AdviserVoiceeconomic recovery Archives - AdviserVoice https://www.adviservoice.com.au/tag/economic-recovery/ Financial planner information & financial planner education/CPD - AdviserVoice Wed, 22 Jul 2026 20:20:18 +0000 en-US hourly 1 https://wordpress.org/?v=7.0.2 Investor Signposts: Week Beginning March 6 2011 https://www.adviservoice.com.au/2011/03/investor-signposts-week-beginning-march-6-2011/ https://www.adviservoice.com.au/2011/03/investor-signposts-week-beginning-march-6-2011/#respond Thu, 03 Mar 2011 08:10:10 +0000 https://adviservoice.com.au/?p=6289

The big picture

  • The Reserve Bank Governor isn’t one to gloat. But you can certainly sense from the latest interest rate decision that Glenn Stevens is pretty pleased with the state of the economy. Of course it is not just the Governor that can take credit for our laudable circumstances, it is the Reserve Bank Board more generally, as well his executive officers.
  • Certainly there is a nice balance to the economy at present. Consumers are reluctant to spend but investment in the resources sector is picking up. The job market is strong, but future employment growth is expected to slow and skill shortages are confined to the resources sector. The floods have caused production losses but rebuilding will provide a mild boost to the economy.
  • And then there is inflation – which the RBA continues to describe as ‘moderate’ – with strong competition in some markets, lower wages and a high exchange rate all combining to push underlying inflation to the lower half of the target band.
  • Of course, no one said setting monetary policy was easy. Consider the challenges that the economy has faced over the past few years. There was the global financial crisis, a situation that prompted the Reserve Bank to do a ‘U-turn’ on monetary policy and also prompted the government to insulate the economy by boosting spending. And you know what? It worked. Of course there was also the small matter that the economy was very strong just before the GFC struck. And we can also thank the impeccable timing of the Chinese industrialisation.
  • With the GFC out of the way, the Reserve Bank wasted no time in lifting interest rates back to ‘normal’ levels. Again, that was not without its risks. If it hiked rates too quick, the economy would risk losing momentum at a crucial juncture. And if it hiked rates too slowly there was the risk that all cylinders would be firing at the same time, leading to higher inflation.
  • There is plenty of debate about whether the last rate hike was a step too far, but the Reserve Bank Board can breathe easy for now. The upturn in the Asian economy, and thus demand for Australian raw materials, have served to offset weakness in consumer spending and residential and commercial construction.
  • The new age of consumer conservatism has been another challenge for the Reserve Bank Governor together with the renewed uplift in the terms of trade (ratio of export prices to import prices) and, more recently the floods and Cyclone Yasi.
  • Now the $64 million dollar question is how long the Reserve Bank will stay on the interest rate sidelines. A rate hike in April can be ruled out, with attention turning to May. But if underlying inflation in the March quarter is still restrained by competition and the exchange rate, then rates are set to stay on hold until perhaps August.

The week ahead

  • Last week the ‘autumn avalanche’ hit, with investors inundated by a plethora of economic data releases. The dust is starting to clear, but there is still a healthy offering of statistics on the radar screen over the coming week.
  • The week kicks off with the Performance of Construction index to be issued on Monday together with the latest figures on tourist arrivals, departures and migrant flows. The construction industry is doing it tough at present but conditions in the tourism sector are more mixed, despite the lofty Aussie dollar.
  • On Tuesday the NAB business survey is released. It’s fair to say that business conditions are challenging at present with conservative consumers, floods, cyclones, rising raw material prices and a firm currency all providing headaches in one shape or form. Businesses will certainly feel more chipper when consumers become more confident.
  • And that provides the appropriate lead in to the consumer sentiment figures to be released on Wednesday. In February, the confidence index lifted modestly. But when you smooth out all the bumps, the trend index hit the lowest levels in 20 months. It is hard to see how sentiment could have changed markedly over the past month.
  • Also for release on Wednesday is the January housing finance data. Home prices have flattened over the past few months and this has served to bring more buyers out of the cupboards – even with the double-whammy rate hike in November. Lending probably rose by 1.0 per cent in January after lifting by just over 2 per cent in December.
  • On Thursday, the latest data on inflation and unemployment expectations will be issued alongside the monthly job data. The job market remains tight, due in large part to Government restrictions on migrant numbers. Employers have no alternative to take on marginal workers and train them up given that they can’t obtain the appropriate skilled staff from abroad. We tip a 20,000 increase in jobs with unemployment around 4.9/5.0 per cent.
  • Turning our attention overseas, there are only slim pickings on the US economic calendar over the coming week. On Monday consumer credit figures are released with weekly department store sales on Tuesday and wholesale sales and inventories on Wednesday. On Thursday international trade, weekly jobless claims and monthly federal budget figures are released with retail sales and consumer sentiment data on Friday.
  • Economists tip a slight widening in the trade deficit, from US$40.58 billion to US$41.5 billion. And retail sales are expected to have risen by 0.4 per cent in February with a similar 0.4 per cent rise if autos are excluded. US retail sales are surprisingly stronger than the situation in Australia. And if employment rises as expected, sales will get a further kick along.
  • Also of note, all of the top-shelf Chinese economic data releases will be issued on Friday including retail sales, production, investment, and the all-important inflation figures.

Sharemarket

  • The earnings season is over for another six months, and by and large the results were encouraging. In aggregate, the ASX 200 companies that reported their half-yearly results had earnings up 25 per cent on a year ago with cash on hand up almost 24 per cent. And when you add in the companies reporting full-year earnings, cash on hand at the 152 companies stood at $102.5 billion, up 25 per cent on a year earlier. In short, Aussie companies have cut debt and lifted cash levels to ensure that they are well prepared to meet the difficulties ahead – and there are a few. The Aussie dollar is still high, making life difficult for exporters, import-competing businesses, global companies and retailers. Then there are the vagaries of the weather, providing further challenges. Consumers still won’t spend. And raw material prices are at lofty levels and continue to rise.
  • Overall company profits are still outpacing share prices. The gap should close by share prices lifting to meet the higher earnings, but of course the difficulty is working on when, and how quickly, this will occur. CommSec believes that a combination of solid earnings and a lower Aussie dollar will serve to drive the sharemarket higher in the second half of 2011. We are sticking to our view that the All Ordinaries/ASX 200 will be near 5,400 points by end year.
  • Happy Anniversary! On March 6 2009 the All Ordinaries fell to lows of 3111.7 with the ASX 200 at 3145.5. But it was at that point that the new bull market began with investors concluding that stocks had fallen too far in response to the global financial crisis. In the period since, the All Ords has rebounded by just over 57 per cent with the ASX 200 up almost 53 per cent. Investors that have held the faith have been rewarded.

Interest rates, currencies & commodities

  • Our currency strategists are sticking with their long-held forecasts – and with good reason, because they remain on the money. The Aussie dollar had been expected to be around US102 cents at the end of March, and that still appears a reasonable bet. The US economic expansion was expected to broaden, raising the prospect of higher US interest rates, and lifting the greenback – especially over the second half of the year. That view also looks reasonable given recent data. The CBA strategists are tipping the Aussie dollar to ease to around US99 cents in June, US94 cents by September and US92 cents by the end of the year.

Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN 48 123 123 124 nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report.

The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399 a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia. This report is approved and distributed in the UK by Commonwealth Bank of Australia incorporated in Australia with limited liability. Registered in England No. BR250 and regulated in the UK by the Financial Services Authority (FSA). This report does not purport to be a complete statement or summary. For the purpose of the FSA rules, this report and related services are not intended for private customers and are not available to them.

Commonwealth Bank of Australia and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred to in this report.

]]>

The big picture

  • The Reserve Bank Governor isn’t one to gloat. But you can certainly sense from the latest interest rate decision that Glenn Stevens is pretty pleased with the state of the economy. Of course it is not just the Governor that can take credit for our laudable circumstances, it is the Reserve Bank Board more generally, as well his executive officers.
  • Certainly there is a nice balance to the economy at present. Consumers are reluctant to spend but investment in the resources sector is picking up. The job market is strong, but future employment growth is expected to slow and skill shortages are confined to the resources sector. The floods have caused production losses but rebuilding will provide a mild boost to the economy.
  • And then there is inflation – which the RBA continues to describe as ‘moderate’ – with strong competition in some markets, lower wages and a high exchange rate all combining to push underlying inflation to the lower half of the target band.
  • Of course, no one said setting monetary policy was easy. Consider the challenges that the economy has faced over the past few years. There was the global financial crisis, a situation that prompted the Reserve Bank to do a ‘U-turn’ on monetary policy and also prompted the government to insulate the economy by boosting spending. And you know what? It worked. Of course there was also the small matter that the economy was very strong just before the GFC struck. And we can also thank the impeccable timing of the Chinese industrialisation.
  • With the GFC out of the way, the Reserve Bank wasted no time in lifting interest rates back to ‘normal’ levels. Again, that was not without its risks. If it hiked rates too quick, the economy would risk losing momentum at a crucial juncture. And if it hiked rates too slowly there was the risk that all cylinders would be firing at the same time, leading to higher inflation.
  • There is plenty of debate about whether the last rate hike was a step too far, but the Reserve Bank Board can breathe easy for now. The upturn in the Asian economy, and thus demand for Australian raw materials, have served to offset weakness in consumer spending and residential and commercial construction.
  • The new age of consumer conservatism has been another challenge for the Reserve Bank Governor together with the renewed uplift in the terms of trade (ratio of export prices to import prices) and, more recently the floods and Cyclone Yasi.
  • Now the $64 million dollar question is how long the Reserve Bank will stay on the interest rate sidelines. A rate hike in April can be ruled out, with attention turning to May. But if underlying inflation in the March quarter is still restrained by competition and the exchange rate, then rates are set to stay on hold until perhaps August.

