• 

  Commodity prices on the decline

  The May trade figures showed a large deficit of $1.9bn

• Declining commodity prices and an elevated AUD over the month weighed on export receipts.
• Exports of goods and services were down by 4.6% over the month, driven by falls in iron ore and coal.
• Imports fell by 0.6% due to a big fall in capital goods, primarily as a result of the pullback in mining related capital expenditure.
• A stabilisation in export prices and below‑trend domestic demand growth should see the trade balance return to surplus over coming months.

The May trade deficit came in a lot larger than the market had been expecting.   The market consensus was looking for a small deficit of $200m {CBA (f) ‑$500m}.  The May result was the second consecutive deficit following three big monthly trade surpluses over QI.  The widening in the trade deficit from an upwardly revised $780m shortfall in April reflects a sizeable fall in goods exports and a small decline in imports.

The fall in exports over May was driven by a big decline in metal ores and minerals (‑$760m or 9%).  The plunge in the spot price of iron ore over May was not coupled with a fall in the AUD over the month.  As bulk commodity exports are priced in US dollars, the net result of a decline in prices and a flat AUD weighs on export receipts.  Other mineral fuels fell by a sizeable $352m over the month (‑13%).  Rural exports declined by a more modest 2%.  Services exports bucked the trend and were virtually unchanged over the month.  On a positive note, tourism exports are up around 8½% on year ago levels.  It looks to us like a slightly softer AUD and a pickup in the advanced economies is supporting the domestic tourism sector.  We expect this to continue over the period ahead as global growth lifts.

Imports recorded a small 0.6% decline over May.  The fall was driven by a 4% fall in capital goods imports, which continue to trend lower as the construction‑intensive part of the mining booms unwinds.  This will be a familiar theme over the year ahead.  Consumption goods imports were largely unchanged over the month.   An elevated AUD helps to contain growth in import costs and therefore receipts.  It also helps to keep a lid on tradables inflation which has lifted over the past year.    

Goods exports to China accounted for almost 38% of total goods exports over the past year and highlight both the importance of and dependence on the Chinese economy to Australia.  Resource exports to China will continue to dominate the trade story ahead.  But service exports will also be important.  Tourism is the 3rd biggest export earner at present and education is the 5th largest. The emergence of the Asian middle income consumer brings the huge potential for an acceleration in both goods and services exports.

Looking ahead, we expect to see the monthly trade balance return to surplus.  In our view, export receipts will lift due to higher volumes and a stabilisation in commodity prices.  And import growth is expected to remain soft as the decline in mining capital expenditure weighs on capital goods imports.  Consumption goods imports, on the other hand, are expected to trend higher in line with a lift in household expenditure.

From a GDP perspective, net exports made a massive contribution to QI quarterly growth of 1.4ppts.  A combination of a surge in export volumes, buoyed by some good weather, and a fall in imports underpinned the result.  The story looks like it will be a little different over QII.  We expect to see a bit of statistical payback in export volumes while import volumes are being supported by an elevated AUD.  The net effect means that net exports are unlikely to drive growth over QII.  But we do expect them to be a significant contributor to growth over H2 2014.

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More reform needed: Standard Life Investments

Standard Life Investments, the global investment manager, believes the underwhelming response of Japanese exports to the plunge in the yen should serve as a warning sign to Japanese policymakers that more reforms are needed, both at government and corporate levels.

The latest edition of Global Perspective examines why the recent sizeable depreciation of the yen has not had more of an impact on Japanese exports. Detailed analysis shows a range of long term factors at work.

The report highlights that widespread structural reforms, including changes to the tax system, labour market institutions, innovation policies, product market regulations and corporate governance, must be recognised as being just as essential for restoring Japan’s external competitiveness as they are for revitalising the domestic economy. If the so-called third-arrow agenda continues to disappoint, then the long-term decline in Japan’s export market share is unlikely to be reversed, regardless of the future path of the currency. This has implications for domestic growth and therefore portfolio investment in Japanese companies.

