Introduction

Economic growth a strong possibility for the US.

The problems with the US economy are well known. Its level of public debt is too high, its spending on social security and health is unsustainable, its health system is woefully inefficient – spending more relative to GDP than most OECD countries but with worse life expectancy – its level of savings is too low, its transport infrastructure is becoming run down, its political system seems dominated by ideology and its share market has had a rough time over the last 14 years as the tech and housing credit booms burst.

But it is dangerous to write the US off. Every two or three decades it seems to reinvent itself. It did it with electricity and mass production in the 1920s, with consumerism, petrochemicals and aviation in the 1950s and 1960s and with deregulation and the IT revolution in the 1980s and 1990s.

Don’t write the US off

The US was written off by many during the 1930s only to see it emerge as the world’s major super power and strongest economy in the post war years. The same occurred in the 1970s after the debacles of the Vietnam War, Watergate and stagflation only to see it reinvigorated by Ronald Reagan. Both the 1950s-1960s and the 1980s-1990s saw strong returns from the US share market.

After the debacle of the tech wreck and credit bust of last decade and the loss of its AAA credit rating by S&P, amidst dysfunctional politics, many have been tempted yet again to write the US off. But once more it seems to be bouncing back. This time around the drivers include: American policy makers’ determination to fix their problems; an energy boom; a manufacturing renaissance; and ongoing innovation.

The Fed and the shrinking US budget deficit

American policy makers are criticised a lot, eg for first undertaking quantitative easing and now for slowing it! But they do show a determination to fix things up once they go wrong and for moving a lot faster than other countries. This has been evident since the GFC with the Federal Reserve trying one approach after another to stabilise and then get the US economy moving again and the forced recapitalisation of US banks, which helped restore confidence. That these policies are working is evident in the Fed now moving to slow down its quantitative easing program, effectively taking the US off life support as it appears to be getting to the point where it no longer needs it.

But perhaps the big surprise for many is the massive slump in the US budget deficit over the last few years, which basically explains why you don’t hear much about it these days. As can be seen in the next chart the US Federal budget deficit has shrunk from more than 10% of GDP In 2009 to less than 3% of GDP this year. This reflects a combination of stagnant government spending over the last few years and surging revenue growth.

It is expected to start rising again beyond 2015 to around 4% of GDP by 2022 (according to the Congressional Budget Office) as an aging population really starts to boost spending on social security and health, so there is still more to do. But the savings from the 2011 debt agreement, the scaled back “fiscal cliff” and the “sequester” spending cuts add up to almost $US4 trillion over 10 years and should not be ignored. It’s a long way from the fiscal mess of a few years ago.

The energy boom

It seems only yesterday that the “peak oil” fanatics were raving on (yet again) about how global oil production would soon peak and we would have to ditch the car and return to the horse and buggy. It was nonsense then and even more so now. The basic thing they missed is that rising oil prices will both lead to more fuel efficiencies (just look at all the hybrid cars now available) and make economic access to new supplies of energy viable. This is happening in the US with a vengeance as fracking technology – drilling down and then sideways into shale beds and then pumping in a mix of water and chemicals to fracture the rock allowing gas and oil to be extracted – is leading to a massive energy production boom. US oil production is up around 45% over the last five years which has taken it back to 1990s levels and total energy production including gas is back to late 1980s levels. See the next chart. By around 2020, US oil production is likely to have returned to 1970 levels and the US will be back to being the world’s biggest oil producer.

The energy boom is providing a huge boost to the US economy by boosting demand for drilling services and infrastructure, lowering energy costs & reducing the US trade deficit. US oil is trading around $US7 a barrel below global prices and US natural gas prices are tending to run around one third below European levels and one fifth of Japanese levels. Rough estimates put the boost to US economic growth from the energy boom at 0.2% per annum. The decline in US oil imports can be seen in the next chart. This also means less dependence on the volatile Middle East.

The manufacturing renaissance

Numerous companies have announced that they plan to expand manufacturing production capacity in the US. This ranges from a plant to build a Honda super car to Apple bringing some component manufacturing home. The drivers have been a combination of:

• lower energy costs as cheap gas has seen electricity suppliers switch to gas, depressing the price of electricity;
• very low unit labour costs – as solid productivity growth and low wages growth have seen unit labour costs for manufacturers remain around 1980 levels; and
• the low $US after a decade long decline, which is still down 30% or so from 2001/2002 levels.

As yet this has only resulted in a tentative rise in manufacturing production relative to overall GDP, but it is likely to improve further as the manufacturing base starts to expand again. Very different to Australia, but then again we have seen a doubling in the value of the $A over the last decade, somewhat higher wages growth and surging electricity prices…but that’s a different story!

American ingenuity

Finally, underpinning all of this is American ingenuity and an economic system that encourages it and provides it with finance. The bulk of the new gadgets we get are developed in the US, it remains at the forefront of the IT revolution and its companies are world beaters. Since 1975, the Eurozone has given rise to just one of the firms to join the world’s top 500 companies, whereas 26 of them came from the US.

What does it mean for investors?

The key message is that the US is getting back in business (putting aside the winter freeze) with a potential to grow maybe as much as 0.5% pa more over the medium term compared to what otherwise would have been the case. There are several implications for investors. First, a stronger US economy is good for the global economy and supports the view that global share markets have entered a new secular (or longer term) bull market. Consistent with this, US shares have broken out to a new record high – both in terms of the S&P 500 price index and in terms of real returns after spinning their wheels since March 2000. See the next chart.

Second, the US looking stronger at a time when several emerging countries have hit a more difficult patch favours traditional global shares over emerging market shares.

Finally, whilst US and hence global shares appear to have entered a new secular bull market, returns are likely to be more constrained than was the case during the last secular bull market that started in 1982. This is because starting point valuations for shares are not as attractive as in 1982 and the boost from falling inflation and interest rates won’t be repeated again in the years ahead as inflation is already low.

By Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital

———-

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post The US reinvents itself, yet again! appeared first on AdviserVoice.

• Global shares had a mixed week as investors digested the 5% or so rebound since early February amidst weather affected US data, signs the Fed will soon change its forward interest rate guidance with respect to unemployment, another fall in a Chinese manufacturing conditions PMI and as turmoil continued in the Ukraine and Thailand providing a reminder that issues remain in the emerging world. While US and Eurozone shares were basically flat, Japanese and Asian shares nevertheless saw good gains. Bond yields were also little changed, but commodity prices did see some strength with a strong rise in oil prices (partly due to poor US weather) and higher metal prices. The $A fell on the poor news from China, but only marginally.
• Australian shares continue their sprint higher gaining more than 7% from their early February low with mostly good earnings results over the last few weeks providing confidence that the long hoped for rebound in earnings is finally happening and as shareholders like the news of higher dividends.
• The minutes from the Fed’s last meeting point to ongoing tapering. Cleary the Fed viewed the recent run of soft US data as largely due to poor weather, which along with comments by various Fed officials suggest little change in the pace of tapering. Of course this could change in a few months if US data has still not improved. The Fed does appear to likely soon change its forwards guidance on interest rates with the unemployment approaching the Fed’s 6.5% threshold, but at this stage there appears to be little agreement on what form the new guidance will take. Looking further out, while markets may have become a bit concerned about the reference to “a few participants” raising the possibility that it may need to raise interest rates relatively soon, this is likely to refer to the usual hawkish regional presidents of Fisher, Plosser, Lacker and George and is likely to be of little consequence for now given they don’t drive Fed policy. That said, once the US exits its weather related soft patch and as the Fed nears the end of its QE program later this year, talk of sooner than expected interest rate hikes may start intensifying…maybe later this year.

