Australia | Aug 07 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary:
Aussie market was aimless with US despite Jobless data sending the market on a rate cut call. The market was expecting 6.1% while we have been saying that there is an unemployment tidal wave coming in the next 12mths. We expect the rate to hit 6.5% at some point in the next 12mths and today’s move was a bit too quick even for our pessimistic view. The market has to get used to a much tougher economy in the next few years with unemployment rising, cost of living pressures rising, real wages declining and not to forget higher taxation…and eventually higher interest rates.
Australia spent it’s way though the GFC and transferred the corporate debt to government debt. Now the government wants to transfer that debt from government to the public. That’s right…education (transfer liabilities to students and parents), unemployment benefit (transfer liabilities to the young), retirement age (transfer liabilities to the old), asset sales (transfer maintenance liabilities to the consumers with higher prices), paid parental leave (transfer liabilities to corporate), direct action (transfer liabilities to tax payers), healthcare/education cuts (transfer liabilities to states who will transfer it back to consumers via GST rise after next state election).
Corporates have very low cost of borrowing and relatively clean balance sheets. The problem is that they are waiting for the consumers to start to spend before they invest in growth and create jobs. Consumers are unlikely to do that in an environment where costs and uncertainties are rising. Government is struggling to set a clear path for corporates with too much politics and not enough leadership. Government has to accept that the budget needs to change to get through senate. The longer this “Budget 2014: Day of our lives” day time TV soap continues, the longer we are away from moving to the next stage.
We remain positive in the long term and expect the money sitting on the sidelines to come back into the market as the S&P 200 gets below 5400. We continue to doubt any marginal rise in house prices from here will have any benefit to consumer spending as it does not address the key issues medium to long term. We do not expect RBA to drop cash rate in the next month. We need to see substantial decline in the economy over a few months before they react. ECB does not look like they are going to get the printer out, so we might not see much sentiment improvements tonight. Another worrying sign to keep an eye on is the amount of units being built around the main cities…supply is going to fly past demand in the next few years.
Trading idea of the day:
Carsales.com (CRZ)…we have been positive on this stock since the selloff in late Jan to $8.80…now trading $11.16…more to come. Quant Target Price $12.50…more when the market realises the global growth outlook.
Market Move:
Aussie market was down 0.05% with turnover was just above $4.6b.
Macro Events:
Tonight – Euro zone ECB interest rates decision; UK Bank of England rates decision; US initial jobless claims, continuing claims, Bloomberg consumer confidence. Tomorrow – Australia home loans, investment lending, foreign reserves, RBA statement on monetary policy; Japan current account, Bank of Japan monetary policy statement; China trade balance.
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Baillieu Holst Ltd
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