Jeremy Lawson, Chief Economist, Standard Life Investments, said: “Japan’s weak export performance under the Abe government suggests that the country’s problems have been misdiagnosed.

Structural reforms are the key to boosting exports in the longer term, as well as unlocking domestic growth potential and encouraging portfolio investment in Japanese companies. Currency devaluation can only ever be a stop-gap measure.

“The implications of Japan’s experience should not be lost on those nations considering currency devaluations as a short-cut to regaining international competitiveness. While facilitating depreciation can be an effective way of absorbing negative external shocks, in the long-run it does not boost living standards or prevent the erosion of export market share, particularly when the supply side of the economy is the real problem.”

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• The October trade balance was a deficit of $529m – an increase of $258m on the deficit in September.
• Exports declined by a very small 0.1% over the month and imports lifted by 0.8% to near record highs.
• Australia ran a goods surplus of $427m over the month and a services deficit of $957m.  The services deficit is being driven by freight charges and related insurance charges.

Exports to China hit a record high: CBA

Exports to China hit a record high, both as an absolute amount and also as a share of total exports.The October trade deficit of $529m came in worse than market expectations which centred on a $350m deficit {CBA(f) ‑$600m).  Australia has been running a trade deficit since December 2011.  Deficits have primarily been a result of a falling terms of trade.  The decline in commodity prices over the past two years has seen the value of our exports relative to imports fall.   Trade deficits therefore become more likely until volumes are sufficient to offset the price effect.  A softer AUD bodes well for export receipts, but pushes up the price of imports.

The 1% rise in imports over October was due to a lift in consumption goods (+1%), services (+1%) and other merchandise goods (+1%).  Imports of capital goods were largely flat.  Machinery and equipment imports fell by 5% over the month reflecting the slowdown in mining‑related capital expenditure.

Exports were largely flat over October despite a small decline of 2.4% in commodity prices (AUD terms).  This suggests that export volumes lifted.  Over the past year, export volumes have been rising while commodity prices have softened a little.  That is why net exports have being making a positive contribution to real GDP growth.  The QIII GDP figure showed that net exports contributed a sizeable 0.7ppts to real growth over the quarter.  This is a measurement of volumes.  But the trade balance is a nominal measure so changes in the prices of goods, as well as the volumes, matter.  In terms of the breakdown over the month, there were falls in rural exports (‑3%), other mineral fuels (‑11%), and metal ores and minerals (‑1%).  These were partially offset by a solid rise in coal, coke and briquettes (+7%) on the back of a solid lift in volumes.

On a geographic basis, exports to China hit a record high during over the month, surpassing $9bn for the first time.  Exports to China are up a whopping 58% on year ago levels.  Its share of exports from Australia also hit a record high, surpassing 40% for the first time.  These numbers highlight just how important the Chinese economy is to Australia’s growth at present.  And why economic data out of China is having an increasingly bigger impact on the AUD and the Australian equity and interest rate markets.

From an RBA perspective, today’s figures are neutral for policy setting.  Resource export volumes are solid, reflecting a continuing increase in capacity as the mining boom transitions from the investment phase to the extraction phase.  The AUD has pulled back to be trading near USD0.90 this week and the central bank will be comforted that the local currency looks to once again be playing its traditional role of buffering incomes and local activity.