Major global economic events and implications

• US economic data presents a confusing picture at present. Freezenomics clearly played a role in depressing the NAHB home builders’ survey (along with a lack of supply), housing starts and manufacturing conditions in the New York and Philadelphia regions. But against this the broad-based Markit manufacturing conditions PMI rose 3 points to a very solid 56.7 in February with strong gains in new orders and employment suggesting the overall manufacturing sector is in good shape and on top of this jobless claims fell and the leading index rose pointing to solid growth ahead. On top of all this inflation readings remain benign, with core and headline inflation of just 1.6% year on year. So beyond the freeze the US economy still looks ok.
• Eurozone flash PMIs slipped in February but only marginally (from 52.9 to 52.7 for the composite) and do nothing to change the outlook for continued gradual economic recovery. That said growth is still not strong enough to reduce deflation risks, so more ECB easing is still likely.
• Japanese December quarter GDP growth was much weaker than expected at just 0.3%, but this was due to a surge in imports as growth in domestic demand was a solid 0.8% driven by consumption and investment. As expected the Bank of Japan made no changes to its asset purchase program or its money supply targets but it did extent or expand various measures to boost bank lending, which could be interpreted as a baby step towards further easing which we expect to see in the next few months.
• China’s flash HSBC manufacturing PMI fell yet again in February pointing to the possibility of a further slowing in economic growth. That said it could have been distorted by the Lunar New Year holiday and pollution related factory suspensions and it’s still bouncing up and down in the same range it’s been in for the last two years, which period has seen GDP growth stuck in a range around 7.5% to 8%. So at this stage we see no reason to change our 2014 growth forecast of 7.5%.

Australian economic events and implications

• In Australia, a fall in annual wages growth to a record low of 2.6% through 2013 provides further confirmation that the labour market is very weak and means that poor household income growth will remain a constraint on consumer spending. Fortunately it also adds to confidence that inflation will remain low thanks to soft growth in wages costs and so adds to confidence the RBA can keep interest rates down. There is also a bit of light at the end of the tunnel for the labour market with skilled vacancies rising for the fifth month in a row in January
• The minutes from the RBA’s last meeting provided nothing new but by dropping any reference to the possibility of further easing, they confirmed that its bias on interest rates is now neutral. We remain of the view that the RBA will keep interest rates on hold out to around September with gradual rates hikes thereafter.
• The corporate earnings news was a bit more mixed over the last week. As is often the case the companies with great results often go first followed by those not doing so well. That said, with around 70% of companies having reported, overall results remain pretty good and confirm the profit cycle has now turned up. So far 54% of companies have exceeded expectations (compared to a norm of 43%); 67% of companies have seen their profits rise from a year ago (compared to a norm of 66%); 70% of companies have increased their dividends from a year ago (compared to an average of around 62% in the last two years); but only 52% of companies have seen their share price outperform the day they released results. Key themes are a massive turnaround for the resources stocks (notably Rio and BHP) leaving the sector on track for circa 35% earnings growth this financial year, banks doing very well (with good results from CBA, ANZ and NAB), help coming through from the lower $A, ongoing cost control, signs of improvement from some cyclicals (like Boral, JB Hi Fi, Fairfax and Seek) and strong growth in dividends. The surge in dividends – which are up about 15% from a year ago – is a good sign that companies are confident about the outlook. The bottom line is that Australian earnings look to be on track for growth of around 15% this financial year, with a 35% surge in resources’ profits, a 10% rise in financials’ profits and a 6% rise in profits for the rest of the market.

• In the US, house price data (due Tuesday) for December is expected to show continued strength but poor weather is likely to have weighed on January new home sales (Wednesday) and possibly consumer sentiment (Friday). Poor weather could also give a subdued result in durable goods orders (Thursday) and December quarter GDP growth is likely to be revised down to 2.5% annualised from the 3.2% initially reported thanks to softer trade and retail sales data than had originally been allowed for. Fed Chair Yellen’s delayed Senate testimony (Thursday) will be watched closely for any hint of a taper slowing following recent mixed data.

What to watch over the next week?

• In the Eurozone, confidence data (Thursday) is likely to confirm the continuing gradual economic recovery. Unfortunately the recovery to date is unlikely to have been strong enough to have pushed the January unemployment rate (Friday) below the 12% level.
• Japanese January data for household spending, the labour market and industrial production are likely to show continued growth, and a continuing rising trend in inflation (all due Friday).
• The official Chinese manufacturing PMI (Friday) is likely to have followed the HSBC flash PMI slightly weaker.
• In Australia, December quarter construction (Wednesday) and business investment data (Thursday) will provide important building blocks for the December quarter GDP data to be released on March 5. Both are likely to be a bit softer than was the case in the September quarter. The capex data will also provide a guide as to how quickly mining investment is slowing and whether non-mining investment is picking up. Private credit growth (Friday) is likely to have shown a continuing modest pick-up in growth. A speech by RBA Governor Glen Stevens (Wednesday) will likely reiterate the case for interest rates to remain on hold for now.
• This will be the final week of the Australian December half 2013 earnings reporting season with 60 major companies due to report, including Worley Parsons, Harvey Norman and Woolworths.
• Investment markets will also digest the outcome of the G20 finance ministers meeting to be held on February 22-23. G20 meetings are a great opportunity for a talkfest – and this one will see lots of interesting discussion around issues such as the impact of Fed tapering on emerging countries, global growth targets, boosting infrastructure investment, financial regulation and tax base erosion – but in the absence of a global crisis to fix, it’s hard to see it having much impact on financial markets. While ongoing concerns from some emerging markets about the Fed’s tapering of its stimulus program create interest, there’s virtually zero chance that the Fed will do anything differently and nor should it as it has to do the right thing by the US economy and emerging market problems are largely of their own making. And it can hardly be claimed that the Fed failed to communicate its plans to start tapering – in fact then Fed Chair Bernanke started flagging his tapering plans back in May last year, nearly six months before the Fed started doing anything.

