The big picture

• Humans like to think that they control most things. Then along comes a natural disaster like a flood and it reinforces the fact that there are many things outside our control – especially the weather. While it was clear last year that the La Nina weather event would be significant, there was little that Australians could do to prepare. We didn’t know when the rain would fall, what centres would be most affected and how much rain would fall. Certainly the Brisbane Lord Mayor warned of the risk of a repeat of the 1974 floods in October last year, but the extent and timing of the rainfall was still a very open question.
• No one wants to see floods occur and the effects are painful and sometimes tragic. But Australians are used to hardship. It is a case of enduring the event and cleaning up afterwards.
• As we noted last week, estimating the impact of the floods on the economy can prove to be a moveable feast.The flooding didn’t stop in Rockhampton but spread through south-east Queensland. And there is still the prospect of further flooding in other parts of the country, with possibly other significant rain events over the coming days.
• The industries most affected are coal, transport, agriculture, tourism, insurance and construction. But the effects vary in magnitude, geography and across time. In general the short-term impact on the economy is negative with business activity and exports curtailed. But effects vary. While coal production in Queensland has been curtailed, producers in NSW are able to meet some of the shortfalls. And coal prices are rising in response to the tighter global conditions.
• Infrastructure has been damaged and that poses costs for individual companies and the Federal Government. Companies will draw on insurance claims for the cost while the government will need to decide whether to soften its commitment on returning the budget to surplus or cut spending in other areas.
• It’s important to note that the Federal Government has allocated $577 million this financial year for natural disaster relief and $80 million in each of the three following years. But it also has a contingency reserve to draw upon. Over the next three years the cumulative total of the contingency reserve stands at $11.4 billion.
• How will the Reserve Bank respond? It will need to stay on the interest rate sidelines until the full impact of the crisis becomes apparent. In fact financial markets see a small chance of a rate cut in the next few months.
• With global media focussing on the severity of the Australian floods, the Aussie dollar has come under pressure. This is a knee-jerk response but will prove beneficial to tourism operators and exporters. And it’s important to note that global investors had already started shifting from the Aussie to the Canadian dollar before the floods.

The week ahead

• There will be a marked shortage of “top shelf” indicators to be released in the coming week. But given how weak the latest results have been, probably that’s no bad thing. In the US the focus will be housing activity indicators. And China should report its monthly economic data together with the economic growth estimate for the December quarter and 2010 year.
• In Australia, lending finance kicks off proceedings on Monday together with car sales and the latest inflation gauge from TD Securities. Lending probably remained weak in November but car sales rose by 1.5 per cent in December and the inflation gauge should be characterised by retailer discounting and higher petrol prices.
• On Tuesday the Bureau of Statistics (ABS) plans to release a long-run series on alcohol consumption. Australians have been trimming beer consumption for some time, the question being whether the latest data confirms that consumption has fallen to 60-year lows as previous estimates implied.
• On Wednesday the ABS and Federal Treasury release their latest estimates on wealth, and courtesy of higher house and share prices, there are reasons to be happy. Data on imports and engineering construction are released the same day.
• On Thursday the usual bevy of long-run labour market statistics will be released, allowing analysts to work out what’s really going on. Unfortunately only a relative few are prepared to trawl through the data. Figures on building activity are released the same day.
• And on Friday the ‘inflation reporting season’ gets underway with latest figures on export and import prices.
• In the US, the week begins with the Martin Luther King holiday on Monday with government offices and financial markets all closed.
• On Tuesday, the Empire State manufacturing index and capital flows data is released.
• On Wednesday the December housing starts estimates are issued. Over the past two years, annual starts have hovered between 500,000-600,000 and a result near 550,000 is tipped for December. Clearly no real growth can occur until the excess of stock is cleared.
• On Thursday data on existing home sales, leading indicators, the Philadelphia Fed index and weekly jobless claims are expected. The leading indicator is tipped to lift by 0.7 per cent after a 1.1 per cent rise in November. And existing home sales may have rise by around 3 per cent.
• In China, monthly economic indicators such as retail sales and production are likely to be released on Thursday together with the December quarter GDP figures.

