Weaker Australian dollar creating opportunity in many sectors.

The weaker $A will benefit tourism, education, agricultural and even the mining industry, a leading fund manager says.

Pengana Capital’s Australian equities fund manager Rhett Kessler says ‘a lower $A represents lower global purchasing power for us as consumers. However, we expect several important domestic industries to benefit materially from the currency shift’.

‘These include the tourism, education, agricultural and even, dare we say it, mining industry. Many companies have been forced to streamline their operations to cope with the high $A.’

Although we have been biased towards a weakening $A for some time, the speed of its decline has been surprising.

Kessler is pessimistic about the short- to medium-term outlook for discretionary spending and employment levels, despite the falling $A possibly translating into very high profits for some companies.

‘Having said this, we expect most domestically orientated companies to report muted trading activities (at best) while also being cautious in their outlook statements.

‘The recent unusual political activity continues to impact negatively on consumers and corporates alike while the unseasonably warm winter has severely dented discretionary fashion retail sales.’

Commenting on the US Fed ‘frightening’ investors during May and June with several ‘tapering’ of fiscal stimulus statements, Kessler says the Fed highlighted its flexible approach to ensure a sustained US economic recovery.

This saw a widespread relief rally with most equity markets – S&P500 (+4.9 per cent), FTSE 100 (+6.5 per cent) and the Euro Stoxx 50 (+6.4 per cent), closing significantly higher.

The Australian market followed with resources (+10 per cent), materials (+9 per cent) and energy (+6 per cent) leading the charge.

Conversely the weaker sectors were REITS (-1 per cent), information technology (0 per cent) and consumer staples (+1 per cent).

The Australian dollar continued its slide against the US dollar falling another 2 per cent (to print) to below 90c for the first time since August 2010.

‘It appears that the combination of political uncertainty, a deteriorating fiscal position, weakening mining sector and persistent concerns regarding the outlook for the Chinese Economy continues to weigh on the domestic economy (read lower interest rates) and consumer confidence,’ he says.

The long list of companies issuing profit warnings during the lead-up to the 2013 financial year reporting season has highlighted the impact these issues are having on trading conditions.

Mining services companies have been hit particularly hard due to the triple whammy of:
a) a difficult comparison with a robust prior period
b) the sharp slowdown in mining activity generally
c) the effect of the larger mining houses laser-like focus on cost-cutting

While this may provide some relief for financial and industrial companies due to less competition for scarce resources (labour and capital in particular), the transition is expected to take some time and be the source of some pain, says Kessler.

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• Record lift in credit card use. The number of purchases and cash out transactions made on credit cards lifted by 13 per cent in November – the biggest increase for a November month.
• Credit card balances are growing at the slowest annual pace in a year. The average credit card balance in November was up just 2.6 per cent on a year ago. The average balance recorded the usual seasonal lift in the month, up $35.90 to $3,280.70.
• Credit card cash advances rose sharply. While it appears an aberration, the number of credit card cash advances lifted 9.6 per cent in November. If the result isn’t reversed next month this may indicate that the recent rate hike has put consumer finances under stress.
• A surprise improvement in tourism numbers. Tourism arrivals have risen for eight months in trend terms while departures are now falling. Given the high level of the dollar, the results are encouraging.

What does it all mean?

• Consumers appeared to take out their credit cards and spend with gusto in November. Credit card use usually does start to lift each November, peaks in December and then falls sharply in January. But the lift in credit card use this November was the biggest ever recorded. That may be a worry for retailers. Because if credit card use soared and retail trade only managed to rise 0.3 per cent in the month, then the December sales figures may prove even softer. Consumers were no doubt enticed to spend by massive discounts on offer by retailers.
• The average credit card balance is barely growing at present with consumers much preferring to live within their own means. The average balance is up just 2.6 per cent on a year ago, the slowest annual pace in a year. And once inflation is taken into account, the average credit card balance hasn’t budget over the past year.
• There were some odd movements in consumer cash and credit transactions in November. Purchases made on both credit and debit cards spiked higher while there was also a sharp surge in one of the most expensive forms of finance – taking cash advances on credit cards. We can’t read too much into one month’s numbers as previous large spikes have generally been quickly reversed the next month. But it is worth watching just to ensure that the November rate hike hasn’t created stress on household balance sheets.
• The good news is that tourism arrivals are showing modest signs of recovery despite the high value of the currency. In fact tourist arrivals have been consistently rising in trend terms for eight months while departures actually turned negative in the latest month.
• The Federal Government simply needs to be doing more to lift migrant numbers and thus prevent skill shortages in the economy. In November, net migrant numbers stood at just over 5,000 people – the second lowest result recorded over the past decade. After the floodwaters recede in Queensland, a substantial rebuilding operation will be needed, thus putting pressure on the job market. To meet the demand for workers, the government will clearly need to look overseas or risk forcing wages and prices up.