The week ahead

  • Last week the ‘autumn avalanche’ hit, with investors inundated by a plethora of economic data releases. The dust is starting to clear, but there is still a healthy offering of statistics on the radar screen over the coming week.
  • The week kicks off with the Performance of Construction index to be issued on Monday together with the latest figures on tourist arrivals, departures and migrant flows. The construction industry is doing it tough at present but conditions in the tourism sector are more mixed, despite the lofty Aussie dollar.
  • On Tuesday the NAB business survey is released. It’s fair to say that business conditions are challenging at present with conservative consumers, floods, cyclones, rising raw material prices and a firm currency all providing headaches in one shape or form. Businesses will certainly feel more chipper when consumers become more confident.
  • And that provides the appropriate lead in to the consumer sentiment figures to be released on Wednesday. In February, the confidence index lifted modestly. But when you smooth out all the bumps, the trend index hit the lowest levels in 20 months. It is hard to see how sentiment could have changed markedly over the past month.
  • Also for release on Wednesday is the January housing finance data. Home prices have flattened over the past few months and this has served to bring more buyers out of the cupboards – even with the double-whammy rate hike in November. Lending probably rose by 1.0 per cent in January after lifting by just over 2 per cent in December.
  • On Thursday, the latest data on inflation and unemployment expectations will be issued alongside the monthly job data. The job market remains tight, due in large part to Government restrictions on migrant numbers. Employers have no alternative to take on marginal workers and train them up given that they can’t obtain the appropriate skilled staff from abroad. We tip a 20,000 increase in jobs with unemployment around 4.9/5.0 per cent.
  • Turning our attention overseas, there are only slim pickings on the US economic calendar over the coming week. On Monday consumer credit figures are released with weekly department store sales on Tuesday and wholesale sales and inventories on Wednesday. On Thursday international trade, weekly jobless claims and monthly federal budget figures are released with retail sales and consumer sentiment data on Friday.
  • Economists tip a slight widening in the trade deficit, from US$40.58 billion to US$41.5 billion. And retail sales are expected to have risen by 0.4 per cent in February with a similar 0.4 per cent rise if autos are excluded. US retail sales are surprisingly stronger than the situation in Australia. And if employment rises as expected, sales will get a further kick along.
  • Also of note, all of the top-shelf Chinese economic data releases will be issued on Friday including retail sales, production, investment, and the all-important inflation figures.

Sharemarket

  • The earnings season is over for another six months, and by and large the results were encouraging. In aggregate, the ASX 200 companies that reported their half-yearly results had earnings up 25 per cent on a year ago with cash on hand up almost 24 per cent. And when you add in the companies reporting full-year earnings, cash on hand at the 152 companies stood at $102.5 billion, up 25 per cent on a year earlier. In short, Aussie companies have cut debt and lifted cash levels to ensure that they are well prepared to meet the difficulties ahead – and there are a few. The Aussie dollar is still high, making life difficult for exporters, import-competing businesses, global companies and retailers. Then there are the vagaries of the weather, providing further challenges. Consumers still won’t spend. And raw material prices are at lofty levels and continue to rise.
  • Overall company profits are still outpacing share prices. The gap should close by share prices lifting to meet the higher earnings, but of course the difficulty is working on when, and how quickly, this will occur. CommSec believes that a combination of solid earnings and a lower Aussie dollar will serve to drive the sharemarket higher in the second half of 2011. We are sticking to our view that the All Ordinaries/ASX 200 will be near 5,400 points by end year.
  • Happy Anniversary! On March 6 2009 the All Ordinaries fell to lows of 3111.7 with the ASX 200 at 3145.5. But it was at that point that the new bull market began with investors concluding that stocks had fallen too far in response to the global financial crisis. In the period since, the All Ords has rebounded by just over 57 per cent with the ASX 200 up almost 53 per cent. Investors that have held the faith have been rewarded.

Interest rates, currencies & commodities

  • Our currency strategists are sticking with their long-held forecasts – and with good reason, because they remain on the money. The Aussie dollar had been expected to be around US102 cents at the end of March, and that still appears a reasonable bet. The US economic expansion was expected to broaden, raising the prospect of higher US interest rates, and lifting the greenback – especially over the second half of the year. That view also looks reasonable given recent data. The CBA strategists are tipping the Aussie dollar to ease to around US99 cents in June, US94 cents by September and US92 cents by the end of the year.

Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN 48 123 123 124 nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report.

The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399 a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia. This report is approved and distributed in the UK by Commonwealth Bank of Australia incorporated in Australia with limited liability. Registered in England No. BR250 and regulated in the UK by the Financial Services Authority (FSA). This report does not purport to be a complete statement or summary. For the purpose of the FSA rules, this report and related services are not intended for private customers and are not available to them.

Commonwealth Bank of Australia and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred to in this report.

The post Investor Signposts: Week Beginning March 6 2011 appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2011/03/investor-signposts-week-beginning-march-6-2011/feed/ 0 Businesses bank on second half recovery https://www.adviservoice.com.au/2011/02/businesses-bank-on-second-half-recovery/ https://www.adviservoice.com.au/2011/02/businesses-bank-on-second-half-recovery/#respond Thu, 24 Feb 2011 04:51:25 +0000 https://adviservoice.com.au/?p=6137 Private New Capital Expenditure; Average weekly earnings
  • New business investment rose by a less than expected 1.3 per cent in the December quarter. Manufacturing dominated investment plans with investment in the sector up by 7.0 per cent as opposed to mining investment which fell by 4.8 per cent in the December quarter.
  • Businesses expect to invest $128.9 billion in the 2010/11 year up 3.6 per cent on the fourth estimate from the September quarter and slightly above the usual (decade average) upgrade of 2.2 per cent made by firms at this time of the year. Investment plans are up 16.2 per cent on the equivalent estimate made a year ago.
  • The first estimate for business investment in 2011/12 is $132.7 billion, up 30.3 per cent on a year ago – marking the biggest percentage lift in first estimate investment plans on record.
  • Average weekly earnings rose by 1.1 per cent in the three months to November after a small 0.6 per cent lift in the previous three months. Wages rose by 3.9 per cent over the year – in line with yesterday’s wage cost index, however the result marked the slowest annual growth in four years.
  • Over the year male wages rose by 3.8 per cent while female wages rose by 4.5 per cent. The average wage stands at $66,264. The highest average wage can still be found in the mining sector, at $108,009 per year.

What does it all mean?

  • The latest capital investment plans certainly paints a mixed picture of the domestic economic landscape. The sluggish 1.3 per cent lift in December quarter investment suggests that businesses remain cautious, investment plans are still not being committed to, and as such activity is likely to be subdued in the near term. However the longer term outlook is much more buoyant. In fact businesses expect to invest around $132 billion over 2011/12 – a record 30 per cent upgrade on the first estimate for 2010/11.
  • Overall the results confirm the CommSec view that interest rates will lift in the second half of 2011 with the cash rate ending the year near 5.50 per cent. However it is likely that in the near term interest rates will remain on hold until there is confirmation that Corporate Australia will commit to the ramp up in future spending.

  • The result is consistent with the Reserve Bank’s view that growth in the near term is likely to be subdued. No doubt the impact of the natural disasters will have a further detrimental impact on March quarter economic growth. Clearly the focus is the second half of the year and beyond. If the ramp up in investment plans does come to fruition, and given the rebuilding that will take place in flood damaged areas, further rate hikes will indeed be on the cards.
  • There is a nice balance in the economy at present. Consumer spending is restrained while business spending is rising modestly. Inflation is under control, wage growth is benign. And according to the Reserve Bank, the job market is not overly tight at present. The Reserve Bank can stay on the interest rate sidelines for a few more months. It’s not nirvana but it is a Goldilocks scenario.
  • Investment has been far from uniform, and in past quarters it has been the mining sector that has driven investment. However in the latest quarter investment spending has been largely dominated by the manufacturing sector – providing a degree of comfort given the sustained weakness in the sector.
  • Over the coming year it is clear that Australia will be riding on the back of the mining sector. But the non-mining states are unlikely to feel the effects of the rise in incomes until the recovery is well and truly in full swing. No doubt as the recovery gains traction the mining states will be in the driver’s seat and continue to enjoy strong investment flows.
  • It is important to highlight that while economic growth is expected to rebound in the second half of the year it is unlikely to be firing on all cylinders. Even the Reserve Bank believes that at present the labour market remains well supplied and that employment growth is likely to moderate to some degree. In fact the latest forecasts only have the unemployment rate dropping just half a per cent over the next two years. More importantly the lift in planned investment is encouraging for the economy as a whole, serving to boost productive capacity and therefore keep any potential inflationary pressures in check.
  • According to the latest data average weekly earnings rose by almost 3.9 per cent over the year. Unfortunately this measure tends to be quite volatile and changes in the composition of the labour force – which was especially evident during the global financial crisis – can tend to skew the result. As such the best guide to wage pressures in the economy is the wage price index with the latest figures showing that wage growth is under control.
  • The AWOTE data are also affected by compositional changes, such as the shift from full-time to part-time and movements across sectors. But the average weekly earnings data provides useful dollar estimates for wages.
  • The latest data on wages highlights what the Reserve Bank has been stating for sometime – that the industrialisation of China and India will lead to major shifts in our economy. Wages in the mining sector are now more than double the earnings in food sectors like cafes and restaurants as well as across the retail sector. And the resources states of Western Australia, Northern Territory and Queensland are dominating in the pay stakes.
  • The mining states have been major winners in the pay stakes over the past year, with Western Australia the undisputed leader. However coming up quickly is the Northern Territory. Wages in the ‘top end’ have been stunning, up 7.3 per cent over the past year – well ahead of its counterparts. The industrialisation of China, and in turn, India are paying dividends, and domestically the reallocation of resources in terms of labour to the mining states will only gain in traction over oming year.

What do the figures show?

  • Business investment rose by 1.3 per cent after rising by 6.9 per cent in the December quarter. The September quarter result was revised up from the earlier-reported rise of 6.2 per cent. In annual terms investment was up 5.6 per cent on a year ago.
  • Spending on buildings fell by 2.8 per cent in the quarter. Spending on equipment rose by 6.1 per cent after easing.