Sharemarket

• The US earnings season is underway. And while only a sprinkling of companies have reported so far, the list will grow over the next fortnight and reach a peak late in January. Overall, analysts surveyed by Thomson Reuters tip solid results with consensus forecasts centred on a 32 per cent lift in earnings per share for S&P 500 companies. However the gains will be fuelled by massive growth in the financial sector. Excluding financials, analysts tip earnings to rise by 11.1 per cent with materials and energy expected to record the strongest gains.
• Amongst companies reporting on Tuesday are Charles Schwab, Citigroup, Apple and IBM. On Wednesday a bevy of financial companies report including Bank of New York, Goldman Sachs, State Street, US Bancorp and Wells Fargo while eBay reports the same day. On Thursday Morgan Stanley, Advanced Micro Devices and Google are slated to release earnings. And on Friday General Electric is amongst those to issue results.

Interest rates, currencies & commodities

• In 2010 the Aussie dollar was the second strongest currency in the world behind the Mongolian tugrik. But as often the case, last year’s winners can quickly become next year’s losers, and that certainly does appear to be playing out at present. Early on New Year’s Day in Sydney (11am New York) the Aussie dollar scaled a 28-year peak of US102.5 cents. But from that point it was all one-way traffic lower for the Aussie. It was almost as if the high point signalled that time was up for our currency, with investors starting the search for the currency that would be the darling of 2011.
• And it appears that investors have decided that the NZ dollar and Canadian dollar will replace the Aussie at the top of the tree in 2011. The Aussie peaked earliest against the Kiwi, hitting NZ$1.35 on December 23 and has since retreated by 4 per cent. And the Aussie hit highs of C$1.02 at the start of the year, again receding by just over 4 per cent in the period since. Investors seem to be of the belief that Canadian and New Zealand economies have more upside potential in 2011 than the Australian economy. Certainly given the weak Aussie economic data since the start of the year, the view has a reasonable basis.
• It is certainly amazing how swiftly views can change, and that also applies to the interest rate market. Current pricing on the overnight index swap rate market is that there is a 6 per cent chance of a rate cut at the February Reserve Bank Board meeting. A rate hike is now not fully priced into the OIS market in 2011.

The post Investor Signposts: Week Beginning January 16 2011 appeared first on AdviserVoice.

• When it comes to airline travel, the key message is to shop around for the best deals because airfares are creeping higher. According to the latest data from the Bureau of Infrastructure, Transport and Regional Economics full economy airfares have risen to the highest levels in almost three years.
• It is not just full economy airfares that are rising, discount economy fares have been trending higher for the past five months, but the good news is that they still remain 9.6 per cent lower than a year ago.
• The HIA- RP Data Residential Land Report reveals that land sales fell by 3.6 per cent in the June quarter – a further sign that weaker construction activity lies ahead.

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AMP Capital Managing Director Stephen Dunne said increasingly clients are seeking to award global
mandates and with a strong presence already in Asia Pacific and Europe, AMP Capital is taking the
opportunity to expand into North America.

“AMP Capital is one of the most experienced global infrastructure investment managers and by
launching a North American infrastructure business we are delivering our clients first class access to
some of the best infrastructure opportunities around the world,” Mr Dunne said.

“The private infrastructure investment market in North America is starting to open up, so there has been
no better time to grow our global infrastructure capability. In addition, our institutional clients are
increasingly seeking global access to infrastructure opportunities.”

Joining AMP Capital from Access Capital Advisers are Head of Infrastructure Americas Thomas
Majewski, Senior Vice President Infrastructure Farhad Billimoria and Vice Presidents Damien McDonald
and Digby Beaumont.

Thomas Majewski has more than 15 years of experience as a senior finance executive. Since 2008 he
was Partner and Head of Americas Infrastructure with Access Capital Advisers, where he was actively
involved in selecting and managing a wide variety of infrastructure investments for clients. Prior to that,
Mr Majewski was with Merrill Lynch in New York as a Managing Director in their Global Markets and
Investment Banking division. He has also held various roles with Bear Stearns, J.P. Morgan, Arthur
Andersen and Salomon Brothers. Mr Majewski will report directly to AMP Capital Global Head of
Infrastructure & Private Debt Phil Garling, who is based in Sydney.

