Australia | Dec 16 2013
-Aussie softening, but not too much
-Oz sub-trend growth likely in 2014
-Lower savings rate, higher consumption?
-Positive equity returns seen in 2014
By Eva Brocklehurst
What's on investor plates in 2014? The main expectations are that the US Federal Reserve will soon start winding back its asset purchases, with the US economy expected to grow firmly in 2014. CIMB expects this to happen by mid year and this should push the US currency higher against most of the major players. The broker expects the Australian dollar will fall to US86c by the end of 2014. This should be welcomed by Australia's Reserve Bank. The governor, Glenn Stevens, recently indicated US85c was a more comfortable position for the Australian dollar.
The strong currency has weighed on the Reserve Bank's efforts to ease the strain from changing economics as Australia backpedals from the mining boom. CIMB notes the interest rate differential with the US is still only around long-run averages, despite the RBA's easing of the cash rate and market expectations for less US Fed stimulus. CIMB thinks the RBA's easing cycle is now complete and the terms of trade could rise on the back of stronger metallurgical and thermal coal prices. CIMB does not expect demand for the Australian dollar to collapse, unless Chinese growth is weaker than expected.
The Australian dollar may fall, but it's unlikely to go far. The strategists do not see a return to the post-float average of US76c and expect the Aussie to stay well above the fair-value estimate. That said, the recent falls from parity are considered supportive, with health care and materials stocks having the most to gain and consumer discretionary and energy also benefiting to a lesser degree. CIMB thinks the weak growth outlook in both Europe and Japan also signals the Australian dollar should outperform against these currencies. Moreover, some policy reversal is expected in Q3 2014 as the Reserve Bank tightens its monetary stance. This, in turn, may underpin the Aussie.
JP Morgan is not so sure that the RBA's efforts to guide the Australian dollar down will bear fruit any time soon. The strategists think weak income growth will constrain consumption spending and weak profitability and lack of competitiveness will cap employment gains. JP Morgan expects 2014 to be another year of sub-trend growth for Australia, with little prospect of the cash rate being hiked until 2015 at the earliest. The next week is expected to bring some key indicators for the new year with the federal government's MYEFO, RBA board meeting minutes an the RBA governor's testimony before parliament. Such events, coupled with the season of low liquidity, could mean an outsized reaction in the market. If such were the case, the strategists are betting it would be a move in the direction of lower bond yields.
UBS takes a slightly different tack and expects lower savings rates could act to lift consumption spending. Supporting this view is a survey of household attitudes about the wisest place for savings. This survey has showed a sharp drop in those wanting to repay debt or mortgages, to the lowest share since 2007, while sentiment is holding around average. Income growth has improved because of the substantial reductions in official cash rates that has sent interest payments to a decade low of 9% of income. A fall in the savings rate coupled with low inflation means real consumption growth can pick up to around 3%, in UBS' view, even without an acceleration in disposable income growth. The broker concedes that wages and jobs growth still needs to improve a little for this scenario, given the end of the direct boost from rate cuts. The risk to this scenario is if the savings rate fails to fall because it remains de-coupled from its prior relationship with wealth, confidence and attitudes to saving.
Macquarie expects value and earnings momentum strategies will play the key role in 2014, as the economic cycle progresses and investors move into riskier assets. The broker's survey shows that the majority of investors see downside risks in emerging markets and flows to that quarter may contract over the next six months. The broker's global strategists prefer developed market cyclicals as these benefit from stronger global growth. The large majority of investors anticipate positive returns from equities, with the weakest returns to come from government bonds, corporate bonds, commodities and cash over the next six months.
The broker asked respondents to identify a factor that may surprise in the next six months. US growth was the most common response. A number of investors identified faster, stronger growth in the US as the main upside risk. Other surprises on the upside were stronger emerging market growth, along with free trade agreements and lower oil prices. On the negative side, defaults in either southern Europe or South America, US credit downgrades and social unrest were cited as potential surprises. Investors also expect monetary policies to either turn contractionary in 2014, or stay as they are.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.