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The big picture

• Our central view is that the US economy is undergoing a mid-cycle pause and that growth will start to lift again late in 2011. As such, we believe that the Federal Reserve won’t provide additional monetary stimulus and will in fact start to withdraw the stimulus in early 2012. The gradual withdrawal of stimulus is expected to translate to a firmer greenback over 2012.
• We tip the Aussie dollar to ease from US104 cents at the end of 2011 to US102 cents by March 2012 and US97cents by June 2012. The Aussie is also expected to ease from 70.75 Euro cents in December 2011 to 70.30 Eurocents in June 2012.
• The weaker Australian dollar should cause foreign investors to become more positive about the Australian sharemarket. Around 40 per cent of all our listed shares are owned by foreign investors, so the stronger Aussie dollar caused some investors to become overweight Australian shares, prompting some to lessen their exposure. In the March quarter foreign investors sold $1.9 billion of Aussie shares – the first fall in just over eight years.
• But while a weaker currency should improve interest in Aussie shares, other factors such as proposed taxes on carbon emissions and mining profits, as well as a potential ban on the live animal trade, may also serve to restrain interest by foreign investors.
• Valuations on the Australian sharemarket remain broadly favourable. Currently share prices stand at 13.6 times historic earnings – below the long-term P/E ratio of 15. At face value the sharemarket appears cheap, but given investor preference for liquid investments such as cash and bank deposits, it may actually just be regarded as fairly valued in these more conservative times. CommSec expects the ASX 200/All Ordinaries to end 2011 at 5,000 before lifting to 5,500 points by the end of 2012.
• Shares are expected to out-perform other asset classes over 2011/12. Returns on residential property are expected to remain modest at 0-3 per cent given that supply and demand for property has become more balanced. Cash is expected to provide returns of around 5 per cent over the coming year with Government bonds also earning close to 5 per cent.
• The $64 question is when will the “new conservatism” come to an end. Unfortunately no one has the answer. We expect cash to rise from 4.75 per cent to around 5.25 per cent over the coming year. However, just like 2010/11,the risk is that “new conservatism” results in rates remaining stable for longer

The week ahead

• A busy week lies ahead in terms of domestic economic data with a Reserve Bank interest rate decision thrown in for good measure. In the US, the spotlight shines brightly on Friday’s jobs data.
• In Australia, the first full week of the new financial year begins with a barrage of economic data. On Monday, data on job advertisements is released together with the TD Securities/Melbourne Institute inflation gauge, retail trade and building approvals data.
• We expect that retail trade rose by 0.6 per cent in May with the colder weather providing a spur to seasonal purchases. Building approvals are expected to have risen by 3 per cent in May, but approvals are up one month and down the next, so little should be read into the gain. The other data is also worth watching. Job ads fell in May while underlying inflation fell to near 6½ year lows. If the June readings produce similar results, the Reserve Bank won’t be in any rush to lift rates.
• The Reserve Bank Board meets to decide interest rate settings on Tuesday with the monthly trade figures and Performance of Services index released the same day. No change in rate settings is expected or justified. The next big test for most analysts is the June quarter inflation data to be released on July 27.• In terms of the economic data, the Performance of Services index was below 50 in May, pointing to a contraction of activity across the sector. Another weak reading would further water down the chances of a rate hike in coming months. And the trade surplus may have expanded to $1.7 billion in May.
• Data on engineering construction is released on Wednesday while the June jobs report is issued on Thursday. We expect that employment grew by 15,000 people in the month – largely in line with the number of new entrants. As a result, the jobless rate probably remained unchanged at 4.9 per cent. Over the past two months, full-time positions have been cut by almost 80,000, and another fall in jobs in June would raise doubts about the fundamental health of the economy.
• In the US, markets are closed for the Independence Day holiday on Monday. On Tuesday, data on factory orders is released, while the ISM services sector index is issued on Wednesday alongside the Challenger job lay-off series. Economists believe that the services sector is still growing – a reading above 50 is expected – but the index probably eased from 54.6 to 54.3 in June.
• The ADP survey of private sector employment is released on Thursday while the non-farm payrolls (employment) report is issued on Friday alongside figures on consumer credit and wholesale inventories.
• Economists tip a modest 60,000 lift in the ADP survey and then project a modest 90,000 lift in non-farm payrolls. But whichever way you cut it, job gains are modest. The unemployment rate is tipped to remain high near 9.0 percent, albeit down from 9.1 per cent in May.
• The European Central Bank and Bank of England have rate-setting meetings on Thursday.