Outlook for markets

• While returns will be more constrained and volatile, shares will nevertheless push higher this year helped by reasonable valuations, improving earnings on the back of improved economic growth and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. With the current earnings reporting season pointing to solid earnings growth this year, the ASX 200 is on track to meet our year-end target of around 5800 by year end.
• The recent decline in global bond yields should be seen as a correction against the backdrop of a slow rising trend in yields on the back of gradually improving global growth. This will mean subdued returns from government bonds. Cash and bank deposits also continue to offer pretty poor returns given low interest rates/yields.
• The broad trend in the $A remains down on the back of softer commodity prices, a reversion to levels that offset Australia’s relatively high cost base and a decline in Australia’s growth relative to that in the US. However, short positions in the $A still remain excessive and so it could still have a bit more of a bounce before the downtrend resumes.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

———-

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 21 February, 2014 appeared first on AdviserVoice.

Paul Sainsbury

AMP has launched Australia’s first fully integrated ‘whole of wealth’ mobile app to drive customer engagement with their finances – as Newspoll research shows a quarter of working Australians know little or nothing about their superannuation investments.

The AMP.Own Tomorrow app is the first in Australia where customers can access their banking, superannuation, insurance and investments, including access to AMP’s leading North platform and non-AMP investments and direct shares.

Key features include:

• A complete position of your finances across banking, superannuation, insurance and investments, including a customer’s non-AMP investments
• SMS notifications when your AMP Bank account balance is low, for deposits and withdrawals over certain thresholds, and alerts for super contributions
• A detailed view of your insurance inside and outside superannuation
• BPAY, ATM locator, internal and external bank transfers and ability to consolidate super accounts
• Regularly updated news and insights articles on retail and investment trends
• Enhanced security features

AMP Chief Customer Officer Paul Sainsbury said people engaged with their banking and superannuation were more likely to be in a better position to enjoy a comfortable retirement.

“We know that people engaged with their superannuation are more likely to achieve their retirement goals so it’s never too soon for people to increase their understanding of their superannuation choices, and their finances in general,” Mr Sainsbury said.

“One of the ways the AMP app helps customers be more engaged is that it enables customers to choose to be notified when they and their employer pays money in their superannuation account.

“As an industry we have to make it easy for customers to keep on top of how their retirement savings are tracking.  The AMP app does that by combining all of a customer’s banking, superannuation, investment and insurance arrangements into one,” Mr Sainsbury added.

The Newspoll and AMP research shows 26 per cent of respondents either did not know how their super was invested or knew nothing about super at all.

The research showed that people nearing retirement have the highest engagement with their super with 53 per cent of 50-64 year olds making investment decisions about how their superannuation is invested followed by 25-34 year olds at 52 per cent and 35-49 year olds at 49 per cent.

The AMP/Newspoll also found:

• Overall, 44 per cent of people said they decided how their super was invested while 34 per cent left this decision to their super fund.
• 15 per cent of those surveyed thought the decision on how their super was invested was made by someone else such as the government, family member, financial adviser, employer or partner.
• New South Wales was the most engaged state at 54 per cent while Western Australia was the least engaged at 40 per cent.

The research, to gauge Australians level of engagement with their superannuation, conducted by Newspoll, surveyed online around 1200 people aged 18-64.

The AMP .Own tomorrow app is now available to Apple users via the Apple store and android users via Google Play.

The post AMP launches first whole of wealth App appeared first on AdviserVoice.

• Shares rose over the past week thanks to a combination of soothing comments from Janet Yellen, good Chinese trade data, talk of more easing in Europe and, in Australia, good earnings results & soaring dividends. Emerging market worries seem to be fading a bit. Growth optimism also saw commodity prices rise with the $A making it back above $US0.90. Bond yields generally rose though as safe haven demand continued to fade.
• Steady as she goes from Janet Yellen. Those who were uncertain about US monetary policy following the handover from Ben Bernanke as Fed chair can breathe easy. The key message from Janet Yellen is clearly one of continuity: gradually winding down QE but only if the economy continues to improve as expected and interest rates to remain on hold well after unemployment has fallen below 6.5%. While Yellen painted an upbeat picture on the economy she clearly still sees unemployment as being too high (despite falling participation) and inflation too low and therefore sees the US requiring accommodative policies for a while to come.
• No debt ceiling debacle in the US, with Congress smoothly suspending it till next year. Quite clearly the Republican leadership has decided that a re-run of the battle last year was not in their interest given the mid-term elections later this year. So the political truce in the US continues and for now the economy is a key beneficiary, at least till after the mid-terms. But with the US budget deficit having fallen to 3.4% of GDP from over 10% post the GFC and government spending flat the last five years, it’s rapidly receding as a political issue.
• Will Toyota’s decision to cease making autos in Australia in 2017 following exit moves by Ford and Holden knock the economy into recession? No. Toyota’s decision seemed inevitable, but it’s still horrible news for the workers, families and communities that will be directly affected. Direct and indirect job losses from the shutdown of auto manufacturing could run up to 40,000 or so.  But claims of recessions and economic disaster for Australia are ridiculous. First, even if 40,000 jobs are ultimately lost this is still tiny compared to total Australian employment of 11.5 million people (just 0.3%) and the job losses will be spread over the next 3 years. Second, this impact is likely to be reduced by government assistance programs. Thirdly, it should be noted that manufacturing has been in decline for 50 year or so. Back in 1960 manufacturing employed 26% of the workforce and now it’s just 8%. And yet the economy has performed well despite this. Finally, we need to accept that government assistance of the auto industry amounting to $30bn over the last 15 years in tariffs and subsidies was a waste of taxpayers’ money. The subsidies can now be re-directed to well-targeted infrastructure spending which is what the economy really needs and tariffs on car imports should now be eliminated leading to lower car prices and a boost to real household spending power.
• Looks like a big round of privatisation on the way in Australia. The impression from the Treasurer is that the May budget will likely see big savings focussed on spending cuts rather than tax increases and that another big round of privatisation is on the way. Providing the spending cuts are not too short term focussed but are rather aimed at getting long term spending growth back to more reasonable levels, this is all a move in the right direction. Renewed privatisation is particularly positive as the private sector invariably runs assets better than governments do, it will provide opportunities for super funds to invest in Australia infrastructure rather than having to go offshore and it will free up public money for new infrastructure spending and/or debt repayment.

Major global economic events and implications

• US small business optimism rose but retail sales and jobless claims look to have been dampened by bad weather. With bad weather continuing this month, it will be March before clean US data can be expected again.
• The US December quarter profit reporting season is now 80% complete and is seeing profits come in about 5% better than expected. 76% of companies have beaten on earnings and 65% have beaten on sales.
• Eurozone industrial production was soft in December but this followed a solid gain in November and PMIs point up. Meanwhile, another ECB official indicated consideration was being given to further monetary easing. While PM Letta is stepping down in Italy, clearing the way for Matteo Renzi to take over, the market reaction has been relaxed as a new election is unlikely and Renzi is well regarded and will likely follow similar policies to Letta.
• Chinese data was good with benign inflation and strong exports and imports. The export data could have been distorted by the Lunar New Year but also lines up with stronger economic growth in the US and Europe.

