Australia | Oct 24 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market was back on the positive run with solid global sentiment. Aussie yield stocks continue move up while the miners remained in the positive territory despite falling Iron Ore and China property worries. We continue to expect AUDUSD to move from 87 to 90 cents in the short term as global investors come back into Aussie markets (i.e. reverse the September currency trade) and then gradually come down to 85 cent level as the domestic economy deteriorates.
We continue to feel that RBA is currently trying to curb asset prices (i.e. house prices, equity markets etc.) with inflation under control, so that they can cut rates in mid-2015 to stimulate a stagnant domestic economy. More ivory tower big broker macro giants are now extended their negative domestic economy outlook to property prices as well. You don’t have to be a government minister to realise that the tidal wave of unemployment, rising cost of living and falling living standards are going to make consumers follow the Treasurer’s catchphrase and deliver “cuts, cuts and more cuts” to their spending pattern.
Since GFC, it is hard to remember any country that recovered using austerity budget, free trade deals, lowering tariffs and removing industry support while costs and unemployment are rising. This may have worked in the past, but in a global environment of low growth, low interest rates and manipulated currencies, we struggle to see where the recovery is going to come from. The main buffer in recent years has been housing construction which is showing all the hall marks of becoming a bubble. We continue to expect the oversupply of units, falling rental yield and eventual rate rise will expose the economy to substantial risk. RBA is right to warn about the investor driven housing bubble and try and remove the risk slowly. Macro prudential tools may slow it down, but the real solution is to remove negative gearing on existing dwellings.
This will never be an easy political solution, but if we really do not have vested interests in this decision process, it would be simple to apply negative gearing only to newly built dwellings from a certain date. This will be a new equilibrium that will deliver new construction when there is sufficient demand and also not allow investors to outbid low-income/fist-home buyers on existing dwelling. Under this scenario if the investor wants to pay a very high price for a new construction, they will take on the substantially high risk to support it with no free handout. Basic premise of the argument is that the public should not be helping someone punt on the property market.
But then again, I could be completely wrong. Few months ago I wrote that house prices will come back in the next 12-18mth time frame and I was told RBA and Economists in the market did not agree with that….well things have changed…housing bubble is real (i.e. bit like climate change)…rates are not going to go up till 2016…something has to give…time will tell.
Beware brokers pushing Christmas retail recovery….Santa has gone online with Treasurer planning to deliver a Christmas Grinch mid-year budget review in mid-December to stamp down any consumer sentiment left standing. Food and experience related retail will continue to do well….RFG looking to take over Gloria Jean….now there is a growth story with global options…other global growth retailers DMP, KMD and BRG are worth a look as well.
Trading idea of the day: CarSales.com (CRZ) – CRZ is a global online car classified business model now moving into related financial services. It was trading below $10 and we see the stock re-rating to $12.50 in the near term as the market’s search for growth in global growth downgrades. The free cashflow generation of this model allows CRZ to keep acquiring and growing globally. Good move today above $10 after AGM…more to come.
Maket Move: Aussie market was up 0.54% with turnover was just above $4.4bn. S&P/ASX 200 closed at 5412.2, up 29.10 points.
Macro Events: Tonight – US leading index, new home sales; UK first estimate Q3 UK GDP; German consumer confidence; Euro zone leaders economic summit.
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