Sharemarket

• It may not seem like it, but the sharemarket had one of its least volatile years during 2010/11. Over the past financial year, there were just 56 trading days where the All Ordinaries either rose or fell by more than one percent. In fact it was the least volatile 12-month period in almost four years.
• Looking back over the past 15 years, on average the sharemarket has risen or fallen by more than one percent on 63 days in a year, or around once every 4-5 days. No surprises for the most volatile period – it was the time of the global financial crisis. Over the year to January 2009, the All Ordinaries moved up or down by more than a percent on 163 days or around two in every three days. The least volatile period was the year to January 2005 when there were just nine days where the sharemarket rose or fell by more than one per cent.

Interest rates, currencies & commodities

• The past year has been the most stable year for interest rate changes in six years – since 2004/05. Contrary to the forecasts of most private sector economists, the Reserve Bank hasn’t had to lift rates more than once over the financial year as a slowdown in non-mining sectors together with the effects of floods and cyclone have offset solid growth in the resources sector. The only rate change was a 25 basis point increase delivered on November 3. The last time there was just one rate change in a financial year was 2004/05 when rates rose 25 basis points on March 2 2005. That was the only official rate change between January 2004 and April 2006.
• Interestingly, financial markets have again changed their view on the next move in rates. In five months time, the cash rate is tipped to be at 4.70 per cent – or below the current 4.75 per cent cash rate. In other words, financial markets have priced in a 20 per cent chance of a rate hike late this year.
• Over the past year the Aussie dollar has held between US83.14 cents and US110.11 cents – a range of almost US27 cents or a 32 per cent movement between the highs and lows. It sounds a lot, but is this normal? Over the2 7½ years since the currency floated, the Aussie dollar has moved on average by US13.6 cents over a year, or a change of around 21 per cent. The 2010/11 financial year was actually the second most volatile year on record behind 2008/09 (range of US38.45 cents).

The post Investor Signposts: Week Beginning July 3 2011 appeared first on AdviserVoice.

• The Australian economy fell by 1.2 per cent in the March quarter. And while the downturn can be largely explained by the disruption to coal exports caused by Cyclone Yasi, it only takes a small fall in output in the June quarter to produce a “technical recession.” In short, there are no grounds for complacency.The economy didn’t grow in the September quarter before lifting 0.8 per cent in the December quarter and then contracting in the March quarter.
• GDP per person fell by 1.5 per cent in the quarter – the second contraction in the past three quarters.
• The biggest drag on growth was net exports (exports less imports; a reduction of 2.4 percentage points) followed by inventories (0.5pp). But spending on machinery added 0.4pp with household consumption and dwelling investment both up 0.3pp.
• Eight of the 19 industry sectors contracted in the March quarter. While mining output fell 6.1 per cent, agriculture, forestry & fishing slumped 8.9 per cent and “Other services” fell by 3.1 per cent.

What does it all mean?