Australian economic events and implications

• Australian data was mixed. On the bad side unemployment rose to 6% and consumer confidence fell. The jobs market is very weak with zero jobs growth over the last year and the highest unemployment rate since 2003. However, a rise in unemployment to 6% or above has been widely expected, including by the RBA and so it’s not a surprise and not enough to get the RBA thinking about more rate cuts. More importantly, the labour market is a lagging indicator of the economy reflecting last year’s weak growth. With more forward looking indicators for the economy pointing up we expect jobs growth to improve later this year which should see unemployment peak around 6.25% before starting to turn back down to around 6% by year end.
• In terms of more forward looking indicators the news over the last week was mostly good. The latest NAB business survey showed further improvement in confidence and conditions including a sharp rise in new orders and hiring plans, housing finance approvals continue to trend solidly up, tourist arrivals rose 7.5% through last year with even US arrivals picking up suggesting the fall in the $A is starting to help and ABS data confirmed solid gains in house prices which provides a strong boost to household wealth.
• The news from corporates has been very good. Its early days as we are only 20% or so through the December half earnings reporting season, but so far the results have been impressive. So far 57% of companies have exceeded expectations (compared to a norm of 43%); 72% of companies have seen their profits rise from a year ago (compared to a norm of 66%); a whopping 84% of companies have increased their dividends from a year ago (compared to an average of around 62% in the last two years); and 55% of companies have seen their share price outperform the day they released results. Key themes are a massive turnaround for the resources stocks (notably Rio), banks doing very well (with great results from CBA and ANZ), help coming through from the lower $A, ongoing cost control, improved outlook comments from cyclicals (like Boral) and soaring dividends. The surge in dividends is a good signal that companies are confident about the outlook. The bottom line is that Australian earnings look to be on track for strong growth this financial year.

What to watch over the next week?

• In the US, expect a slight rise in the February home builders conditions index (Tuesday), but weather related falls in January readings for housing starts (Wednesday) and existing home sales (Friday). The February Markit manufacturing conditions index (Thursday) along with the New York and Philadelphia regional manufacturing conditions indexes (due Tuesday and Thursday respectively) are likely to show continued reasonable growth, although all are at risk of being dampened by poor weather conditions. Inflation data (Thursday) is likely to have remained benign.
• In Europe, the flash Markit PMIs are expected to confirm a continued gradual recovery in economic conditions.
• Japanese December quarter GDP data is expected to show a rebound in growth to 0.7% quarter on quarter (or 2.8% annualised) driven by a combination of consumer spending and business investment. The Bank of Japan meets Tuesday but is unlikely to make any changes to monetary policy.
• In China, the flash HSBC manufacturing conditions PMI is expected to remain around the 50 level.
• In Australia, the minutes from the last RBA Board meeting (Tuesday) are likely to confirm the RBA as being comfortably on hold regarding interest rates. December wages data (Wednesday) is likely to show that wages growth is very modest at 2.5% year on year consistent with weak labour market conditions.
• This will be the peak week for Australian December half 2013 earnings results with nearly 100 major companies due to report including BHP, Wesfarmers, Woodside, AMP, Leighton and IAG. Consensus expectations are for 13% earnings growth in 2013-14 led by 35% growth in resources profits on the back of the lower $A and reduced capex and 8% growth for industrials. So far so good.

Outlook for markets

• Although returns will be more constrained and volatile, shares will nevertheless push higher this year helped by reasonable valuations, improving earnings on the back of improved economic growth and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. Against this backdrop the recent correction was healthy in leading to less ebullient investor sentiment. The ASX 200 is expected to rise to around 5800 by year end.
• The recent decline in global bond yields should be seen as a correction against the background of a slow rising trend in yields on the back of gradually improving global growth. Cash and bank deposits continue to offer pretty poor returns given low interest yields.
• The broad trend in the $A remains down on the back of softer commodity prices, a reversion to levels that offset Australia’s relatively high cost base and a decline in Australia’s growth relative to that in the US. However, short positions in the $A still remain excessive and so it appears to be going through another short covering rally – supported in part by the RBA’s more relaxed stance on the currency – that could see it rise to around $US0.92-93 before the downtrend resumes.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

————–

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 14 February, 2014 appeared first on AdviserVoice.

• While the past week got off to a bad start after a weather affected slump in the US ISM manufacturing conditions index, mostly good economic data and earnings reports thereafter along with some settling of emerging market worries and a strong easing bias from the ECB saw shares bounce back somewhat along with bond yields.
• It’s too early to say that a full blown emerging market “crisis” has been averted. Several emerging countries remain vulnerable, the Fed is likely to continue its tapering which is a bit like a falling tide exposing who was swimming naked and emerging market growth in the years ahead is likely to be lower than we have become used to. However, investors seem to have become a bit more discriminating, emerging market currencies seems to be stabilising a bit and fears of an emerging market downturn dragging down growth in the US and Europe seem to have faded a bit.
• Our view remains that coming into this year high levels of investor confidence and last year’s strong gains had left shares vulnerable to a correction and that is what we have seen. While it may be premature to say we have seen the bottom for sure, the combination of improved valuations and more subdued investor sentiment suggest there is a good chance that we have and that the bull market in shares can resume.
• In Australia, the RBA surprised no one by leaving interest rates on hold at 2.5%. But its quarterly Statement on Monetary Policy clearly indicates it has become a bit more optimistic about the growth outlook and a bit more concerned about inflation. Reflecting this it has revised up its growth forecasts for the next 18 months by around 0.25% pa and sees headline inflation rising above 3% by June before heading back into the 2-3% target range. As a result it has dropped its easing bias in favour of a period of stability in interest rates and now seems relaxed and comfortable about the $A. Our view remains that interest rates have hit bottom and are likely to be left on hold at 2.5% ahead of rate hikes starting around September/October this year. However, I am bit concerned that the RBA has over-reacted to the higher than expected December quarter inflation reading and so has given up too early on jawboning the $A lower, as it is still too high given Australia’s cost base and the mining investment slowdown. The $A has already had a 3 cent bounce from last month’s low which could go further and take it above $US0.90 as short covering continues, in which case I suspect the RBA will at some point revert to jawboning.