  • Spending in the mining sector fell by 4.8 per cent in the December quarter, however investment rose by 7.0 per cent in the manufacturing sector and by 4.6 per cent in “other selected industries”.
  • Investment fell in just one of the eight states and territories in the December quarter. The biggest increase was in ACT (up 56.7 per cent),  Northern Territory (up 31.8 per cent), South Australia (up 26.6 per cent), Tasmania (up 24.8 per cent), NSW (up 3.0 per cent), Queensland (up 2.7 per cent), and Victoria (up 2.0 per cent). Spending fell only in Western Australia (down 4.9 per cent).
  • The overall deflator for investment goods fell by 0.5 per cent in the December quarter after rising by 0.7 per cent in the September quarter. The price of buildings and structures rose by 0.6 per cent in the quarter while the cost of equipment fell by 1.5 per cent.
  • Over the year, the cost of investment goods fell by 1.0 per cent. The cost of buildings rose by 2.5 per cent over the year, while the cost of investment equipment fell by 4.8 per cent over the year.
  • The fifth estimate of investment for 2010/11 was $128.9 billion, up 3.6 per cent on the fourth estimate and slightly above the usual (average) upgrade in the quarter of 2.2 per cent. Compared with a year earlier, the fifth estimate of investment was up 16.2 per cent on a year ago.
  • The first estimate of investment for 2011/12 was $132.7 billion, up 30.3 per cent on a year ago.

Average weekly earnings

  • Average weekly earnings rose by 1.1 per cent in the three months to November after a small 0.6 per cent lift in the previous three months. Wages rose by 3.9 per cent over the year – in line with yesterday’s wage cost index.
  • Private sector wages rose 1.3 per cent in the quarter and by just 3.5 per cent over the year. Public sector wages rose by 0.8 per cent in the quarter and by 5.1 per cent over the year. Male wages rose 1.3 per cent in the quarter and by 3.8 per cent over the year. Female wages rose by 1.1 per cent in the quarter and by 4.5 per cent over the year.
  • Wages rose most over the year in Transport postal and warehousing (up 10.3 per cent), Electricity, gas, water & waste services (up 9.1 per cent), Financial & insurance services (up 8.8 per cent). Wages were weakest over the past year in Rental Hiring and Real Estate Services (down 2.6 per cent), followed by Administrative and support services (up 1.3 per cent), and Retail trade (up 1.4 per cent).
  • Across states & territories, we have calculated average annual wages as follows: NSW $66,565 (up 2.7 per cent over the year), Victoria $64,620 (up 4.5 per cent), Queensland $65,619 (up 4.1 per cent), South Australia $60,414 (up 4.0 per cent), Western Australia $73,148 (up 5.4 per cent), Tasmania $57,808 (up 5.5 per cent), Northern Territory $65,900 (up 7.3 per cent) and ACT $76,367 (up 4.3 per cent).
  • The highest average wage can still be found in the mining sector, at $107,510 per year. Next highest is scientific & technical services ($79,612), finance & insurance services ($78,933), and information media & telecommunications ($77,110). The lowest average wage is obtained by workers in the accommodation and food services sector ($47,518), followed by retail trade ($48,422) and “other services” ($53,352).

What is the importance of the economic data?

Private New Capital Expenditure and Expected Expenditure is released quarterly by the Bureau of Statistics. The figures show actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.

The data on actual spending is broken-down at a state and industry level and estimates are represented in nominal and price-adjusted (volume) terms. The data on expected spending contains a mix of short and longerterm estimates. The short-term estimates may focus on periods just three months ahead while the longer-term estimates may look as far as 18 months into the future.

What are the implications for interest rates and investors?

  • Interest rates will continue to rise as the recovery gains traction. However business and consumers will need a few months to adjust to the current economic conditions. Spending and activity needs to be firmly entrenched before interest rates are raised once again.

Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN 48 123 123 124 nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report.

The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399 a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia. This report is approved and distributed in the UK by Commonwealth Bank of Australia incorporated in Australia with limited liability. Registered in England No. BR250 and regulated in the UK by the Financial Services Authority (FSA). This report does not purport to be a complete statement or summary. For the purpose of the FSA rules, this report and related services are not intended for private customers and are not available to them.

Commonwealth Bank of Australia and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred to in this report.

– Show quoted text –

]]> Private New Capital Expenditure; Average weekly earnings
  • New business investment rose by a less than expected 1.3 per cent in the December quarter. Manufacturing dominated investment plans with investment in the sector up by 7.0 per cent as opposed to mining investment which fell by 4.8 per cent in the December quarter.
  • Businesses expect to invest $128.9 billion in the 2010/11 year up 3.6 per cent on the fourth estimate from the September quarter and slightly above the usual (decade average) upgrade of 2.2 per cent made by firms at this time of the year. Investment plans are up 16.2 per cent on the equivalent estimate made a year ago.
  • The first estimate for business investment in 2011/12 is $132.7 billion, up 30.3 per cent on a year ago – marking the biggest percentage lift in first estimate investment plans on record.
  • Average weekly earnings rose by 1.1 per cent in the three months to November after a small 0.6 per cent lift in the previous three months. Wages rose by 3.9 per cent over the year – in line with yesterday’s wage cost index, however the result marked the slowest annual growth in four years.
  • Over the year male wages rose by 3.8 per cent while female wages rose by 4.5 per cent. The average wage stands at $66,264. The highest average wage can still be found in the mining sector, at $108,009 per year.

What does it all mean?

  • The latest capital investment plans certainly paints a mixed picture of the domestic economic landscape. The sluggish 1.3 per cent lift in December quarter investment suggests that businesses remain cautious, investment plans are still not being committed to, and as such activity is likely to be subdued in the near term. However the longer term outlook is much more buoyant. In fact businesses expect to invest around $132 billion over 2011/12 – a record 30 per cent upgrade on the first estimate for 2010/11.
  • Overall the results confirm the CommSec view that interest rates will lift in the second half of 2011 with the cash rate ending the year near 5.50 per cent. However it is likely that in the near term interest rates will remain on hold until there is confirmation that Corporate Australia will commit to the ramp up in future spending.

  • The result is consistent with the Reserve Bank’s view that growth in the near term is likely to be subdued. No doubt the impact of the natural disasters will have a further detrimental impact on March quarter economic growth. Clearly the focus is the second half of the year and beyond. If the ramp up in investment plans does come to fruition, and given the rebuilding that will take place in flood damaged areas, further rate hikes will indeed be on the cards.
  • There is a nice balance in the economy at present. Consumer spending is restrained while business spending is rising modestly. Inflation is under control, wage growth is benign. And according to the Reserve Bank, the job market is not overly tight at present. The Reserve Bank can stay on the interest rate sidelines for a few more months. It’s not nirvana but it is a Goldilocks scenario.
  • Investment has been far from uniform, and in past quarters it has been the mining sector that has driven investment. However in the latest quarter investment spending has been largely dominated by the manufacturing sector – providing a degree of comfort given the sustained weakness in the sector.
  • Over the coming year it is clear that Australia will be riding on the back of the mining sector. But the non-mining states are unlikely to feel the effects of the rise in incomes until the recovery is well and truly in full swing. No doubt as the recovery gains traction the mining states will be in the driver’s seat and continue to enjoy strong investment flows.
  • It is important to highlight that while economic growth is expected to rebound in the second half of the year it is unlikely to be firing on all cylinders. Even the Reserve Bank believes that at present the labour market remains well supplied and that employment growth is likely to moderate to some degree. In fact the latest forecasts only have the unemployment rate dropping just half a per cent over the next two years. More importantly the lift in planned investment is encouraging for the economy as a whole, serving to boost productive capacity and therefore keep any potential inflationary pressures in check.
  • According to the latest data average weekly earnings rose by almost 3.9 per cent over the year. Unfortunately this measure tends to be quite volatile and changes in the composition of the labour force – which was especially evident during the global financial crisis – can tend to skew the result. As such the best guide to wage pressures in the economy is the wage price index with the latest figures showing that wage growth is under control.
  • The AWOTE data are also affected by compositional changes, such as the shift from full-time to part-time and movements across sectors. But the average weekly earnings data provides useful dollar estimates for wages.
  • The latest data on wages highlights what the Reserve Bank has been stating for sometime – that the industrialisation of China and India will lead to major shifts in our economy. Wages in the mining sector are now more than double the earnings in food sectors like cafes and restaurants as well as across the retail sector. And the resources states of Western Australia, Northern Territory and Queensland are dominating in the pay stakes.
  • The mining states have been major winners in the pay stakes over the past year, with Western Australia the undisputed leader. However coming up quickly is the Northern Territory. Wages in the ‘top end’ have been stunning, up 7.3 per cent over the past year – well ahead of its counterparts. The industrialisation of China, and in turn, India are paying dividends, and domestically the reallocation of resources in terms of labour to the mining states will only gain in traction over oming year.

What do the figures show?

  • Business investment rose by 1.3 per cent after rising by 6.9 per cent in the December quarter. The September quarter result was revised up from the earlier-reported rise of 6.2 per cent. In annual terms investment was up 5.6 per cent on a year ago.
  • Spending on buildings fell by 2.8 per cent in the quarter. Spending on equipment rose by 6.1 per cent after easing.