• Let’s not sugar coat it – it is a big decline in output. The Reserve Bank thought it “likely” that the economy would have gone backwards in the March quarter, but if it factored in a drop of 1.2 per cent, its language would have been more definite. Clearly Cyclone Yasi was the key influence, stalling Queensland coal exports. But now the focus is on the June quarter result. And so far the prospects are not bright. Investment forecasts have been scaled back, home prices and building approvals have fallen, manufacturing is contracting and lending is flat. The economy will probably rebound in the June quarter, but there are still headwinds to be breached.
• As always, we shouldn’t put too much emphasis on one quarter’s figures, especially as the March quarter result was so significantly weather affected. But it’s worth noting that the economy recorded no growth back in the September quarter before lifting 0.8 per cent in the December quarter and then going backwards by 1.2 per cent in the latest quarter.
• While we shouldn’t over-react to the GDP shock, we also shouldn’t be complacent. It is clear that the Australian economy has lost momentum. The medium-term outlook looks OK, but the short-term prospects are muddied by the reluctance of consumers and businesses to spend, borrow and build.
• The Reserve Bank indicated it would “look through” (in essence, ignore) the weather impact on the economy. But it can’t look through the more recent partial indicators that show the economy struggling for momentum. The Reserve Bank needs to stay on the interest rate sidelines until the economic situation becomes clearer. There is clearly too much noise at present – and thus potential for mistakes – to be moving interest rates in any direction.
• Interest rates are still more likely to rise in the future, than fall. But a batch of stronger economic readings will be required before the Reserve Bank could be comfortable with lifting rates. We are still pencilling in a rate hike in August, but the timing may need to be put back a few months. Clearly the June quarter inflation numbers will be pivotal to any decision to lift rates in August.

Performance of Manufacturing

The manufacturing sector has contracted for the eighth time in nine months with the Performance of Manufacturing index (PMI) easing 0.7 points to 47.7 in April. Any reading below 50 indicates that the manufacturing sector is contracting.

What does it all mean?

• It’s not rocket science. It would be clear to anyone who has reviewed economic data readings over the past month that the economy is struggling. Manufacturing has been consistently going backwards over 2011, housing finance is at decade lows, consumers aren’t spending and approvals to construct new buildings remain below longer-term averages.
• The downturn in manufacturing is broad-based with nine of the 12 sectors going backwards. In short, it’s not an aberration or a mirage – there are deep-seated problems caused by a high Aussie dollar and reluctance byconsumers to spend.

What do the figures show?

• The PMI fell by 0.7 points to 47.7 in April. Any reading below 50 signifies that the manufacturing sector iscontracting. This is the eighth time in nine months that the PMI has been below 50.
• Nine of the 12 manufacturing sub-sectors reported declines in activity in May led by clothing & footwear and the chemical, petroleum & coal products sub-sector.

What is the importance of the economic data?

• The monthly Performance of Manufacturing Index is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• The Reserve Bank must acknowledge that the domestic economy has hit a flat spot. While a recovery is likely later this year, an absence of consumer and business confidence has sapped momentum from the economy.
• Cost pressures are easing for manufacturers. Input costs eased in the past month while selling prices rose modestly, boosting profitability.

The post CommSec: Patchwork economy in reverse; manufacturing shrinks appeared first on AdviserVoice.

The big picture

1. Is the petrol price high? It depends on your stand-point, especially given the fact that prices are quite volatile, making it harder to make comparisons over time. But it is worthwhile looking at the experience over the past three years as the pump price at that time was similar to now.
2. Over 2008, the pump price was climbing in Australia. In February the petrol price was near 135 cents a litre, lifting to a record high of 163.4 cents a litre in the week to July 13. But at this time three years ago, the pump price was around 146 cents a litre, much the same as now. The main difference is that the pump price was lifting solidly at that time, up 6 cents in the space of two months where as it has risen 3 cents since late March of this year.
3. However some will point out that the Aussie dollar is much higher now than three years ago, suggesting that motorists may be being short-changed. Certainly the Aussie dollar was lower three years ago – around US 93-95cents. In comparison the Aussie dollar has been trending higher over the last couple of months, averaging around US104 cents.
4. So what about the Singapore gasoline price? Well, it’s higher now in US dollar terms than three years ago, and that’s where the stronger currency comes in. Three years ago Singapore gasoline price was around US 73.7 cents a litre, where as now it has been averaging just over US 79c a litre.• Once you apply the higher value of the currency, the tables are turned. In Australian dollar terms Singapore gasoline has been averaging around 76 cents a litre in recent weeks, down from around US 79 cents three years ago.
5. So at face value, Aussie motorists appear to have lost out by around 3 cents a litre. Not a lot, mind you, but still higher than most would probably like. So what has been going on? Well the gap between the wholesale (terminal gate price) has widened over that period. Currently the gap between the pump price and the terminal gate stands at around 8 cents a litre. Back in April/May, that gross retail margin was closer to 5 cents a litre.
6. Why the wider margin? Well, that’s a question for the oil marketers like BP, Coles/Shell, Mobil/7-Eleven andWoolworths/Caltex. It may reflect higher costs such as wages or occupancy.
7. So at face value, the petrol price hasn’t changed much over the past three years. But then again, your wage probably has. Over the past three years the average for full-time employees has lifted by $174.70 a week. That means that you can buy an extra 120 litres of petrol, or an increase in purchasing power of around 16 per cent. And clearly that is an improvement you can’t claim for many items we purchase each week.