Major global economic events and implications

• US economic data was a mixed bag with a weather related slump in the manufacturing conditions ISM and January auto sales helping to drive US shares down, but the Markit manufacturing PMI holding up, both the ISM and Markit services PMI’s rising and employment indicators looking okay. The Fed’s latest bank lending survey showed a further easing in lending standards and increased loan demand for most types of loans but with the exception being mortgages – hopefully lower mortgage rates will help. Overall, while US GDP growth will likely slow in the current quarter due to a weaker contribution from inventories, final demand looks okay albeit a bit distorted by bad weather. At the same time strong productivity growth and falling unit labour costs point to continued low inflationary pressures for now.
• Meanwhile the US December quarter profit reporting season remains solid. It’s now 70% complete and so far 77% of companies have beaten on earnings and 66% have beaten on sales. As a result earnings growth estimates for the quarter are now running around 9.8% which is double where they were a month ago.
• The latest Congressional Budget Office projections for the US Federal Budget point a further improvement to 3% of GDP this year and 2.6% next which is a big turnaround from 10.1% of GDP in 2010. The bad news remains that it will head back up to 4% of GDP next decade due to the aging population.
• While ECB disappointed by leaving monetary policy unchanged the extremely dovish comments from President Draghi indicate it’s very close to easing further, so expect a move next month. This could include a further incremental cut in interest rates and some form of quantitative easing.

Australian economic events and implications

• Australian data was mostly okay adding to evidence of a brightening economic outlook. To be sure a further slight fall in the AIG’s manufacturing PMI was a disappointment as was a decline in building approvals, but the former is still up from its lows and building approvals are still around previous cyclical highs. More importantly, retail sales saw their strongest annual growth rate since 2009, the AIG services PMI rose in January, the trade balance came in with a surprisingly strong surplus for the second month in a row and house prices continued to rise in January. What’s more the TD Securities Inflation Gauge was benign in January going some way to allay fears about higher inflation.
• While higher food prices helped boost December retail sales, the pick-up in momentum through the second half of last year is very positive suggesting retailing may be throwing of the malaise of the last four years.
• Likewise the return to trade surpluses is great news. While exaggerated by a surge in grain exports the combination of reduced mining capex resulting in reduced capital goods imports and rising resources export volumes from completed projects points to more trade surpluses ahead.

Major market moves

• Shares started the week badly on weather affected US data before recovering somewhat as the news flow improved.
• Bonds did the reverse with bond yields mostly rising over the last week.
• While commodity prices were mixed the $A had a good bounce as traders covered short positions after the RBA shifted its easing bias and wound down its efforts to jawbone it lower.

What to watch over the next week?

• In the US, there will be a lot of interest in Janet Yellen’s first Congressional testimony as Fed Chairman on Tuesday. Our expectation is that she will likely signal a continuation of the message Ben Bernanke has been communicating, ie that growth is gradually improving and that as long as this remains the case tapering will continue. On emerging markets she is likely to signal that the Fed is aware of the risks but at this stage doesn’t see it as a major threat. On the data front expect only a 0.1% gain in January retail sales (Thursday) and a 0.3% gain in industrial production (Friday) with bad weather being a possible drag on both.
• In the Eurozone, expect a 0.3% gain in December quarter GDP due Friday consistent with business conditions indicators pointing to continued gradual recovery.
• Chinese data for January is expected to show softish exports and imports (Wednesday), another fall in inflation to 2.4% (Friday) but a pick up in bank lending and total financing. Bear in mind though that Chinese data over the January/February period is notoriously unreliable due to the floating New Year holiday.
• In Australia, expect housing finance data (Tuesday) to show a continuing rising trend, house prices (also Tuesday) are likely to have increased 2% or so in the December quarter and a 10,000 bounce in employment is expected but not enough to stop unemployment rising to 6% (Thursday). The NAB business survey (Tuesday) and consumer confidence (Wednesday) will also be watched closely.  
• Australian December half 2013 earnings results will start to hot up with 30 major companies due to report including the Commonwealth Bank, Rio, Telstra and Qantas. Consensus expectations are for 14% earnings growth in 2013-14 led by 35% growth in resources profits on the back of the lower $A and reduced capex and 8% growth for industrials, so earnings results should show signs of this turnaround starting to come through. Key themes are likely to be the benefits of the lower $A for miners and offshore earnings, early and tentative signs of top line revenue improvement, ongoing focus on cost control and solid dividend growth.

Outlook for markets

• Our view remains that, although returns will be more constrained and volatile, shares will nevertheless push higher this year helped by reasonable valuations, improving earnings on the back of improved economic growth and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. Against this backdrop recent weakness having led to improved valuations and less ebullient investor sentiment provide a good buying opportunity. The ASX 200 is expected to rise to around 5800 by year end.
• The recent decline in bond yields should be seen as a correction against the background of a slow rising trend in yields on the back of gradually improving global growth. As such it provides an opportunity for investors to further lighten bond exposures. Cash and bank deposits continue to offer pretty poor returns given low interest rates.
• The broad trend in the $A remains down on the back of softer commodity prices, a reversion to levels that offset Australia’s relatively high cost base and a decline in Australia’s growth relative to that in the US. However, short positions in the $A have become excessive and so it appears to be going through another short covering rally – supported in part by the RBA’s more relaxed stance on the currency – that could see it rise to around $US0.92-93 before the downtrend resumes.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

————–

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 7 February, 2014 appeared first on AdviserVoice.

• The rising tide in favour of the $A has well and truly reversed with further downside likely in the years ahead, particularly against the $US and Euro.
• The commodity price boom has faded in response to a moderation in Chinese growth as commodity supply increases, the US is slowing its quantitative easing program and rate cuts have reduced the attractiveness of the $A all at a time that it remains above levels that offset relatively high costs and prices in Australia. Expect it to fall to around $US0.80 in the next few years.
• For Australian investors, this means less need to hedge global exposures back to Australian dollars.

Introduction

Over the last year the $A has fallen from around $US1.05 to around $US0.89 – a fall of 15%. In fact the $A is down nearly 20% from its 2011 high. The drivers of the slump have been a combination of lower commodity prices; increasing evidence that Australia is not competitive internationally; a deterioration in Australia’s relative growth outlook; falling Australian interest rates; and more recently the Fed’s move to slow down its monetary stimulus. RBA “jawboning” has also helped. Despite periodic bounces, like that in the last few days, our assessment is that more downside lies ahead.

The big secular picture

The big swings in the value of the Australian dollar line up well with key long term swings globally:

• In the 1980s and 1990s the $A fell as commodity prices softened on stronger supply, global investor sentiment shifted in favour of the US and Australia was seen as “old economy”. As a result the $A fell to $US0.48 in 2001.
• In the 2000s the $A surged as commodity prices rose (driven by China and the emerging world and weak commodity supply), the US and Europe hit hard times, Australia was seen as being in good shape and the $US generally fell. The $A peaked in 2011 at $US1.10.
• Now the secular picture is turning again: the US, Europe and Japan seem to be tracing out a renaissance of sorts at a time when parts of the emerging world seems to be running difficulties; slower growth in the emerging world led by China at a time of increased commodity supply is weighing on commodity prices; as a result the $A is trending down as the $US trends back up.