Farhad Billimoria has more than five years infrastructure and project finance experience and joins us
from Access Capital Advisers where he was Associate Director Infrastructure. From 2004 to 2006 Mr
Billimoria was an Investment Analyst with Access Economics.

Damien McDonald joined Access Capital Advisers in 2007 as a Senior Analyst Infrastructure where he
conducted due diligence on prospective debt and equity investments. He has also held roles with Credit
Suisse and BMO Capital Markets.

Digby Beaumont was a Senior Analyst with Ernst & Young from 2005 to 2007, he then joined Allco
Finance Group in 2007 where he was an Infrastructure Associate until 2008. Most recently Mr
Beaumont was an Investment Manager with Access Capital Advisers sourcing and executing unique
infrastructure and private equity opportunities.

“We welcome this outstanding and experienced team to AMP Capital at what is an exciting time of
growth. This comes on the back of our increased global listed infrastructure capability and the launch of
our new AMP Capital Global Infrastructure Securities Fund to Australian retail investors last week,” Mr
Dunne concluded.

The new team starts this week, taking our total unlisted infrastructure team to over 60 investment
professionals located across offices in Australia, New Zealand, India, China, Europe, the United
Kingdom and North America.

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AMP Capital Investors Global Portfolio Manager Craig Noble said the global growth in infrastructure is
driven by a build-out of new infrastructure in emerging markets, the upgrading and expanding of
infrastructure in developed markets and the privatisation of infrastructure assets by governments.

“Globally it’s estimated there is a US$25 trillion gap in government infrastructure spending over the next
25 years. Fuelled by population growth and economic growth around the world, demand for private
sector investment continues to grow. Through the AMP Capital Global Infrastructure Securities Fund
retail investors can access and be part of these exciting growth opportunities in the sector,” Mr Noble
said.

“The Fund delivers retail investors portfolio diversification, providing access to a range of infrastructure
sectors across geographic regions, and active portfolio management which seeks to target excess
returns and predictable, stable cash flows.”

The AMP Capital Global Infrastructure Securities Fund seeks to give retail investors access to the return
potential associated with infrastructure assets. It focuses on companies that own and operate
infrastructure assets, derive most of their cash flow from those assets and have liquid market listings on
major global stock exchanges.

Investments are diversified across geographic regions in the sectors of energy, transportation,
communication and water.

Craig Noble and a dedicated global investment team with a local presence in Hong Kong, Sydney,
London and Chicago will manage the Fund.

“Our on the ground investment team allows us to source unique opportunities and insights and supports
our aim of finding the best ideas globally for our clients,” Mr Noble said.

The Fund will be benchmarked against the Dow Jones Brookfield Global Infrastructure Index AUD
Hedged and the Dow Jones Brookfield Global Infrastructure Index (AUD) respectively.

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The AMP Financial Planning Centre, officially opened by Parramatta Lord Mayor Paul Garrard and AMP CEO Craig Dunn, is expected to attract a broad customer base, offering a free initial consultation with one of the centre’s 16 financial planners to talk through their financial needs.

AMP Financial Planning Managing Director Michael Guggenheimer said the launch of AMP’s first walk in retail financial planning centre is part of AMP’s aim to make it easier for people to access quality financial advice.

“This is an opportunity for customers to have direct access to tailored advice based on their individual needs. It’s a one-stop-shop where customers can get the financial advice they need, whether it’s increasing their savings; protecting their income; maximising their super; owning their home or planning for their retirement.”

Mr Guggenheimer said that this new model had proven attractive to planners who wanted to make the transition to a self employed environment while also being supported by the AMP brand.

“We are providing planners with all the infrastructure and onsite support they need to run their business and provide convenient and quality financial advice to clients. Many planners have been attracted to this concept and the support the centre can offer them, and we expect to grow the numbers of planners available at the centre even further post its launch.”

The AMP Financial Planning Centre is located at 20 Smith Street, Parramatta in the financial hub of Western Sydney.