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The week ahead

• The domestic economic calendar is sparsely populated in the coming week. The spotlight will be on the release of new data on business investment, but there is also a speech by Reserve Bank Deputy Governor Battellino worth watching. Meanwhile in the US, each day there are key indicators to be released and deserving of investor attention.
• In Australia, as noted the clear highlight is the business investment data on Thursday, formally known as “private capital expenditure and expected expenditure”. While it may be a convoluted title, it accurately describes the content – the figures relate not just to spending over the last three months but also cover expected investment over the coming year.
• Overall CommSec is looking for a solid 4 per cent lift in business spending in the March quarter, reflecting cheaper prices for imported equipment as well as increased spending on buildings and equipment more broadly by the mining sector. And in respect of the latter point, it will be interesting whether other sectors are joining mining in lifting investment or staying on the sidelines.
• The other point of interest concerns future investment spending. Based on changes over the past decade, a reading of $131 billion for expected investment in 2010/11 would be considered “average” while estimated investment of $141 billion in 2011/12 would again be considered a reasonable outcome. Readings above these figures, especially for 2011/12 would suggest that strong business spending lies ahead.
• The other indicators to watch over the coming week are the figures on alcohol consumption (Tuesday),construction work done (Wednesday) and “Spotlight on the National Accounts (Thursday). The data on alcohol consumption will be important for investors in beer and wine companies while the residential building results in the construction work done release plug directly into the economic growth equation. That is, weak results on home building work completed would add to speculation that the Australian economy contracted in the March quarter.
• The other event to watch is the speech by Reserve Bank Deputy Governor, Ric Battellino. To date we haven’t received Reserve Bank views on the latest wage figures, Federal Budget or activity data like the weak home loan data. Some analysts have been speculating about a potential rate hike in June or July – the Deputy Governor may settle the argument once and for all.
• In the US, the Chicago Fed index is issued on Monday with data on new home sales and the influential Richmond Fed manufacturing index issued on Tuesday. On average, economists tip no change in home sales in April.
• On Wednesday, a measure of business investment – orders of “durable’ goods – is released together with the Federal Home Finance Authority price index for March. Economists expect that orders for durable goods like cars and aircraft eased by just 0.3 per cent in April
• On Thursday, the second estimate (preliminary reading) for economic growth in the March quarter is released. Economists tip a modest upward revision in the growth estimate to 2.1 per cent from the initial reading of 1.8 percent. And on Friday, data on personal income and spending is released. Analysts expect that both spending and income recorded healthy gains of 0.5 per cent in April. Figures on consumer sentiment and pending home sales are also released the same day.
• Overall the figures should confirm that the Federal Reserve is nearing the point where it will stop stimulating the economy, and indeed start removing some of the stimulus being applied – a development with implications for currency, equity and commodity markets.

Sharemarket

• Over time, the Australian sharemarket has consistently outperformed the US market, when expressed in US dollar terms. Over the past decade, the Aussie market lifted by almost 13 per cent, compared with 3 per cent inthe US. Even over the past year, Aussie shares have lifted by 24 per cent, ahead of a 16 per cent gain in the US. But are times changing? Since the start of 2011, the near 2 per cent lift in Aussie shares compares with 6 percent growth in the US. More analysts are recommending overseas shares, and perhaps with good reason.