  • Spending in the mining sector fell by 4.8 per cent in the December quarter, however investment rose by 7.0 per cent in the manufacturing sector and by 4.6 per cent in “other selected industries”.
  • Investment fell in just one of the eight states and territories in the December quarter. The biggest increase was in ACT (up 56.7 per cent),  Northern Territory (up 31.8 per cent), South Australia (up 26.6 per cent), Tasmania (up 24.8 per cent), NSW (up 3.0 per cent), Queensland (up 2.7 per cent), and Victoria (up 2.0 per cent). Spending fell only in Western Australia (down 4.9 per cent).
  • The overall deflator for investment goods fell by 0.5 per cent in the December quarter after rising by 0.7 per cent in the September quarter. The price of buildings and structures rose by 0.6 per cent in the quarter while the cost of equipment fell by 1.5 per cent.
  • Over the year, the cost of investment goods fell by 1.0 per cent. The cost of buildings rose by 2.5 per cent over the year, while the cost of investment equipment fell by 4.8 per cent over the year.
  • The fifth estimate of investment for 2010/11 was $128.9 billion, up 3.6 per cent on the fourth estimate and slightly above the usual (average) upgrade in the quarter of 2.2 per cent. Compared with a year earlier, the fifth estimate of investment was up 16.2 per cent on a year ago.
  • The first estimate of investment for 2011/12 was $132.7 billion, up 30.3 per cent on a year ago.

Average weekly earnings

  • Average weekly earnings rose by 1.1 per cent in the three months to November after a small 0.6 per cent lift in the previous three months. Wages rose by 3.9 per cent over the year – in line with yesterday’s wage cost index.
  • Private sector wages rose 1.3 per cent in the quarter and by just 3.5 per cent over the year. Public sector wages rose by 0.8 per cent in the quarter and by 5.1 per cent over the year. Male wages rose 1.3 per cent in the quarter and by 3.8 per cent over the year. Female wages rose by 1.1 per cent in the quarter and by 4.5 per cent over the year.
  • Wages rose most over the year in Transport postal and warehousing (up 10.3 per cent), Electricity, gas, water & waste services (up 9.1 per cent), Financial & insurance services (up 8.8 per cent). Wages were weakest over the past year in Rental Hiring and Real Estate Services (down 2.6 per cent), followed by Administrative and support services (up 1.3 per cent), and Retail trade (up 1.4 per cent).
  • Across states & territories, we have calculated average annual wages as follows: NSW $66,565 (up 2.7 per cent over the year), Victoria $64,620 (up 4.5 per cent), Queensland $65,619 (up 4.1 per cent), South Australia $60,414 (up 4.0 per cent), Western Australia $73,148 (up 5.4 per cent), Tasmania $57,808 (up 5.5 per cent), Northern Territory $65,900 (up 7.3 per cent) and ACT $76,367 (up 4.3 per cent).
  • The highest average wage can still be found in the mining sector, at $107,510 per year. Next highest is scientific & technical services ($79,612), finance & insurance services ($78,933), and information media & telecommunications ($77,110). The lowest average wage is obtained by workers in the accommodation and food services sector ($47,518), followed by retail trade ($48,422) and “other services” ($53,352).

What is the importance of the economic data?

Private New Capital Expenditure and Expected Expenditure is released quarterly by the Bureau of Statistics. The figures show actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.

The data on actual spending is broken-down at a state and industry level and estimates are represented in nominal and price-adjusted (volume) terms. The data on expected spending contains a mix of short and longerterm estimates. The short-term estimates may focus on periods just three months ahead while the longer-term estimates may look as far as 18 months into the future.

What are the implications for interest rates and investors?

  • Interest rates will continue to rise as the recovery gains traction. However business and consumers will need a few months to adjust to the current economic conditions. Spending and activity needs to be firmly entrenched before interest rates are raised once again.

Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN 48 123 123 124 nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report.

The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399 a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia. This report is approved and distributed in the UK by Commonwealth Bank of Australia incorporated in Australia with limited liability. Registered in England No. BR250 and regulated in the UK by the Financial Services Authority (FSA). This report does not purport to be a complete statement or summary. For the purpose of the FSA rules, this report and related services are not intended for private customers and are not available to them.

Commonwealth Bank of Australia and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred to in this report.

– Show quoted text –

The post Businesses bank on second half recovery appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2011/02/businesses-bank-on-second-half-recovery/feed/ 0 Hedge now, gain later https://www.adviservoice.com.au/2011/01/hedge-now-gain-later/ https://www.adviservoice.com.au/2011/01/hedge-now-gain-later/#respond Mon, 17 Jan 2011 00:04:38 +0000 https://adviservoice.com.au/?p=5210 Businesses urged to consider hedging strategies ahead of expected dip in value of Aussie

Businesses that rely on importing goods or services are being urged to consider hedging strategies in the first quarter of 2011 to make the most of the current high Aussie dollar – and mitigate against any adverse impact of expected decreases in the value of the Aussie later in the year.

“We see the Aussie continuing to perform strongly for the early part of the 2011, but there is a feeling that it is heavily overvalued and may start to run out of steam from the second half of the year onwards,” said Joe McKenna, head of corporate foreign exchange at specialist brokers World First.

“For example, we are predicting $0.98 to the US Dollar in three months’ time, which isn’t a significant change on current rates, then $0.95 to the US Dollar in six months and $0.90 this time next year.

“What we would say to businesses is don’t get complacent and consider protecting yourself against future currency movements. Hedging is definitely something for businesses to consider in the early part of 2011, and we are seeing a lot of companies hedge on a three to six month basis to protect a certain margin,” he explained.

Mr. McKenna believes there are a lot of factors that could have a negative impact on the value of the Australian dollar in 2011 – most obviously, the flood disaster.

“A number of industries, from commodities to agriculture to financial services, have been heavily affected by the flood crisis and this has already had some impact on the dollar.

“In the medium-to-long term, however, continuing economic recovery in other parts of the world and a possible slowdown in the Chinese economy may start to show more significant effects on the value of the dollar from the middle of 2011.

“If the Chinese economy is performing well, demand for commodities remains robust, which has positive implications for the Australian economy. However, we know that China is looking to increase interest rates and reduce lending to prevent their economy from overheating, and we expect this will have a negative impact on our economy during 2011,” he explained.

“There are also signs that economies like the US and UK are beginning to play catch-up and starting to show green shoots of recovery, and this will make the major currencies like the US dollar stronger in the long run against the Aussie.”

Mr. McKenna recommended that SMEs who don’t need to pay for items up-front consider taking out forward contracts, meaning they can lock in a contract to secure today’s rate for a future date anywhere up to two years ahead.

But he also advised business owners to shop around for the best rates on their foreign exchange as offerings can vary massively between providers.

“Corporate day rates with some of the banks range up to 1.5% away from the market rates. If, for example, your business imported $2 million worth of goods in a year, that’s $30,000 Australian dollars paid unnecessarily every year.”

]]> Businesses urged to consider hedging strategies ahead of expected dip in value of Aussie

Businesses that rely on importing goods or services are being urged to consider hedging strategies in the first quarter of 2011 to make the most of the current high Aussie dollar – and mitigate against any adverse impact of expected decreases in the value of the Aussie later in the year.

“We see the Aussie continuing to perform strongly for the early part of the 2011, but there is a feeling that it is heavily overvalued and may start to run out of steam from the second half of the year onwards,” said Joe McKenna, head of corporate foreign exchange at specialist brokers World First.

“For example, we are predicting $0.98 to the US Dollar in three months’ time, which isn’t a significant change on current rates, then $0.95 to the US Dollar in six months and $0.90 this time next year.

“What we would say to businesses is don’t get complacent and consider protecting yourself against future currency movements. Hedging is definitely something for businesses to consider in the early part of 2011, and we are seeing a lot of companies hedge on a three to six month basis to protect a certain margin,” he explained.

Mr. McKenna believes there are a lot of factors that could have a negative impact on the value of the Australian dollar in 2011 – most obviously, the flood disaster.

“A number of industries, from commodities to agriculture to financial services, have been heavily affected by the flood crisis and this has already had some impact on the dollar.

“In the medium-to-long term, however, continuing economic recovery in other parts of the world and a possible slowdown in the Chinese economy may start to show more significant effects on the value of the dollar from the middle of 2011.

“If the Chinese economy is performing well, demand for commodities remains robust, which has positive implications for the Australian economy. However, we know that China is looking to increase interest rates and reduce lending to prevent their economy from overheating, and we expect this will have a negative impact on our economy during 2011,” he explained.

“There are also signs that economies like the US and UK are beginning to play catch-up and starting to show green shoots of recovery, and this will make the major currencies like the US dollar stronger in the long run against the Aussie.”

Mr. McKenna recommended that SMEs who don’t need to pay for items up-front consider taking out forward contracts, meaning they can lock in a contract to secure today’s rate for a future date anywhere up to two years ahead.

But he also advised business owners to shop around for the best rates on their foreign exchange as offerings can vary massively between providers.

“Corporate day rates with some of the banks range up to 1.5% away from the market rates. If, for example, your business imported $2 million worth of goods in a year, that’s $30,000 Australian dollars paid unnecessarily every year.”

The post Hedge now, gain later appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2011/01/hedge-now-gain-later/feed/ 0 Global Property Securities Update https://www.adviservoice.com.au/2010/10/global-property-securities-update/ https://www.adviservoice.com.au/2010/10/global-property-securities-update/#respond Thu, 28 Oct 2010 02:54:40 +0000 https://adviservoice.com.au/?p=3602 Overview
  • Strong returns by listed property companies during the month were mainly driven by positive momentum in most global equity markets.
  • The prospect of further quantitative easing in the US would be beneficial to property companies. Asset valuations would improve because the lower risk-free rate tends to cause capitalisation rates to have adownward bias.
  • We continue to hold a positive bias to the North American and Asia-Pacific regions and a cautious stance towards property companies in Europe, which we expect to continue to lag despite the outperformance during the September quarter.

Market Review

Strong returns were generated by property companies during the quarter in virtually all major geographies. European property companies generated the highest total returns, up more than 18%, based in part on the positive response to bank stress tests in July followed by Basel III pronouncements in September, both of which were deemed to be less stringent than expected. Property companies have benefited from lower bond yields, which have improved the yield spread versus fixed-income alternatives as well as improving earnings prospects.