“At the geographic and demographic centre of the greater Sydney metropolitan area, Parramatta has gone through some exciting changes over the past few years and has grown into a full service business hub, making it a suitable market for us to grow our business,” Mr Guggenheimer added.

For more information on the AMP Financial Planning Centre visit the website at www.amp.com.au/fpp.

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John Brogden, CEO of the Financial Services Council, said these were critical public policy issues the financial services industry must take a more active role in addressing.

“As the largest sector in the Australian economy, responsible for managing the savings of all working Australians and facilitating investment in all industries, the financial services industry has an obligation to lead broader economic policy discussion and development,” he said.

National savings

The Financial Services Council/PricewaterhouseCoopers CEO Survey 2010 found that less than half (44 per cent) of CEOs have confidence with Australia’s approach to addressing the needs of tomorrow’s ageing population.

Andrew Wilson, Wealth Management Leader, PricewaterhouseCoopers said: “By 2050, one in five Australians will be over 65 and begin drawing down on their retirement savings. This may have far-reaching implications on the economy as the amount of money flowing out of super funds begins to exceed the amount of money flowing into them.

“This ‘de-accumulation’ may significantly impact equity markets and economic growth as investors move from higher risk, longer-term investments to more conservative ones.

“It is acknowledged that Australia’s savings pool, particularly investments in equity markets, helped support companies seeking to recapitalise during the global financial crisis. Such support may not be readily available once we move into this ‘de-accumulation’ phase.”

Mr Brogden said: “Australia is facing not only an ageing population but also a critical shortfall in retirement savings to the tune of $695 billion. The financial services industry is ideally placed to help Australia respond to this challenge.”

CEOs acknowledged the industry’s responsibility in helping Australians secure a comfortable lifestyle in retirement.

They identified improving consumer engagement with superannuation, expanding service and product offerings to cater for an ageing population and broadening the availability and breadth of advice as the chief strategies towards achieving this.

Infrastructure standoff

Nearly all (95 per cent) the CEOs surveyed were not confident that Australia’s approach to infrastructure would meet the nation’s future needs.

“It is clear that if Australia continues with its current approach to funding we will fall well short of meeting our infrastructure needs both now and into the future. There is a significant opportunity for the financial services industry to work with government in this area for the benefit of all Australians,” Mr Brogden said.

CEOs identified daily unit pricing requirements; the scale and complexity of transactions; and a lack of confidence as key barriers to greater investment in infrastructure projects.

“Securing channels of funding from super funds is about providing the industry with confidence that infrastructure will deliver a reasonable return commensurate with an acceptable level of risk,” Mr Wilson said.

“Instruments such as municipal bonds have been used in the United States and in parts of Asia. A similar mechanism could be set-up in Australia to provide government with access to new funding.

“Furthermore, the government could also build confidence by providing funding during a project’s ‘start-up’ phase before selling assets onto investment-funds.”

Australia’s role in Asia

Most CEOs considered Australia should be positioned as a regional financial services hub, exporting financial services and skills throughout the Asia Pacific region. However there were differing views on how best to achieve this.

“There is no doubt that Australia is very well placed to capitalise on the strong economic growth in the region. At the same time, if we are to maximise this opportunity it is clear that further tax and regulatory reform is required, as outlined in the Johnson report,” Mr Brogden said.

According to the survey, the provision of asset management services is where Australian investment managers could realise immediate growth opportunities in Asia. Other sectors such as custodial services, platforms and insurance offerings often require a well-established, local physical presence and distribution capabilities, which can take many years to establish.

Survey respondents highlighted that Australia’s wealth management footprint in Asia was relatively immature compared with other nations.

“We are 10 years behind more established entrants from Europe. There are already more than 5,000 European-domiciled Undertakings for Collective Investments in Transferrable Securities (UCITS) offered throughout Asia,” Mr Wilson said.

“There has been much discussion for Australia to develop an Asia Region Funds Passport. However, we should not limit ourselves to Asia. UCITS are a global passport for the European industry and we should be just as ambitious. Australia has an opportunity to export its financial expertise on a much greater scale.”

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