Interest rates, currencies & commodities

• The Australian dollar has a reputation as being a volatile currency. That is, it gets embraced when times are good and there are favourable expectations for the global economy. Conversely the Aussie dollar is shunned in the bad times when the global economy looks shaky or there are wars or geopolitical jitters. So how has it fared this year?
• So far in 2011, the Aussie dollar has tracked in a range of just over US 13 cents – that is from US 97.04c to US 110.11 cents. In percentage terms, that is a movement of just under 12 per cent. That movement is close to the average of the experience over the past 29 years – but of course the year hasn’t yet reached the halfway mark. On average, the Aussie dollar has fluctuated by around US14 cents over a calendar year, or a movementof around 17 per cent.
• Interestingly however the Aussie has traded in a US 27 cent range on average over the past four years or around 28 per cent a year.

The post CommSec Investor Signposts: Week Beginning May 22 2011 appeared first on AdviserVoice.

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Australian-owned sector ETF provider, Australian Index Investments (Aii), believes that with the increase in energy costs worldwide that it might be time for investors to tilt their portfolios towards this growth sector.

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“There are some views in the marketplace that oil stock prices have not yet translated into more widespread gains on the ASX, and importantly, with a basic underlying energy shortage, global demand from economic hotspots like China and India, along with civil unrest in other developing economies suggests that triple digit, long-term oil prices are here to stay,” said Annmaree Varelas, CEO of Aii.

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“The Aii Energy ETF is based on an index of 22 stocks including oil majors such as Woodside Petroleum, Origin Energy, Santos and Oil Search.  Interestingly, the sector ETF does not just include oil producers but also offers exposure to explorers and service companies supplying the energy industry,” said Ms Varelas.
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The beauty of investing in a sector ETF is that investors can take a macro view on the energy sector and not worry about trying to pick winners and more importantly, avoiding the losers.

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“On average, over 80% of the return that the investor generally receives for a stock comes from general market and sector returns, and only 10%-20% of the return actually comes from the attractiveness of the stock. As such, if you can take a macro approach to investing by getting the market and sector right, then you are 80% of the way there,” said Ms Varelas.

Energy Sector Outperforms



Source: Iress complied by Australian Index Investments

Product Information

• Aii S&P/ASX 200 Energy ETF
• ASX Code: ENY
• MER: 0.43%
• Number of holdings: 22
• Top 10 holdings: Woodside, Origin, Santos, Oil Search, Worley Parsons, Paladin Energy, Riverdale Mining, Caltex, Whitehaven Coal, Aquila Resources

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The current range of Aii Sector ETFs includes:

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Lloyds chief economist on inflation, interest rates and the outlook for the Australian economy

Top 5 issues facing the Australian economy:

1. Inflation: Will continue to rise due to growing economy fuelled by the resources boom
2. Interest rates: To rise to 5.75 per cent by end of 2011
3. House prices: Are beginning to slide (but not falling as much as expected due to lack of supply
4. Australian Dollar: Driven up by the resources sector, making it difficult for other export sectors to compete – leading to an increased current account deficit
5. Debt: High level of domestic debt

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• Australia has recorded its first trade deficit in 11 months. The trade balance eroded from a surplus of $1,433 million in January to a deficit of $205 million in February. The impact of the natural disasters was the key driver behind the weaker than anticipated result.
• Exports fell by 2.4 per cent in February while imports rose by 4.9 per cent. The slide in exports was largely driven by the non-rural component – metal ores and minerals which fell by $543 million or 8 per cent, while imports of fuel and lubricant rose by $561 million or 26 per cent. Also non monetary gold export receipts fell by $688 million in February.
• In March, 93,984 vehicles were sold, down by 0.8 per cent compared with a year ago. In seasonally adjusted terms CommSec estimates that sales rose by 1.0 per cent in the month.