Central to these long term swings as far as the $A is concerned is the commodity super cycle. This is because 70% or so of Australia’s exports are commodity related. Raw material prices over the past century have seen a roughly 10 year secular or long term upswing followed by a 10 to 20 year secular bear market. This can be seen in the next chart.

The upswings are usually driven by a surge in global demand for commodities after a period of mining underinvestment. The downswings come when the pace of demand slows but the supply of commodities picks up in lagged response to the previous price upswing. The last commodity super cycle that got underway around 2000 looks to have run its course. Growth in China remains strong but it has slowed from 10% plus to 7 to 8% at a time when the supply of commodities is surging after record levels of mining investment globally. And a basing in the $US is also not helping as commodities tend to be priced in US dollars.

Just as the upswing in the $A lasted a decade the downswing could last as long. But how far will the $A fall?

Purchasing power parity & hamburgers

A good place to start is with what economists call purchasing power parity, according to which exchange rates should equilibrate the price of a basket of goods and services across countries. A rough guide to this is shown below which shows the $A/$US rate against where it would be if the rate had moved to equilibrate relative consumer price levels between the US and Australia over the last 110 years or so.

Purchasing power parity doesn’t work for extended periods. In fact the commodity super cycle and the key long term global swings noted earlier play a big role in the long term swings in the $A around the level suggested by purchasing power parity, ie rising above it during 1970s, falling below in the 1980s & 1990s before rising back above it into 2011.

However, it does provide a guide to where exchange rates are headed over very long periods of time. A popularised version of purchasing power parity is The Economist magazine’s Big Mac index, which works on the principle that exchange rates should adjust until the Big Mac costs the same in any two countries. Such measures can give different results depending on the estimation period and the types of prices used. Right now after the sharp fall of the past year the Big Mac index suggests the $A is fair value. By contrast the relative consumer price measure used in the chart above suggest the $A is still 15% overvalued, with fair value around $US0.75-0.80. The broader approach also lines up with anecdotes of high prices and labour costs in Australia compared to many other countries. This suggests the $A could at last fall to $US0.80 in the years ahead.

Other drivers

But the last chart above also suggests there is a good chance of an overshoot. Several other factors also point lower for the $A. The major factors on this front are commodity prices, relative monetary policies and changing perceptions of Australia. First, as already noted commodity prices are in a secular downswing.  The chart below shows an index of industrial metal prices against the $A, showing they have gone from a positive influence to a negative.

Second, monetary policies are now working against the $A with the RBA cutting interest rates since late 2011 which has reduced the interest rate differential favouring the $A when the US Fed is slowing its quantitative easing program.

Finally, perceptions of global investors about the $A appear to be changing. Over much of the last decade it was positive reflecting Australia’s favourable fundamentals tied to growth in the emerging world and more latterly as a AAA rated safe haven against turbulence in the US and Europe. Now there is a bit more wariness as emerging markets have gone out of favour and Australia’s budget deficit has deteriorated.

While the RBA appears to have relaxed its efforts at jawboning the $A lower this may simply reflect the extent of the fall that has already occurred. Coming at time when short positions in the $A are extreme the change in the RBA’s stance could see a further short term bounce in the $A as short positions are unwound. However, it doesn’t change our broader assessment that the trend in the $A will be down.

Implications for investors

Changes in the value of the $A can have a big impact on the return Australian based investors receive from international investments. This can be seen in relation to international equity returns in the next table. The first column shows the return from global shares in local currency terms, the second shows the return in Australian dollars (if foreign currency exposures are not hedged back to Australian dollars), the third column shows the difference which is the change in the $A on a weighted basis and the final column shows the return to global shares if hedged back to Australian dollars.

In years when the $A falls like last year it boosts investors’ returns from global shares. But when the $A rises as was the case for much of the 2002 to 2011 period it reduces returns from international shares. As can be seen in the last column the return from global shares when hedged back to Australian dollars is usually a bit higher than the local currency return because investors also receive the difference between Australian and foreign interest rates.

Over the 2001 to 2010 period unhedged international shares lost an average 3% pa whereas hedged international shares returned 5.5% pa. The difference largely reflects the rise in the $A (+6% pa), but also the interest rate differential between Australia and the rest of the world (+2.5% pa).

Most global investments offered by fund managers come with a choice of being unhedged, ie exposed to fluctuations in the value of foreign currencies, or hedged, where the value of the investment is locked back into Australian dollars.

There are essentially three key drivers of the decision to hedge or not when investing offshore:

• The outlook for the $A. When it is rising it is best to be hedged, but best to be unhedged when it is falling.
• Whether an investor is “paid” to hedge or not – this is determined by relative interest rates. Most of the time Australian interest rates are above average global rates so investors are paid to hedge into Australian dollars.
• The diversification benefits of foreign currencies. Having an exposure to foreign currency means not keeping all your “currency eggs” in one basket. At times the $A can be pro-cyclical, rising in good times and falling in bad, so it can smooth out swings in global shares.

Right now the broad trend in the $A remains down and investors are getting “paid” less to hedge as the RBA has cut interest rates (2% pa compared to around 3.5% pa 3 years ago). As a result it makes sense to take advantage of the diversification benefits of other currencies by having a greater unhedged exposure than a decade or so ago.

The one major currency where this may not apply is the Yen where further weakness against the $US is likely.

by Dr Shane Oliver, AMP Capital

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post The Australian dollar – still more to fall appeared first on AdviserVoice.

