Australia | Nov 09 2009
By Andrew Nelson
Not since Steven Bradbury won gold in the 1000m short track speed skating event at the 2002 Winter Olympics in Salt Lake City, has Australia taken such a bitter-sweet first place on the world stage. Russell Investments’ November 2009 Market Barometer indicates that Australia will post GDP growth of 0.8% for 2009, making it the only OECD economy expected to expand this year.
The latest Russell Barometer is designed to give a forward-looking quarterly insight and provide valuations based on some of the core themes that drive investment markets. It also outlines Russell’s outlook for major asset classes.
And much like 2002, it’s not that Australia has run a pretty race – a mere 0.8% growth rate attests to that – but it is still a case of being in a good enough position to take advantage when the so-called best in the world faltered and fell.
The November report from Russell indicates Australia is in a relatively strong economic position given the value of the “strong” domestic banking system and a resilient housing market. However, notes Russell, there is still a danger that the current bullish international investor sentiment towards Australia is overdone.
The Australian dollar also continues to outperform the broader global currency market, trading at over 90c vs the US dollar. The report from Russell indicates that there are no near-term indications that this trend will reverse. Yet while global investors are likely to continue to be attracted to rising short term interest rates, the Russell report does note that the “valuation ‘elastic’ is getting pulled tighter”.
Andrew Pease, an investment strategist at Russell Investments, points out that the combination of the strong Australian dollar, the phasing out of government fiscal stimulus payments to households and rising interest rates could well see key economic indicators like retail spending soften in the coming months. While he admits that Australia’s economy is in better structural shape than just about any other, he also notes that there is less cyclical upside than other economies. Plus, many of the factors that supported Australian growth, like cash from Canberra, are now unwinding.
On the international stage, Russell is of the belief that global share markets still offer some compelling value, even after a 65% rebound since March 2009. The report also indicates that global credit markets are rallying strongly, with global corporate investment grade credit now offering “good value”.
Many of those who pulled up stakes and ran in the lead up to March, notes the report, are yet to return. And while not all will come back, Russell believes that the “weight of money” argument is strongly in favour of riskier assets like equities.
According to the report, almost everyone has accepted that the financial crisis is over and the global economic recovery is under way. However the question now is: will the global recovery be self-sustaining, or will the initial bounce in activity give way to a sluggish, Japan-style “lost decade” of growth? Pease says it will fall somewhere between the two poles.
He notes the amount of cash sitting on the sidelines will allow equity markets to continue pushing higher before being back in “expensive” territory. Yet there are still some hurdles that need to be cleared, says Pease, which means banks are unlikely to get carried away with lending any time soon. One of his prime concerns is that the full losses from commercial property lending are yet to be dealt with and may not have even peaked.
US core inflation is also continuing to trend lower, according to the report, and this has some investors worried that the US could be headed towards entrenched deflation. However, others fear that the hectic pace of money printing by the Federal Reserve could see a return to 1980s style high inflation. The report, once again, puts reality somewhere in the middle of the two extremes, predicting moderate, but positive inflation as being the most likely medium-term outcome.
Pease admits that the global recovery is just getting started and still has a long way to run. However, with it generally agreed the global financial crisis is over, Pease notes the danger is now that expectations will soon become overly optimistic and investors might just get a little too carried away. We are not there yet, he says, “this is the next risk to watch out for”.