What does it all mean?

• Over the past year higher commodity prices and relatively strong demand for coal and iron ore have helped support the Australian economy as the global recovery gained traction. However in recent times the economic landscape has changed once again. The economy has been going through a soft patch and now the trade balance is back in the red.
• Australia has notched up its first trade deficit in 11 months – largely due to the impact of the floods on coal and iron ore exports, but also due to the strength of the Australian dollar and the resulting additional demand for cheaper imports, and higher world oil prices.
• Importantly the latest trade data is for February and the recent strength of the Australian dollar will place further downward pressure on the trade balance in coming months. This is especially likely given that the Aussie rallied a further 1.4 per cent over March and broke through USD104 cents in early April. Not only does the stronger Aussie make exports less competitive but cheaper imports will also be in stronger demand.
• The main determinant on how quickly the trade balance gets back into the black will clearly be based on how quickly the coal and iron ore miners can get back to business. And the anecdotal commentary suggests that the trade accounts will again be back in surplus in the next couple of months.
• Interestingly the economy as a whole generated an additional $20 billion dollars in export revenue in just under a year. Despite the boost to Australian coffers the impact has yet to have a resounding effect on the economy. The weakness in business and consumer spending suggests the additional income is being saved rather than spent.
• However as the Reserve Bank has highlighted, increased savings will eventually mean a pickup in spending down the track. It is the multiplier effect that essentially the Reserve Bank is banking on to spur domestic growth over the coming year. At present the additional income is not being spent, but as the recovery gains traction it is likely that Australian businesses and consumers will follow through on spending and investment plans.

What do the figures show?

International trade

• Australia has recorded its first trade deficit in 11 months. The trade surplus fell from $1,433 million in January to a deficit of $205 million in February.

• Exports of goods and services fell by 2.4 per cent in February. Imports of goods and services rose by 4.9 per cent. Exports are up 12.1 per cent on a year ago while imports are up 8.1 per cent on a year earlier.

• Rural exports rose by 11.8 per cent in February while non-rural exports fell by 1.7 per cent.

• Within non-rural exports, metal ores and minerals was the major driver of the weakness falling by $543 million or 8 per cent.

• Non-monetary gold exports fell from $1,535 million in January to $847 million in February.

• Within imports, consumer imports rose by 0.2 per cent in February, capital goods imports rose by 2.2 per cent while intermediate goods imports rose by 11.6 per cent (fuels and lubricants up by $561 million).

• While the physical trade of goods is in surplus, the services account remains mired in deficit – narrowing from the record deficit of $737 million posted in January to a $700 million shortfall in February. The high Australian dollar is a key culprit, depressing tourism receipts.

Car sales:

• The Federal Chamber of Automotive Industries reported that 93,984 new cars were sold in March, down 0.8 per cent on a year ago. Passenger car sales were 6.5 per cent lower than a year ago, 4WDs were up 6.6 per cent and “other vehicles” (trucks, utes etc) were up 6.7 per cent.

What is the importance of the economic data?

• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.

• The Federal Chamber of Automotive Industries release figures on new car sales at the start of each month. The data is useful in gauging consumer spending behaviour.

What are the implications for interest rates and investors?

• The strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s service sector has notched up its 17th consecutive deficit and the shortfall is sitting just shy of the record high $737 million reached in January. The Aussie dollar strength is making Australia a less attractive destination for overseas tourists and potential international students. Interestingly when the Aussie fell below US70c in 2009 the services sector notched up a series of surpluses.
• While the floods in Queensland have had a detrimental impact on coal exports, in coming months production will once again ramp up. Added to firmer volumes will be higher contract coal prices, ensuring that trade surpluses are back on the agenda. That is provided the weather doesn’t take an extreme turn for the worse.

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