Macro-economic news continues to drive sentiment

Macro-economic news continues to confound investors who are seeking smooth, sustainable trends. Economic releases have been inconsistent as they appear to vacillate. As an example, US existing home sales plunged 27% in July from a month earlier to an 11-year low as demand was pushed forward from the anticipated expiration of the first-time home buyer’s tax credit, only to rebound 7.6% in August to a seasonally adjusted annual rate of 4.13 million sales.

While up nicely from the 3.84 million annualized rate in July, this remains 19 percent below the 5.10 million-unit pace in August 2009 (so good news at first glance turns out to be mixed).

One clear theme for the quarter, however, was the consistently benign nature of the review of European banks. European bank stress tests, released on July 23, were less stringent than expected as only seven of the 91 banks tested failed. Separately, the Basel III rules announced in September were more accommodating than expected as banks will have the better part of a decade to meet the new requirements. This measure has provided relief for European banks as well as industries deemed to be capital users, including property companies. Equities rallied globally on this news.

Language from the US Federal Reserve Bank (the Fed) in September indicating that it’s open to further quantitative easing also contributed to the rally during the quarter. Taken with economic growth in the Asia-Pacific (ex-Japan) region which remains robust, the case for a continued global economic recovery appears to remain intact.

The implications of potential quantitative easing

Probably the most important recent event during the quarter was the change in language from the Fed’s rate-setting Federal Open Market Committee. The Committee in its September statement made it clear that further quantitative easing is a possibility as it stated that it “is prepared to provide additional accommodation if needed to support the economic recovery.”

As background, quantitative easing has typically been in the form of the Fed expanding its balance sheet by purchasing Treasuries and potentially mortgage-backed securities in the market in an effort to reduce these “reference rates” for a variety of fixed income instruments.

The ultimate goal is to reduce the cost of private sector borrowing in order to spur economic growth. The impact on real estate companies is generally very positive both with respect to asset valuations as well as cash flow.

Asset valuations are improved since a lower risk-free rate tends to cause capitalisation rates to have a downward bias, which causes the value of an in-place cash flow to rise.

Cap rates decrease since investors are able to afford to pay more for a given level of earnings while maintaining the same spread to the cost of capital (which has gone down because debt costs have come down and possibly the cost of equity, too).

Cash flows tend to improve as the cost of borrowing becomes cheaper.

External growth (acquisitions/development) also tends to pencil out more easily as the overall cost of capital goes down.

Taken together or even separately, quantitative easing is clearly very beneficial to real estate companies.

While the Fed has not engaged in another round of quantitative easing, it has made it clear that it is ready and able to engage if and when needed. This would be positive for real estate stocks.

Low rates and high spreads improved real estate valuations

Talk of quantitative easing and fears of recession are likely to keep interest rates low in the near term. As stated previously, yield spreads for real estate companies versus fixed-income alternatives remain attractive. Even with the rally in real estate stocks in September, implied cap rates generally represent significant positive spreads to local bond yields.

For investors who expect a continuation of low yields and low returns, it is logical that real estate values have been going up and may continue to do so. In the US, the implied real estate yield on REITs is 6.5%, which implies a spread at the end of September of 90 basis points to the 5.6% yield on Baa corporate bonds (the longest duration corporate bond composite of 25-30 year paper). This remains above the
average spread, which according to data compiled by Green Street Advisors has averaged 80 basis points since 1994.

Green Street Advisors has also estimated that commercial property values in the US have risen by 25% in the last 12 months and almost 30% from the trough values in May 2009. Values are still more than 20% below the peak levels reached in late 2007.

Other markets have followed a similar trend. The following table shows real estate yields (i.e., cap rates) implied by current REIT pricing around the world, as well as the NAV premium or discount, which reflects our estimate of implied pricing versus prevailing private market valuations for comparable real estate portfolios. We currently estimate that global listed property stocks trade, on a market cap weighted average basis, at a 3% discount to private market real estate values.

Third quarter earnings season is upon us

Third quarter earnings reports should evidence continued improvement as we expect many of the themes seen during 2Q10 to continue to play out:

  1. improving property fundamentals;
  2. wide-open access to debt and equity capital at competitive costs;
  3. increasing transaction volumes and;
  4. firming property transaction yields.

If anything, we expect the “new news” to be that yields have room to compress further as a result of bond yields, which have headed lower over the past few months and the Fed which has made it clear that it would like to keep yields low over the foreseeable future.

Property companies will continue to be able to reduce their cost of capital via a lower cost of debt as refinancing improves the prospects for positive spread investing. We expect low yields to continue to underpin property values.

OUTLOOK

Improving fundamentals portend positive earnings growth in 2011

We believe real estate companies will be able to deliver modest growth in earnings in the current environment. We look for a global weighted average growth rate for property company earnings of 7% in 2011. In the meantime, the unusually wide spreads between real estate yields and bond yields suggest that real estate assets are still attractively valued. If yields remain low, then real estate values if anything are likely to improve.

The path forward

We continue to retain the view we had at the beginning of the year, but with a few caveats. We continue to hold a positive bias to the North American and Asia-Pacific regions and a cautious stance towards property companies in Europe, which we expect to continue to lag despite the outperformance during the quarter.

By property type, we remain overweight sectors which stand to benefit from an economic recovery, including the shorter lease length hotel and apartment sectors as well as certain office markets in the Asia Pacific region. We remain underweight property types which react more slowly to economic recovery including healthcare and most office markets in North America and Europe.

Our outlook remains predicated on the assumption of gradual but steady global economic growth.

This document contains proprietary information of ING Investment Management Limited (INGIM) ABN 23 003 731 959 AFS Licence 233793. The opinions contained in the
document may not be modified or otherwise provided, in whole or in part, to any person or entity without INGIM’s prior written permission. The information in this document
is provided by INGIM and is based on current information as at the date of publication. INGIM does not guarantee the repayment of capital or investment performance.

]]> Overview
  • Strong returns by listed property companies during the month were mainly driven by positive momentum in most global equity markets.
  • The prospect of further quantitative easing in the US would be beneficial to property companies. Asset valuations would improve because the lower risk-free rate tends to cause capitalisation rates to have adownward bias.
  • We continue to hold a positive bias to the North American and Asia-Pacific regions and a cautious stance towards property companies in Europe, which we expect to continue to lag despite the outperformance during the September quarter.

Market Review

Strong returns were generated by property companies during the quarter in virtually all major geographies. European property companies generated the highest total returns, up more than 18%, based in part on the positive response to bank stress tests in July followed by Basel III pronouncements in September, both of which were deemed to be less stringent than expected. Property companies have benefited from lower bond yields, which have improved the yield spread versus fixed-income alternatives as well as improving earnings prospects.

Macro-economic news continues to drive sentiment

Macro-economic news continues to confound investors who are seeking smooth, sustainable trends. Economic releases have been inconsistent as they appear to vacillate. As an example, US existing home sales plunged 27% in July from a month earlier to an 11-year low as demand was pushed forward from the anticipated expiration of the first-time home buyer’s tax credit, only to rebound 7.6% in August to a seasonally adjusted annual rate of 4.13 million sales.

While up nicely from the 3.84 million annualized rate in July, this remains 19 percent below the 5.10 million-unit pace in August 2009 (so good news at first glance turns out to be mixed).

One clear theme for the quarter, however, was the consistently benign nature of the review of European banks. European bank stress tests, released on July 23, were less stringent than expected as only seven of the 91 banks tested failed. Separately, the Basel III rules announced in September were more accommodating than expected as banks will have the better part of a decade to meet the new requirements. This measure has provided relief for European banks as well as industries deemed to be capital users, including property companies. Equities rallied globally on this news.

Language from the US Federal Reserve Bank (the Fed) in September indicating that it’s open to further quantitative easing also contributed to the rally during the quarter. Taken with economic growth in the Asia-Pacific (ex-Japan) region which remains robust, the case for a continued global economic recovery appears to remain intact.

The implications of potential quantitative easing

Probably the most important recent event during the quarter was the change in language from the Fed’s rate-setting Federal Open Market Committee. The Committee in its September statement made it clear that further quantitative easing is a possibility as it stated that it “is prepared to provide additional accommodation if needed to support the economic recovery.”

As background, quantitative easing has typically been in the form of the Fed expanding its balance sheet by purchasing Treasuries and potentially mortgage-backed securities in the market in an effort to reduce these “reference rates” for a variety of fixed income instruments.

The ultimate goal is to reduce the cost of private sector borrowing in order to spur economic growth. The impact on real estate companies is generally very positive both with respect to asset valuations as well as cash flow.

Asset valuations are improved since a lower risk-free rate tends to cause capitalisation rates to have a downward bias, which causes the value of an in-place cash flow to rise.

Cap rates decrease since investors are able to afford to pay more for a given level of earnings while maintaining the same spread to the cost of capital (which has gone down because debt costs have come down and possibly the cost of equity, too).

Cash flows tend to improve as the cost of borrowing becomes cheaper.

External growth (acquisitions/development) also tends to pencil out more easily as the overall cost of capital goes down.

Taken together or even separately, quantitative easing is clearly very beneficial to real estate companies.

While the Fed has not engaged in another round of quantitative easing, it has made it clear that it is ready and able to engage if and when needed. This would be positive for real estate stocks.

Low rates and high spreads improved real estate valuations

Talk of quantitative easing and fears of recession are likely to keep interest rates low in the near term. As stated previously, yield spreads for real estate companies versus fixed-income alternatives remain attractive. Even with the rally in real estate stocks in September, implied cap rates generally represent significant positive spreads to local bond yields.

For investors who expect a continuation of low yields and low returns, it is logical that real estate values have been going up and may continue to do so. In the US, the implied real estate yield on REITs is 6.5%, which implies a spread at the end of September of 90 basis points to the 5.6% yield on Baa corporate bonds (the longest duration corporate bond composite of 25-30 year paper). This remains above the
average spread, which according to data compiled by Green Street Advisors has averaged 80 basis points since 1994.