• Emerging market worries and no signs that the Fed is too concerned as it announced a further tapering of its monetary stimulus program saw share markets remain under pressure over the last week with bonds benefitting from safe haven demand.
• Our assessment remains that last year’s strong gains and high levels of investor confidence had left share markets vulnerable to a correction and that emerging world worries helped provide the trigger. There are several points to note. First, the emerging market (EM) problems are consistent with a longer term deterioration in their relative outlook that reflects a combination of slowing productivity growth and political problems. The Fed’s taper has merely helped expose these problems rather than cause them.
• Second, while emerging country growth is likely to be slower than we have become used to – with rising interest rates in several countries not helping – a plunge into a 1997-98 style emerging market recession seems unlikely: much of the emerging world is in better shape than back then with less reliance on debt, current account surpluses, lower inflation and floating exchange rates. What’s more while its still a time to be cautious on emerging markets generally, some do offer good value – particularly the surplus countries like Korea and China.
• Thirdly, a downturn in the emerging world is unlikely to have a major impact on advanced countries. Historically EM crisis have not had a big impact on advanced countries, eg the Mexican crisis of 1994-95 had little impact on the US and nor did the 1997-98 Asian-emerging market crisis.
• For Australia, the key remains China and its growth outlook hasn’t changed that much, but the broader problems in the emerging world provide a reminder that growth in commodity demand in the years won’t be what we have become used to. Which all points to the need for continued low interest rates and a lower $A.
• Once the share market correction has run its course and investor sentiment readings have fallen back to less exuberant levels the bull market in shares is likely to resume.
• With January seeing share market falls of around 3%, its worth having a look at the so called January barometer again. This basically says that “as goes January for shares, so goes the year”, but its track record is messy. For the US S&P 500 there have been 22 positive Januarys since 1980 of which 19 saw positive years, indicating an 86% hit rate. But the hit rate for negative Januarys (of which there were 12 going on to negative years was only 42%. It’s the same for Australia – since 1980 there have been 20 positive Januarys for the All Ords index of which 15 saw positive years, giving a hit rate of 75%. But of the 14 negative Januarys since 1980 only 5 saw negative years resulting in a hit rate of 36%. The bottom line is that while a positive January augurs well for the rest of the year, the fact that January has been negative doesn’t tell us much at all. In both Australia and the US, January’s in 2003 and 2009 saw shares fall but both years had solid returns.
• Finally, the news wasn’t all bad over the last week with confirmation that US growth has picked up, strong US earnings results, a further rise in European confidence measures, more solid Japanese data including a further rise in inflation and a good pick up in Australian business conditions in December. So despite the emerging market woes and a rough patch in shares, the world is in reasonable shape.

Major global economic events and implications

• The Fed provided no surprises with another $US10bn reduction in its QE program and ongoing assurances that further tapering is data dependent and that rates will remain near zero for a long time. The Fed’s failure to mention the issues in the emerging world probably suggests it does not see it as a big problem.
• US economic data remained good. Home sales and durable goods orders fell but the first was affected by bad weather and the latter was distorted by aircraft orders. Meanwhile consumer confidence and house prices rose solidly and December quarter GDP growth was a solid 3.2% annualised with the highlight being strong growth in consumer spending and business investment. The overall impression is that US growth has picked up pace.
• US December quarter earnings continue to improve with now 80% of results beating earnings expectations and 66% exceeding sales expectations. It now looks like quite a good reporting season.
• Eurozone money supply and lending growth remained weak highlighting the case for more ECB stimulus, but against this bank lending standards eased a bit and consumer and business confidence continue to improve.
• Japanese data for December saw more evidence that Abenomics is working with strong household spending, lower unemployment, the jobs to applicant ratio at a new 6 year high, industrial production growing at 7.3% and a further rise in headline inflation to 1.6% year on year and 0.7% in terms of the core.
• A possible crisis of confidence in China’s wealth management funds was averted when investors in a fund that invested in a failed coal venture were bailed out. While concern may linger regarding such funds, this one was complicated by fraud so may be a special case. The fund’s name “Credit Equals Gold #1”!
• Finally, strong and better than expected growth data from Korea, Taiwan and the Philippines highlighted that many Asian countries are in good shape and a long way from any sort of Asian-emerging market crisis.

Australian economic events and implications

• Australian data was reasonable. Skilled job vacancies slipped in December and the Westpac leading indicator showed only weak growth. But against this business conditions improved solidly in December, new home sales held on to held on to the bulk of a big November gain and remain in a strong uptrend and credit growth picked up a notch. Finally producer price inflation remained benign at 0.2% month on month or 1.9% year on year.

Major market moves

• Share markets had another difficult weak as emerging market concerns lingered.
• Bond yields were flat to down helped by safe haven demand. Yields particularly fell in Spain and Italy, highlighting that they are well and truly off the radar screen as investor concerns.
• Commodity prices were mostly softer, but the $A had a bit of a bounce after the previous week’s fall.

What to watch over the next week?

• In the US, the big focus will be on the January payrolls report due Friday which is expected to show a recovery from December’s weather affected gain of just 74,000 jobs. Expect payrolls to gain 190,000 with unemployment remaining at 6.7%. In other data expect a slight fall back in the ISM manufacturing conditions index (Monday) to a still strong reading of 56 and a slight bounce in the services conditions ISM (Wednesday).
• In Europe, both the Bank of England and the ECB are likely to leave monetary policy unchanged on Thursday, but the ECB is likely to signal it retains an easing bias.
• In Australia, the Reserve Bank is expected to leave interest rates on hold for the fifth meeting in a row on Tuesday. Interest rates have already been cut to record lows, evidence continues to build that rate cuts are getting traction – with housing construction indicators up strongly, retail sales improving and consumer and business confidence up from their lows, the $A has continued to fall and inflation is running slightly higher than expected. While problems in the emerging world pose a threat it’s way too early to respond to this. Our assessment remains that the RBA would prefer to wait for the full impact of past rate cuts to flow through and is now more focussed on achieving and maintaining a lower level for the $A.  On the data front expect the trend in building approvals, house prices (both Monday) and retail sales (Thursday) to remain up in December.
• Australian December half 2013 earnings results will also start to flow. Consensus expectations are for 14% earnings growth in 2013-14 led by 35% growth in resources profits on the back of the lower $A and reduced capex and 8% growth for industrials, so earnings results should show signs of this turnaround starting to come through. Key themes are likely to be the benefits of the lower $A for miners and offshore earnings, early and tentative signs of top line revenue improvement, ongoing focus on cost control and solid dividend growth.

Outlook for markets

• Despite a poor start to the year, global shares are likely to push higher this year helped by reasonable valuations, improving earnings on the back of the global economic recovery and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. However, with shares no longer dirt cheap returns are likely to be a bit more constrained and volatile, and the current correction could go a bit further until investor confidence readings fall back a bit more.
• Despite a likely more volatile ride, Australian shares are expected to perform well as profits pick up and interest rates remain low. The ASX 200 is expected to rise to around 5800 by year end.
• Government bond yields are likely to continue their gradual upward trend as global growth improves and investors switch to risky assets. Cash and bank deposits offer pretty poor returns given low interest rates.
• The $A looks messy with Fed tapering, China/emerging market uncertainties and RBA jawboning all working against it right now. The break below December’s low of $US0.8820 also points lower – down to around $US0.85. The $A is likely ultimately on its way to around $US0.80 over the next few years.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 31 January, 2014 appeared first on AdviserVoice.