What do the figures show?

Overseas arrivals/departures

• Net permanent and long-term arrivals to Australia fell to 206,900 people in the year to November, down 33.8 per cent or 105,530 people on a year ago. Departures from Australia rose by 43,320 while arrivals plunged by 62,210.
• The net number of permanent settlers entering Australia (arrivals less departures) stood at 5,020 in November – the lowest monthly total in 11 months and second lowest result in a decade.
• Tourist departures rose by 0.7 per cent in November to 602,100 after falling by 1.3 per cent in October. It was only the second rise in departures in five months.
• Tourist arrivals rose by 1.1 per cent in seasonally adjusted terms in November to 504,800 after falling by 2.1 per cent in October. It was the third rise in arrivals in four months.
• In seasonally adjusted terms the tourism deficit – the gap between departures and arrivals – stood at 97,300 in November, down 1,200 in the month and below the record (34-year history) deficit of 125,900 in June.
• In trend terms, tourism arrivals have risen for the past seven months. Tourism departures fell 0.1 per cent in trend terms in November – the first fall in 18 months.

Credit & debit card activity:

• Figures released from the Reserve Bank show that the average credit card balance recorded its usual seasonal increase in November, lifting by $35.90 to $3,280.70. But the average credit card balance is only up 2.6 per cent on a year earlier – the slowest annual growth in a year. Over the past five months, the average credit card balance has fallen by $3.10.
• Of credit cards attracting interest charges, the average outstanding balance again recorded the usual seasonal increase in November, up by $45.70 to $2,395.50. The average balance accruing interest is up 4.3 per cent on a year ago (slowest growth in nine months).
• The number of credit card cash advances surprisingly rose by 9.6 per cent in November but was still down 1.8 per cent on a year earlier. Credit card advances have been largely falling in annual terms for four years.
• The number of purchases made on credit cards soared by 13.1 per cent in November after falling 2.9 per cent in October. It was the biggest increase in credit card purchases for a November month.
• The number of purchases made on debit cards rose by 1.6 per cent in October to stand 20.1 per cent higher than a year ago – the fastest annual growth rate in almost eight years.
• The number of just EFTPOS transactions (excludes cash out) rose by 1.4 per cent in November to stand 23.7 per cent higher than a year ago – the fastest annual growth rate on record.
• Cash withdrawn from ATMs in November rose in annual terms in November for the first time in 20 months. The number of cash withdrawals was up 0.7 per cent on a year ago while the value of withdrawals was up by 0.9 per cent.

What is the importance of the economic data?

• The Australian Bureau of Statistics releases data on overseas arrivals and departures is produced monthly and is an indicator of the health of the tourism sector.
• The Reserve Bank releases data on credit and debit card transactions each month. The credit card figures are useful in highlighting consumer borrowing and spending trends.
  What are the implications for interest rates and investors?
• The spike in credit card purchases and cash advances is probably an aberration, but it’s worth watching to ensure that consumer finances aren’t being stressed by higher interest rates.
• The continued easing in migrant numbers must be addressed by the Government or it will risk a lift in inflationary pressures. But the increase in short-term tourism arrivals is certainly encouraging when you consider the heady levels of the Aussie dollar.

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• The job market is tight but permanent settler numbers have plunged. Net permanent and long-term arrivals to Australia hit 4-year lows in the year to October. In October alone, the number of permanent settlers in Australia plunged to 6½ year lows. Businesses are crying out for staff but the Government is failing to open the doors to new migrants.
• The tourism gap has improved. Tourism arrivals have risen for six months in trend terms. Overall it appears that the tourism deficit has stabilised – at least for now.

What does it all mean?

• Businesses are justifiably shaking their heads. Across Australia job markets are tight, with not enough local talent to fill positions. But while companies are crying out for staff, migrant numbers are plunging. Last year there were an extra 325,000 people coming to our shores to fill empty positions, but this year net entrants are closer to 210,000.
• Certainly it’s not just the fact that in-bound migrant numbers have been cut back, it’s also the fact that more Australians are looking at opportunities abroad. But clearly that is a situation that government needs to keep on top of. Most recruitment agencies that the main constraint they face at present is lack of candidates.
• If the Federal government believes it has a role in controlling migrant inflows, it needs to ensure that it isn’t exacerbating tightness in the job market. It is in the interests of all Australians to have a balanced job market. The last thing anyone wants to see is the Reserve Bank keeping interest rates at higher levels than they should be because restrictions on migrant inflows are pushing up wages and prices.
• Over the past year, the annual number of migrants has plunged by a record 35 per cent, robbing the economy of momentum at an important time and keeping job markets tight.
• The latest data shows that the tourism deficit is encouragingly not getting much worse, but unfortunately it’s not getting much better either. Tourism operators will have to continue to work hard to keep their heads above water. In talk of a two-speed economy, clearly mining and tourism are the two sectors that first come to mind.