Green Street Advisors has also estimated that commercial property values in the US have risen by 25% in the last 12 months and almost 30% from the trough values in May 2009. Values are still more than 20% below the peak levels reached in late 2007.

Other markets have followed a similar trend. The following table shows real estate yields (i.e., cap rates) implied by current REIT pricing around the world, as well as the NAV premium or discount, which reflects our estimate of implied pricing versus prevailing private market valuations for comparable real estate portfolios. We currently estimate that global listed property stocks trade, on a market cap weighted average basis, at a 3% discount to private market real estate values.

Third quarter earnings season is upon us

Third quarter earnings reports should evidence continued improvement as we expect many of the themes seen during 2Q10 to continue to play out:

  1. improving property fundamentals;
  2. wide-open access to debt and equity capital at competitive costs;
  3. increasing transaction volumes and;
  4. firming property transaction yields.

If anything, we expect the “new news” to be that yields have room to compress further as a result of bond yields, which have headed lower over the past few months and the Fed which has made it clear that it would like to keep yields low over the foreseeable future.

Property companies will continue to be able to reduce their cost of capital via a lower cost of debt as refinancing improves the prospects for positive spread investing. We expect low yields to continue to underpin property values.

OUTLOOK

Improving fundamentals portend positive earnings growth in 2011

We believe real estate companies will be able to deliver modest growth in earnings in the current environment. We look for a global weighted average growth rate for property company earnings of 7% in 2011. In the meantime, the unusually wide spreads between real estate yields and bond yields suggest that real estate assets are still attractively valued. If yields remain low, then real estate values if anything are likely to improve.

The path forward

We continue to retain the view we had at the beginning of the year, but with a few caveats. We continue to hold a positive bias to the North American and Asia-Pacific regions and a cautious stance towards property companies in Europe, which we expect to continue to lag despite the outperformance during the quarter.

By property type, we remain overweight sectors which stand to benefit from an economic recovery, including the shorter lease length hotel and apartment sectors as well as certain office markets in the Asia Pacific region. We remain underweight property types which react more slowly to economic recovery including healthcare and most office markets in North America and Europe.

Our outlook remains predicated on the assumption of gradual but steady global economic growth.

This document contains proprietary information of ING Investment Management Limited (INGIM) ABN 23 003 731 959 AFS Licence 233793. The opinions contained in the
document may not be modified or otherwise provided, in whole or in part, to any person or entity without INGIM’s prior written permission. The information in this document
is provided by INGIM and is based on current information as at the date of publication. INGIM does not guarantee the repayment of capital or investment performance.

The post Global Property Securities Update appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2010/10/global-property-securities-update/feed/ 0 The new age of consumer thrift https://www.adviservoice.com.au/2010/10/the-new-age-of-consumer-thrift/ https://www.adviservoice.com.au/2010/10/the-new-age-of-consumer-thrift/#respond Thu, 28 Oct 2010 02:12:50 +0000 https://adviservoice.com.au/?p=3640

Key points

  • The GFC has ushered in a period of more cautious consumers in the US and to a lesser extent in Australia. Household savings rates are likely to be higher than over the last decade as households seek to cut debt ratios in the face of reduced credit availability, greater economic uncertainty and constrained wealth.
  • This will result in a more constrained & fragile recovery in the US. In Australia consumer restraint is likely to be offset by mining sector strength.

Introduction

About 18 months ago a big concern was that the collapse in wealth, reduced credit availability and economic uncertainty associated with the global financial crisis would trigger a downwards spiral as households seek to repay debt and cut spending, causing a further fall in asset prices and hence wealth, triggering more efforts to cut debt, etc. In the event this was headed off by monetary easing and fiscal stimulus. But where does this leave us in terms of household balance sheets and debt levels? Will consumers go back to their old ways or remain more cautious going forward? This is not an issue for emerging countries, but is a big issue in the US and Australia.

Household debt levels remain high

The ratio of household debt to income remains high, particularly in Anglo countries. See the chart below.

Source: OECD, ABS, Thomson Financial, AMP Capital Investors

The rise in household debt levels prior to the GFC reflected: the increasingly easy availability of credit following financial de-regulation in the 1980s; falling interest rates which made debt more affordable; younger generations becoming more comfortable with debt as memories of serious economic problems faded; and rapidly rising wealth levels which reduced the need to save and supported a higher level of debt. This went hand in hand with a fall in household savings rates from around 10% of household disposable income prior to 1980, to around zero in both the US and Australia. As a result, consumer spending rose much faster than income did.

The GFC has sent most of these factors into reverse. Credit conditions are tighter, economic uncertainty has made consumers more wary of excessive debt and wealth levels have fallen. So pressure remains to reduce debt.

US households are leading the charge

Household deleveraging is well in train in the US. This is to be expected. Thanks to much lower share prices and a 20 to 30% fall in house prices the ratio of household net wealth to income is still 23% below pre GFC levels. Unemployment near 10% has led to far more cautious attitudes to debt and lending standards have toughened. Consistent with this household debt has fallen nearly 15 percentage points relative to household income from its high point in 2007. See the next chart.

Source: Thomson Financial, AMP Capital Investors

With the household savings rate running around six percent from near zero before the GFC, US households are continuing to pay down debt.

Source: ABS, Thomson Financial, AMP Capital Investors

Unfortunately there is no easy answer to how far debt levels need to fall. Debt levels have been rising ever since debt was first discovered. A simpler approach may be to focus on the saving rate. With US wealth levels unlikely to recover to 2007 levels quickly it’s likely US household savings rates may persist around current levels or even higher for some years to come.

This implies the world has lost the US as global consumer of last resort. From the early 1980s till recently US consumer spending grew faster than income (as the savings rate fell). This made it easy to reflate the global economy in tough times and there was a ready market for excess goods and savings from emerging countries.

However, it’s worth noting it’s not the level of the savings rate which matters but its change. The big drag on consumer spending and economic growth came as the savings rate rose from 2008 meaning consumption weakened relative to income. Having now adjusted to a higher rate of savings and debt reduction, consumption can move more in line with income going forward even if US consumers maintain a circa six percent savings rate. This would mean slower US consumer spending growth than in the pre GFC era but not the contraction some still fear. Maintaining a six percent saving rate will result in a further reduction in household debt ratios. The Bank Credit Analyst (a research group) estimates if US households maintain a savings rate of 6% then in 3 to 4 years US household debt will have fallen from 122% of household income today to around 94%, which is where it was in the late 1990s. This would leave US household balance sheets in good shape, but of course the path to get there will likely be bumpy.

Australian consumers also cautious, but not as much

Anecdotes from retailers attest to a more cautious attitude on the part of Australian consumers. Australian consumers also indicate a strong desire to pay down debt.

Household savings

However the pressure is not as intense as in the US. The ratio of household net wealth to household income, having recovered sharply from its GFC low, is now down by only 12% from its pre GFC peak. Unemployment is just 5.1%. And Australian’s don’t seem to be having much trouble servicing their mortgages despite much higher mortgage rates in the US – non-performing mortgages are running around 1% compared to around 8% in the US. Consequently, Australian households have been less concerned about paying back debt, compared to their US counterparts. As a result household debt has essentially gone sideways relative to household income over the last few years. See the next chart.

This has meant there has been less upwards pressure on Australia’s household savings rate. After a brief spike last year it has since fallen back. See third chart.

Source: RBA, ABS, Thomson Financial, AMP Capital Investors

Consumption has also been less exuberant in Australia, averaging 57% of GDP compared to 70% in the US.

Source: Thomson Financial, AMP Capital Investors

The mortgage equity withdrawal phenomenon – where households borrow to finance spending against the rising value of their home – was also less significant in Australia. Rather the increase in debt was largely focused on housing as increased debt enabled Australian’s to trade houses amongst themselves at ever higher prices.

This leaves much riding on the sustainability of high Australian house prices. If they tumble as in the US then the loss of wealth would likely impart significant upwards pressure on the household savings rate in a desire to reduce debt levels, resulting in significant weakness in consumer spending. On this front our view remains that while Australian house prices are significantly overvalued, the absence of widespread speculative demand and investor participation, slower growth in housing debt and a serious undersupply suggest the housing market is not in a bubble. In the absence of much higher interest rates, much higher unemployment or a huge increase in the supply of land – all of which seem unlikely in the near term – it’s hard to see a collapse in house prices. Which suggests that while growth in consumer spending may remain constrained it is likely to be reasonable.

One dampener though is the need for consumer spending to be constrained to make way for a likely boom in mining investment. Higher interest rates along with the surge in utility charges is likely to ensure that this will be the case.

Concluding comments

Over the last decade real growth in consumer spending in Australia averaged 3.5% pa, which was above average GDP growth of 3% pa. Going forward it is likely to average 2.75% pa, with rising spending on health, education and utilities likely to see slightly weaker growth in retail sales.

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) makes no representation or warranty 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.
]]>

Key points

  • The GFC has ushered in a period of more cautious consumers in the US and to a lesser extent in Australia. Household savings rates are likely to be higher than over the last decade as households seek to cut debt ratios in the face of reduced credit availability, greater economic uncertainty and constrained wealth.
  • This will result in a more constrained & fragile recovery in the US. In Australia consumer restraint is likely to be offset by mining sector strength.

Introduction

About 18 months ago a big concern was that the collapse in wealth, reduced credit availability and economic uncertainty associated with the global financial crisis would trigger a downwards spiral as households seek to repay debt and cut spending, causing a further fall in asset prices and hence wealth, triggering more efforts to cut debt, etc. In the event this was headed off by monetary easing and fiscal stimulus. But where does this leave us in terms of household balance sheets and debt levels? Will consumers go back to their old ways or remain more cautious going forward? This is not an issue for emerging countries, but is a big issue in the US and Australia.

Household debt levels remain high

The ratio of household debt to income remains high, particularly in Anglo countries. See the chart below.