• The wobbly start to the year for share markets continued over the past week. While the news out of Europe and the US was mostly good, a greater than expected fall in a Chinese manufacturing conditions PMI weighed globally along with worse than expected Australian inflation data locally. As a result global and Australian shares mostly fell and bond yields declined, particularly in the US. Globally, the biggest issue for investors in the short term remains a combination of profit taking after last year’s strong gains in share markets and high levels of investor sentiment that may need to be worked off a bit. But the fundamental outlook is fine.
• China was perhaps the biggest source of nervousness over the last week with various growth indicators showing a loss of momentum. GDP growth slowed to 7.7% in the December quarter, industrial production, retail sales and fixed asset investment also slowed a bit and the HSBC flash PMI for January slowed more than expected likely influenced by the slowdown in industrial production late last year. However, while uncertainty regarding China is high at present not helped by a lack of transparency from the People’s Bank of China regarding its periodic liquidity squeezes there are several reasons not to be too concerned. First, Chinese growth is still exceptionally strong, eg, GDP at +7.7% year on year, industrial production at +9.7% year on year and retail sales at +13.6% year on year. Second, the growth readings and the PMI have been bouncing around the same range for the last two years now and since growth is just above the Premier’s growth floor of 7% it would appear the Government is happy with this. Finally, there are no signs of the sort of excesses that normally presage a sharp collapse: inflation is low, the trade balance is in surplus, China is a global creditor, public debt is low by US, European, Japanese, Indian and Brazilian standards and property prices are up but not out of line with urban income growth which is running around 10% year on year.
• While Chinese growth scares may linger, it’s hard to see a hard landing and eventually investors will get used to circa 7.5% growth in China. With Chinese shares amongst the cheapest in the world (with a forward PE of 7.2 times), we continue to see good value there from a medium term perspective. Particularly so relative to say India which is trading at a circa 60% premium to China in terms of its PE ratio, but has much weaker growth and much higher inflation. Best to stay overweight China.
• In other news, the IMF followed the World Bank in revising up its global growth forecast for this year from 3.6% to 3.7%, after 3% growth in 2013. While the IMF is just playing catch up to what the economic indicators and share markets have been telling us, it is noteworthy that it’s the first time in several years that the IMF has started the year off with an upwards revision to its growth forecasts.
• The US Treasury provided a reminder the US debt ceiling needs to be increased, formally by February 7, but at the latest by end February after which the US Government will run out of money. While the usual brinkmanship can be expected, it’s virtually certain it will be raised again as Democrats and Republicans are in a temporary truce as highlighted by the bi-partisan budget deal to avert another Government shutdown, House Speaker Boehner has indicated he is determined to avoid default and given the mid-term elections it’s not in the Republican’s interest to get blamed for any crisis that would flow from default.

Major global economic events and implications

• US economic data was mixed with essentially flat jobless claims, a fall in the Markit manufacturing PMI albeit to a still reasonable 53.7 and a stronger than expected gain in existing home sales. The overall impression is that US growth has picked up pace to around 3% but is a long way from booming.
• While the headlines have been a bit messy, December earnings results in the US have improved over the last week with now 73% of results beating earnings expectations and 67% exceeding sales expectations. The consensus now estimates earnings growth for the quarter at 6.3%, which is up from 4.9% two weeks ago.
• While business conditions PMIs disappointed in China and a bit in the US too, this was not the case in the Eurozone where the composite PMI rose to its highest since June 2011 driven by both manufacturing and services and is now at a level consistent with quarterly GDP growth of around 0.4%, up from 0.1%.
• Reserve Bank of India proposals to introduce an inflation target of 4% are welcome given its chronic inflation problem, but concerns from the Finance Minister warn that it may not have Government support.

Australian economic events and implications

• Australian economic data was somewhat disappointing with a further fall back in consumer confidence and higher inflation. December quarter inflation, coming in at double consensus expectations with a 0.8% gain, or 2.7% for the year was disappointing, and substantially reduces the possibility of another interest rate cut. However, it’s not bad enough to bring on a rate hike either as inflation excluding volatile items (like fruit and vegetables) was just 0.6% quarter on quarter or 2.6% year on year, the big driver of inflation has been government decisions with government related prices and charges up 5.7% over the last year relative to private sector inflation of just 1.8% and finally there is no sign the economy is overheating warranting higher rates.
• Our view remains that the RBA will leave interest rates on hold for an extended period, ahead of a modest rate hike around September/October.

Major market moves

• Share markets mostly fell not helped by the weaker Chinese PMI.
• Bond yields mostly fell as share markets fell, except in Australia where higher inflation left them little changed.
• Commodity prices were mixed with higher gold and oil prices, but lower base metal prices on China worries.
• While the $A had a brief inflation inspired bounce, the weaker Chinese PMI meant it was short lived.

What to watch over the next week?

• In the US, the big focus will be the Federal Reserve which is expected to announce a further $US10bn tapering of its quantitative easing program on Wednesday, taking it from $US75bn a month to $US65bn. Recent US economic data provides confidence that the US economy is picking up pace in line with Fed expectations but with pockets of uncertainty remaining and inflation remaining very low there is no case to accelerate the pace of tapering. The Fed is expected to remind us that further tapering is conditional on sustained economic improvement and that rate hikes remain a long way off even though unemployment at 6.7% is approaching the Fed’s 6.5% threshold beyond which it would consider raising rates. It will also be the last meeting before Ben Bernanke hands over to Janet Yellen as Fed chair.
• On the US data front expect a slight fall in new home sales (Monday) but a continuing rise in house prices (Tuesday), a solid rise in durable goods orders (also Tuesday) and a 3% annualised gain in December quarter GDP data (Wednesday) driven by solid growth in consumption and investment and positive contribution from trade. US December quarter earnings results will continue to flow.
• In the Eurozone, business and consumer confidence data for January (Thursday) are expected to confirm the ongoing economic recovery. Unemployment (Friday) is expected to have remained at 12.1% in December and inflation is also likely to have remained below 1% in January (also due Friday).
• In China, the official PMI (Friday) is expected to fall a bit further consistent with the HSBC flash PMI.
• Japanese data due Friday is expected to show a pick-up in household spending, strong growth in industrial production, further labour market improvement and a further modest rise in core inflation.
• In Australia, the NAB’s business survey (Tuesday) is likely to show a further slip in confidence after its post-election bounce, new home sales (Thursday) are likely to be solid and credit growth (Friday) is likely to remain subdued. Export and import price data (Thursday) will likely to show a further fall in the terms of trade.

Outlook for markets

• Global shares are likely to push higher this year underpinned by reasonable valuations, improving earnings on the back of the global economic recovery and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. However, with shares no longer dirt cheap returns are likely to be a bit more constrained and volatile, particularly with investor sentiment at pretty high levels.
• Australian shares are likely to perform well as profits pick up and interest rates remain low. The ASX 200 is expected to rise to around 5800 by year end. Cyclical shares like resources and industrials that underperformed over the last year are likely to outperform in 2014.
• Government bond yields are likely to continue their gradual upward trend as global growth improves and investors switch to risky assets. Cash and bank deposits offer pretty poor returns given low interest rates.
• The $A looks messy with Fed tapering, China uncertainties and RBA jawboning all working against it. The break below December’s low of $US0.8820 also points lower – down to around $US0.85. The $A is likely ultimately on its way to around $US0.80 over the next few years.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

————————–

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending January 24, 2014 appeared first on AdviserVoice.