Reasons to cheer amid gloomy predictions
Despite the gloomy outlook, Australian Investors have reasons to feel optimistic. With the domestic housing boom reaching its peak, construction is set to see “a record year,” Bank of America Merrill Lynch chief economist Saul Eslake told the Financial Standard
Perpetual head of market research Matt Sherwood said that “companies exposed to housing and infrastructure operating in the east will do well.”
According to financial services Council chief economist James Bond, the retail sector will be the next to benefit from construction growth, as people first by a house, and then they buy the furniture white goods to put in it. Falling oil prices are also likely to have a positive impact on the sector.
However, Australia will go through what Bond calls “the two-speed economy in reverse.” This means that “Western Australia and Queensland will be heavily affected by the slow of the mining boom”, while New South Wales and Victoria are expected to do better thanks to their large manufacture sectors and infrastructure investment. In NSW, infrastructure construction “seems to be going fast enough that it will have an impact on the economy this year.”
Eslake made a distinction between gross domestic product (GDP) and gross domestic income (GDI), an indicator that measures income and purchasing power. In the September quarter, GDP increased by 0.3%, but GDI fell by 0.4%, according to the Australian Bureau of statistics. “This is an important reason for the ongoing weakness in household income and consumer spending,” Eslake said, and concluded that “domestically-oriented companies will struggle.” Lower oil prices “will provide some support, but we are looking at a fairly sluggish year.”
While Australia’s financial institutions have benefited from investors search for yield, Sherwood predicted that “they will underperform the rest of the market, but will deliver attractive yield in the low return environment.”
Looking abroad will be another key trend in 2015. Lower valuations in the European Union and Japan are likely to attract long-term focused investors, while “any stock exposed to the United States economy will do well,” Sherwood added.
Unhedged portfolios exposed to global assets can benefit from falling Australian dollar, which means “this is a good time to rebalance get more exposure to industries such as healthcare, IT and biotechnology, which are not that strong in Australia.”
PM Capital Chief Investment officer Paul Moore considered stellar returns in global equity funds last year unlikely to be repeated in 2015, but limited opportunities in other asset classes make global equities look like a good option.
“The options are to have some cash around so if we do get a little disruption it can be put to work in the equity market or own off-shore businesses, where we can continue to get 6% – 8% return. If you add the currency in there we might end up into below double-digit which would be a solid outcome.”