Source: OECD, ABS, Thomson Financial, AMP Capital Investors

The rise in household debt levels prior to the GFC reflected: the increasingly easy availability of credit following financial de-regulation in the 1980s; falling interest rates which made debt more affordable; younger generations becoming more comfortable with debt as memories of serious economic problems faded; and rapidly rising wealth levels which reduced the need to save and supported a higher level of debt. This went hand in hand with a fall in household savings rates from around 10% of household disposable income prior to 1980, to around zero in both the US and Australia. As a result, consumer spending rose much faster than income did.

The GFC has sent most of these factors into reverse. Credit conditions are tighter, economic uncertainty has made consumers more wary of excessive debt and wealth levels have fallen. So pressure remains to reduce debt.

US households are leading the charge

Household deleveraging is well in train in the US. This is to be expected. Thanks to much lower share prices and a 20 to 30% fall in house prices the ratio of household net wealth to income is still 23% below pre GFC levels. Unemployment near 10% has led to far more cautious attitudes to debt and lending standards have toughened. Consistent with this household debt has fallen nearly 15 percentage points relative to household income from its high point in 2007. See the next chart.

Source: Thomson Financial, AMP Capital Investors

With the household savings rate running around six percent from near zero before the GFC, US households are continuing to pay down debt.

Source: ABS, Thomson Financial, AMP Capital Investors

Unfortunately there is no easy answer to how far debt levels need to fall. Debt levels have been rising ever since debt was first discovered. A simpler approach may be to focus on the saving rate. With US wealth levels unlikely to recover to 2007 levels quickly it’s likely US household savings rates may persist around current levels or even higher for some years to come.

This implies the world has lost the US as global consumer of last resort. From the early 1980s till recently US consumer spending grew faster than income (as the savings rate fell). This made it easy to reflate the global economy in tough times and there was a ready market for excess goods and savings from emerging countries.

However, it’s worth noting it’s not the level of the savings rate which matters but its change. The big drag on consumer spending and economic growth came as the savings rate rose from 2008 meaning consumption weakened relative to income. Having now adjusted to a higher rate of savings and debt reduction, consumption can move more in line with income going forward even if US consumers maintain a circa six percent savings rate. This would mean slower US consumer spending growth than in the pre GFC era but not the contraction some still fear. Maintaining a six percent saving rate will result in a further reduction in household debt ratios. The Bank Credit Analyst (a research group) estimates if US households maintain a savings rate of 6% then in 3 to 4 years US household debt will have fallen from 122% of household income today to around 94%, which is where it was in the late 1990s. This would leave US household balance sheets in good shape, but of course the path to get there will likely be bumpy.

Australian consumers also cautious, but not as much

Anecdotes from retailers attest to a more cautious attitude on the part of Australian consumers. Australian consumers also indicate a strong desire to pay down debt.

Household savings

However the pressure is not as intense as in the US. The ratio of household net wealth to household income, having recovered sharply from its GFC low, is now down by only 12% from its pre GFC peak. Unemployment is just 5.1%. And Australian’s don’t seem to be having much trouble servicing their mortgages despite much higher mortgage rates in the US – non-performing mortgages are running around 1% compared to around 8% in the US. Consequently, Australian households have been less concerned about paying back debt, compared to their US counterparts. As a result household debt has essentially gone sideways relative to household income over the last few years. See the next chart.

This has meant there has been less upwards pressure on Australia’s household savings rate. After a brief spike last year it has since fallen back. See third chart.

Source: RBA, ABS, Thomson Financial, AMP Capital Investors

Consumption has also been less exuberant in Australia, averaging 57% of GDP compared to 70% in the US.

Source: Thomson Financial, AMP Capital Investors

The mortgage equity withdrawal phenomenon – where households borrow to finance spending against the rising value of their home – was also less significant in Australia. Rather the increase in debt was largely focused on housing as increased debt enabled Australian’s to trade houses amongst themselves at ever higher prices.

This leaves much riding on the sustainability of high Australian house prices. If they tumble as in the US then the loss of wealth would likely impart significant upwards pressure on the household savings rate in a desire to reduce debt levels, resulting in significant weakness in consumer spending. On this front our view remains that while Australian house prices are significantly overvalued, the absence of widespread speculative demand and investor participation, slower growth in housing debt and a serious undersupply suggest the housing market is not in a bubble. In the absence of much higher interest rates, much higher unemployment or a huge increase in the supply of land – all of which seem unlikely in the near term – it’s hard to see a collapse in house prices. Which suggests that while growth in consumer spending may remain constrained it is likely to be reasonable.

One dampener though is the need for consumer spending to be constrained to make way for a likely boom in mining investment. Higher interest rates along with the surge in utility charges is likely to ensure that this will be the case.

Concluding comments

Over the last decade real growth in consumer spending in Australia averaged 3.5% pa, which was above average GDP growth of 3% pa. Going forward it is likely to average 2.75% pa, with rising spending on health, education and utilities likely to see slightly weaker growth in retail sales.

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) makes no representation or warranty 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 new age of consumer thrift appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2010/10/the-new-age-of-consumer-thrift/feed/ 0 Global Reflation Mark II, gold and the Australian dollar https://www.adviservoice.com.au/2010/09/global-reflation-mark-ii-gold-and-the-australian-dollar/ https://www.adviservoice.com.au/2010/09/global-reflation-mark-ii-gold-and-the-australian-dollar/#respond Thu, 23 Sep 2010 03:31:07 +0000 https://adviservoice.com.au/?p=843

Key points

  • The sub-par recovery in the US, Japan and Europe and constrained fiscal policy most likely means that we will see another round of global policy reflation, centred on quantitative easing (or printing money).
  • This will be bad news for G3 currencies, but good news for Asian currencies and gold. And it will likely also help stimulate the next asset price bubble.
  • The $A is likely to head higher as Japan and the US boost their money supplies and the RBA continues to raise Australian interest rates.

Global Reflation Mark II

Another round of global monetary reflation is likely getting underway with the US Federal Reserve and the Bank of England indicating that they are now considering additional monetary easing and Japan undertaking its own easing in moving to push the value of the Yen lower. This has major implications for foreign exchange markets, the gold price and the next asset price bubble.

The key driver is the sub-par nature of the recoveries in the US, Japan and Europe and the inability of fiscal policy to respond further given already high public debt levels. With interest rates at or close to zero, central banks look to be turning to another round of quantitative easing. Technically this involves expanding the size of the central bank’s balance sheet and basically involves using printed money to buy securities, so as to increase the quantity of money in the system. Increase the supply of something and its price normally falls!

  • Following its September meeting the US Federal Reserve has indicated that it is considering more monetary easing if needed to support the economic recovery and push inflation back up to levels more consistent with price stability. And since the Fed Funds rate is close to zero this effectively would mean another round of quantitative easing (or QE2), which would involve using printed money to buy Treasury bonds. With US growth now below the level necessary to stop unemployment from rising (which is at least 2.5% pa) and the Fed likely to revise down its 2011 growth forecasts, it’s likely to engage in quantitative easing following its November meeting. Market speculation is that the Fed is considering undertaking another $US1 trillion of asset purchases (which is the equivalent of 7% of US GDP). Coming on the back of $US1.3 trillion in Fed asset purchases in 2008-09 this would result in a further sharp rise in the size of the Fed’s balance sheet (see the chart below) and another big increase in the supply of US dollars.

Source: US Federal Reserve, AMP Capital Investors

Market expectations of QE2 in the US and a resultant increase in the supply of US dollars have seen renewed downwards pressure on the $US.

  • The Bank of England has also indicated that it is considering more quantitative easing.
  • Tiring of seeing the Yen move ever higher in response to a weakening $US, Japan has responded by starting to buy US dollars and by leaving the increased supply of Yen in the economy in what is called unsterilized intervention. As such it has essentially engaged in quantitative easing itself. Currently it has only spent Yen2 trillion but purportedly has Yen35 trillion available, which would be about 7% of its GDP and hence roughly match the potential US easing.
  • So far Europe has merely complained about the Bank of Japan’s intervention and it is still reaping the benefits of the weaker euro seen over the December to May period. But with the euro rising sharply again in response to a weaker $US and fiscal tightening likely to impact next year there is a good chance that it will also be forced into quantitative easing next year.

The end result is likely to be an increase in the supply of US dollars, Yen, British pounds and euros and a race down in each of these currencies, with the $US leading the charge.

Such “beggar thy neighbour” policies or “competitive depreciations” will no doubt result in worries about all sorts of things, in particular inflation and trade tensions. Inflation is a risk but as with QE1 it isn’t going to happen until people start spending and spare capacity, evident in circa 10% unemployment in the US and Europe and idle factories, is used up. Right now the bigger risk is deflation, so G3 central banks can afford to take risks with printing more money.

Another obvious issue is: will it work?

Quantitative easing operates by injecting more cash into banks, lowering mortgage rates and corporate borrowing rates (as government bond yields fall) and pushing the exchange rate lower (at least against countries not doing the same). But so far US banks have not leant much of the cash out from the first round of quantitative easing (ie the money multiplier remains low) and mortgage rates are already at record lows. The counter of course is that QE1 probably did prevent a worse outcome, banks will be able to further rebuild their balance sheets, further falls in mortgage rates will allow more US homeowners to refinance their loans at lower rates and the $US will at least fall against non-major currencies providing a further boost to its exports. And Fed Chairman Ben Bernanke feels that he at least has to try!

So what will it all mean?

There are several implications from another round of monetary easing.

First, it means another boost to global liquidity which should at least support growth, if not provide an additional boost to growth going forward.

Second, it will likely be positive for share markets and other listed growth assets as it was through last year following QE1.

Third, it will be bad for G3 currencies – first the $US, but also the Yen and ultimately the euro as its economy lags the US and it is forced to do the same.

Fourth, Asian and other emerging market currencies are likely to remain key beneficiaries as their central banks engage in tightening and the relative supply of their currencies falls relative to US dollars, Yen, British pounds and euros. China’s move last week to allow a faster appreciation in the Renminbi will likely help accelerate the rise in Asian currencies.