What do the figures show?

Overseas arrivals/departures

• Net permanent and long-term arrivals to Australia fell to 210,420 people in the year to October, down a record 35.2 per cent or 114,300 people on a year ago. Departures from Australia rose by 43,500 while arrivals plunged by 70,800.
• The number of permanent settlers entering Australia in October stood at 9,370 – the lowest monthly total in 6½ years.
• Tourist departures fell by 1.4 per cent in October to 598,400 after rising by 1.9 per cent in September and falling by 1.1 per cent in August. Tourist arrivals fell by 2.3 per cent in seasonally adjusted terms in October to 498,300 after gains of 1.4 per cent in September and 3.6 per cent in August.
• In seasonally adjusted terms the tourism deficit – the gap between arrivals and departures – stood at 100,100 in October, up 3,600 in September but down from the record (34-year history) deficit of 126,300 in June.
• In trend terms, tourism arrivals have risen for the past six months. Tourism departures have risen for the past 17 months in trend terms.

What is the importance of the economic data?

• The Australian Bureau of Statistics releases data on overseas arrivals and departures is produced monthly and is an indicator of the health of the tourism sector.

What are the implications for interest rates and investors?

• If last year over 300,000 more foreigners came to our shores for work and this year it’s closer to 200,000, clearly this will have an impact on housing demand and spending. The record drop in migrant numbers is one of the reasons that the economy barely grew over the last quarter.
• Each month there are over 100,000 more Aussies travelling abroad than foreign tourists coming to our shores. Just like the situation with permanent migration flows, the imbalance in tourism has multiplier effects on the economy. The good news is that the tourism deficit appears to be stabilising.

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• The Aussie dollar hit parity with the US dollar – one Australian dollar equalling one US dollar – overnight. The Aussie hit US$1.0002 very briefly at 11.17pm Sydney time before quickly retreating. The Aussie dollar is ending the US session near US98.80c. The last time that the Aussie was at parity with the greenback was 28 years ago, on July 28 1982.
• The high level of the Australian dollar is good news for consumers and importers but bad news for exporters, rural producers and the tourism sector. Overall, the high level of the currency actually slows
  down momentum in the economy and may stay the Reserve Bank from lifting interest rates in coming months.
• Our currency strategists believe the Aussie will lift to US$1.02 in early 2011.

Click here to download this document (pdf)
Click here to view a timeline of the Australian dollar’s performance against the greenback (pdf)

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• 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.

Click here to download this document (pdf)

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• Australian retailers, especially those dependent on seasonal purchases, could face new pressures unless the weather starts to warm up in the next few weeks. Capital cities such as Sydney, Melbourne and Adelaide are experiencing their coldest starts to spring for over a decade.
• Simply, consumers are unlikely to update their spring/summer wardrobes until the weather starts to warm up. And if temperatures remain mild, this will further hinder purchases of goods like electric fans, air conditioners, outside furniture and beach equipment.
• Retailers are already under pressure from conservative consumers with both David Jones and Myer still heavily discounting hard-to-shift stock.

Click here to download the document (pdf)

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• Based on the latest available government aviation statistics, the Melbourne-Sydney air route can claim the mantle of the third busiest route in the world. There were just over 834,000 available seats on the Melbourne-Sydney city pair, pushing it above the Fukuoka-Tokyo route in Japan.

Click here to download the document (pdf)

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• Australia’s tourism sector was already in trouble, but it is now set to come under even more pressure from renewed strength of the Aussie dollar. The Australian dollar rose to near 21-year highs against the Euro this morning while also lifting above US93 cents.
• The tourism deficit (excess of departures over arrivals) is at record highs and poised to go higher. Over a million more Aussies travelled overseas for holidays in the past year than foreign tourists visited our shores.
• CommSec has found that passenger numbers on seven of Australia’s top domestic tourist air routes fell by 6.2 per cent in 2009/10 and were down almost 11 per cent from the highs reached in the year to January 2009. In comparison, passenger numbers on the Sydney-Melbourne route rose 12.2 per cent in 2009/10.
• Regional Australia is particularly vulnerable to the high Aussie dollar, especially northern NSW, North Queensland, Tasmania and the Northern Territory. And apart from tourism, manufacturers and exporters will come under renewed pressure from the strong Aussie dollar.
• A high Aussie dollar depresses economic activity while at the same time capping inflationary pressures, thus reducing the scope for the Reserve Bank to lift interest rates.

Click here to download the document (pdf)

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