Source: Bloomberg, AMP Capital Investors

Fifth, the increase in the supply of US dollars, Yen, British pounds and euros (the latter next year) will be good for gold as investors seek a safe haven from falls in major paper currencies. This explains why gold has recently broken out to a new record high, even though inflation remains benign. The chart below shows that while the gold price has come a long way over the last decade it is still well below its inflation adjusted peak of 1980, when gold rose above $US2,000 an ounce. It will likely head up to a similar level over the next few years.

Source: Global Financial Data, AMP Capital Investors

Sixth, commodity currencies such as the Australian and Canadian dollars are also likely to be key beneficiaries. Talk of an additional boost to the supply of US dollars via quantitative easing is coming at a time when the RBA is signalling more interest rate hikes and commodity prices are strong all of which are positive for the $A. All the talk of QE2 in the US is helping propel the $A back to parity against the $US. The chart below showing the value of the $A since 1901 serves as a reminder that the post float period of the $A which saw it slip below parity is an aberration. The norm up until early 1982, was for the $A to trade above parity. This includes the early 1950s when the terms of trade was about as strong as it is now. Back then one Australian dollar bought $US1.12.

Source: Thomson Financial, RBA, AMP Capital Investors

Finally, another surge in global liquidity will help fertilise the next asset price bubble, the seeds of which have already been sown in the bursting of the last. This could well be in emerging markets or commodities. And to the extent that emerging market countries intervene to resist appreciation in their currencies it will only add to the boost in global liquidity.

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) makes no representation or warranty 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.
]]>

Key points

  • The sub-par recovery in the US, Japan and Europe and constrained fiscal policy most likely means that we will see another round of global policy reflation, centred on quantitative easing (or printing money).
  • This will be bad news for G3 currencies, but good news for Asian currencies and gold. And it will likely also help stimulate the next asset price bubble.
  • The $A is likely to head higher as Japan and the US boost their money supplies and the RBA continues to raise Australian interest rates.

Global Reflation Mark II

Another round of global monetary reflation is likely getting underway with the US Federal Reserve and the Bank of England indicating that they are now considering additional monetary easing and Japan undertaking its own easing in moving to push the value of the Yen lower. This has major implications for foreign exchange markets, the gold price and the next asset price bubble.

The key driver is the sub-par nature of the recoveries in the US, Japan and Europe and the inability of fiscal policy to respond further given already high public debt levels. With interest rates at or close to zero, central banks look to be turning to another round of quantitative easing. Technically this involves expanding the size of the central bank’s balance sheet and basically involves using printed money to buy securities, so as to increase the quantity of money in the system. Increase the supply of something and its price normally falls!

  • Following its September meeting the US Federal Reserve has indicated that it is considering more monetary easing if needed to support the economic recovery and push inflation back up to levels more consistent with price stability. And since the Fed Funds rate is close to zero this effectively would mean another round of quantitative easing (or QE2), which would involve using printed money to buy Treasury bonds. With US growth now below the level necessary to stop unemployment from rising (which is at least 2.5% pa) and the Fed likely to revise down its 2011 growth forecasts, it’s likely to engage in quantitative easing following its November meeting. Market speculation is that the Fed is considering undertaking another $US1 trillion of asset purchases (which is the equivalent of 7% of US GDP). Coming on the back of $US1.3 trillion in Fed asset purchases in 2008-09 this would result in a further sharp rise in the size of the Fed’s balance sheet (see the chart below) and another big increase in the supply of US dollars.

Source: US Federal Reserve, AMP Capital Investors

Market expectations of QE2 in the US and a resultant increase in the supply of US dollars have seen renewed downwards pressure on the $US.

  • The Bank of England has also indicated that it is considering more quantitative easing.
  • Tiring of seeing the Yen move ever higher in response to a weakening $US, Japan has responded by starting to buy US dollars and by leaving the increased supply of Yen in the economy in what is called unsterilized intervention. As such it has essentially engaged in quantitative easing itself. Currently it has only spent Yen2 trillion but purportedly has Yen35 trillion available, which would be about 7% of its GDP and hence roughly match the potential US easing.
  • So far Europe has merely complained about the Bank of Japan’s intervention and it is still reaping the benefits of the weaker euro seen over the December to May period. But with the euro rising sharply again in response to a weaker $US and fiscal tightening likely to impact next year there is a good chance that it will also be forced into quantitative easing next year.

The end result is likely to be an increase in the supply of US dollars, Yen, British pounds and euros and a race down in each of these currencies, with the $US leading the charge.

Such “beggar thy neighbour” policies or “competitive depreciations” will no doubt result in worries about all sorts of things, in particular inflation and trade tensions. Inflation is a risk but as with QE1 it isn’t going to happen until people start spending and spare capacity, evident in circa 10% unemployment in the US and Europe and idle factories, is used up. Right now the bigger risk is deflation, so G3 central banks can afford to take risks with printing more money.

Another obvious issue is: will it work?

Quantitative easing operates by injecting more cash into banks, lowering mortgage rates and corporate borrowing rates (as government bond yields fall) and pushing the exchange rate lower (at least against countries not doing the same). But so far US banks have not leant much of the cash out from the first round of quantitative easing (ie the money multiplier remains low) and mortgage rates are already at record lows. The counter of course is that QE1 probably did prevent a worse outcome, banks will be able to further rebuild their balance sheets, further falls in mortgage rates will allow more US homeowners to refinance their loans at lower rates and the $US will at least fall against non-major currencies providing a further boost to its exports. And Fed Chairman Ben Bernanke feels that he at least has to try!

So what will it all mean?

There are several implications from another round of monetary easing.

First, it means another boost to global liquidity which should at least support growth, if not provide an additional boost to growth going forward.

Second, it will likely be positive for share markets and other listed growth assets as it was through last year following QE1.

Third, it will be bad for G3 currencies – first the $US, but also the Yen and ultimately the euro as its economy lags the US and it is forced to do the same.

Fourth, Asian and other emerging market currencies are likely to remain key beneficiaries as their central banks engage in tightening and the relative supply of their currencies falls relative to US dollars, Yen, British pounds and euros. China’s move last week to allow a faster appreciation in the Renminbi will likely help accelerate the rise in Asian currencies.

Source: Bloomberg, AMP Capital Investors

Fifth, the increase in the supply of US dollars, Yen, British pounds and euros (the latter next year) will be good for gold as investors seek a safe haven from falls in major paper currencies. This explains why gold has recently broken out to a new record high, even though inflation remains benign. The chart below shows that while the gold price has come a long way over the last decade it is still well below its inflation adjusted peak of 1980, when gold rose above $US2,000 an ounce. It will likely head up to a similar level over the next few years.

Source: Global Financial Data, AMP Capital Investors

Sixth, commodity currencies such as the Australian and Canadian dollars are also likely to be key beneficiaries. Talk of an additional boost to the supply of US dollars via quantitative easing is coming at a time when the RBA is signalling more interest rate hikes and commodity prices are strong all of which are positive for the $A. All the talk of QE2 in the US is helping propel the $A back to parity against the $US. The chart below showing the value of the $A since 1901 serves as a reminder that the post float period of the $A which saw it slip below parity is an aberration. The norm up until early 1982, was for the $A to trade above parity. This includes the early 1950s when the terms of trade was about as strong as it is now. Back then one Australian dollar bought $US1.12.

Source: Thomson Financial, RBA, AMP Capital Investors

Finally, another surge in global liquidity will help fertilise the next asset price bubble, the seeds of which have already been sown in the bursting of the last. This could well be in emerging markets or commodities. And to the extent that emerging market countries intervene to resist appreciation in their currencies it will only add to the boost in global liquidity.

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) makes no representation or warranty 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 Global Reflation Mark II, gold and the Australian dollar appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2010/09/global-reflation-mark-ii-gold-and-the-australian-dollar/feed/ 0 Emerging markets local currency debt: Capitalising on improved sovereign fundamentals https://www.adviservoice.com.au/2009/10/emerging-markets-local-currency-debt-capitalising-on-improved-sovereign-fundamentals/ https://www.adviservoice.com.au/2009/10/emerging-markets-local-currency-debt-capitalising-on-improved-sovereign-fundamentals/#respond Thu, 01 Oct 2009 11:10:49 +0000 https://adviservoice.com.au/?p=1603 Emerging markets local currency-denominated debt is a relatively large and liquid asset class that represents some of the most creditworthy emerging market sovereigns, offers two distinct sources of return (currency and local bond yields), and provides the potential to generate equity-like returns without taking on direct equity risk. We expect the sizeable growth differentials between emerging market countries and the developed world to continue serving as a magnet for capital flows into emerging markets. These capital inflows should augment appreciation pressures on many emerging market currencies, especially in the context of a global economic recovery. Reflecting the persistently positive term premium of local yield curves, emerging market government bonds have provided a better way to get emerging market currency exposure than currency forwards. Bond managers, however, may selectively use currency forwards in those situations where the currency is attractive but not prospective duration returns.

Click here to download this document (pdf)

]]> Emerging markets local currency-denominated debt is a relatively large and liquid asset class that represents some of the most creditworthy emerging market sovereigns, offers two distinct sources of return (currency and local bond yields), and provides the potential to generate equity-like returns without taking on direct equity risk. We expect the sizeable growth differentials between emerging market countries and the developed world to continue serving as a magnet for capital flows into emerging markets. These capital inflows should augment appreciation pressures on many emerging market currencies, especially in the context of a global economic recovery. Reflecting the persistently positive term premium of local yield curves, emerging market government bonds have provided a better way to get emerging market currency exposure than currency forwards. Bond managers, however, may selectively use currency forwards in those situations where the currency is attractive but not prospective duration returns.

Click here to download this document (pdf)

The post Emerging markets local currency debt: Capitalising on improved sovereign fundamentals appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2009/10/emerging-markets-local-currency-debt-capitalising-on-improved-sovereign-fundamentals/feed/ 0