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Risk of recession is waning as Australia outpaces its peers
Two major investment firms say the outlook for the economy is in much better shape, writes Vanessa Desloires.
Will strong Chinese demand for our exports continue?
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by Vanessa Desloires
Australia's economy is far from a recession – its outlook has improved and it is poised to attract international buyers, according to two major investment firms.
Stephen Roberts, chief economist at Sydney-based Altair Asset Management, said the local economy was faring better compared with most of the world, with global growth set to remain stagnant at 2.8 per cent in 2016.
"There is more reason for international investors to carefully trawl Australian opportunities and not to sell but to buy, especially after the underperformance of the Australian sharemarket over recent months," he wrote in a client note.
Mr Roberts listed four signs, albeit tentative, that investors should be encouraged by: the depreciating currency; the housing boom correcting rather than collapsing; the changing mix of the big banks' loan books; and strong employment numbers.
[img=620x0]http://www.afr.com/content/dam/images/1/3/2/k/r/t/image.related.afrArticleLead.620x350.gl26x0.png/1447901853529.jpg[/img]Altair's chief economist says the housing boom correcting rather than collapsing is a positive sign for Australia's economy.
"The combination of these four positive factors means that the risk of Australia slipping into recession has lessened over the past month or so, from a near 50 per cent chance to under 30 per cent in our view," he said.
The depreciating Aussie, which has fallen 25 per cent against the US dollar in two years and 16 per cent on a trade-weighted basis was doing its job in lowering export prices while boosting tourism.
HOUSING NOT SO BLEAK
Housing, meanwhile, had turned from a predominantly speculative investment market to a more stable owner-occupier market, meaning macro-prudential policy was working, Mr Roberts said.
"That does not mean that house prices will not fall, but it does imply that the fall is likely to be much less than if investors driven entirely by unrealistic expectations of capital gain had continued to be by far the most dominant influence in the market," he said.
The big four banks had managed to raise the capital required by the Australian Prudential Regulatory Authority without too much market disruption, and their loan books were shifting to more diversified mix of risk in both home and commercial lending.
Finally, employment growth, which posted very strong numbers in October and sent unemployment back to 5.9 per cent should prop up retail spending and housing demand.
Underpinning the unknowns was the fact that the Reserve Bank of Australia had room to ease if necessary, Mr Roberts said.
The optimistic note came as Olga Bitel, economist for Chicago-based fund manager William Blair, said Australia was beating its Organisation for Economic Co-operation and Development peers in capitalising on China's economic transition.
While many Australians were disheartened by falling iron ore prices, which are caught in a global commodity rout amid weaker demand from China, services of exports have almost caught up with resources.
"We are talking about medical services, pharmaceuticals, tourism, education – all of these sectors are seeing a tremendous boost [in demand from China]," Ms Bitel told Fairfax Media on a visit to Australia.
"The resources boom was a big tax on the economy. It made the exchange rate very expensive and the services sector very uncompetitive," she said.
CHINA SERVICES SECTOR STRONG
In a further blow to the resources sector, the OECD on Wednesday struck an historic agreement to scale back coal production.
But the numbers coming from China's growing demand for services were extraordinary, Ms Bitel said.
Services consumption had risen from 45 per cent of China's gross domestic product to 50 per cent in five years, while retail sales were rapidly growing. Online shopping, almost non-existent a decade ago, was growing at a pace of around 40 per cent a year and accounted for 10 per cent of China's economy.
She said the legacy from China's manufacturing boom was that it knew how to build roads and bridges. It was not as good as Australia at building hospitals and nursing homes – for which there was a skyrocketing demand.
This meant that investor portfolios tilted at China should look very different to what they did a decade ago, she said, indicating less resources, and more healthcare and agriculture stocks.
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Australian dollar looks cheap if China does better than expected
[img=620x0]http://www.afr.com/content/dam/images/g/l/3/0/a/g/image.related.afrArticleLead.620x350.gl2zxe.png/1447972464433.jpg[/img]Saxo Bank chief economist Steen Jakobsen is confident the Australian currency will rise.
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by Jeremy Chunn
If a rise in the US Federal Reserve interest rate triggers an international flow of funds, don't presume the US dollar will shoot upwards as a result. Quite the opposite, said Saxo Bank chief economist Steen Jakobsen.
"The first currency I will buy when the Fed hikes will be the Australian dollar," said Jakobsen, on a visit from the bank's Denmark headquarters. "I expect an outperformance of the Australian dollar in the first six months of next year."
If that's a surprise, here's another. The consensus "embedded" negative outlook for China is "simply wrong", he said.
The Communist Party's Silk Road initiative will put $US3 trillion into credit facilitation and a lot of that will be spent on infrastructure. The demand for raw materials will be met by supply from Australia.
[img=620x0]http://www.afr.com/content/dam/images/g/l/3/1/f/x/image.imgtype.afrArticleInline.620x0.png/1447908002893.png[/img]In four of the past five rate cycles the US dollar has peaked around the first Fed hike, Jakobsen said.
"The Australian dollar looks cheap if you believe China is going to do better than expected, which I do," Jakobsen said. "And it looks cheap if you think the Federal Reserve hike cycle at least initially will lead to a weaker [US] dollar – then the Australian dollar becomes extremely attractive at US70¢."
In four of the past five rate cycles the US dollar has peaked around the first Fed hike, said Jakobsen, and he should know.
"I've been doing this job 25 years and in my full career have only seen three actual Fed hikes. Eighty per cent of everyone who sits and trades in the banks, they've never been in a Fed hike cycle before."
The market should "intuitively" be prepared for the US dollar to fall when the Fed announces a rate rise as low US rates in the past three years have prevailed as the US dollar has risen in value.
"We are in front of a massive change in the direction of monetary policy but also in terms of how people should trade the market," he said.
His tip for Australian investors is to hedge global investments or reduce exposure to foreign markets. "You don't necessarily need to leave the foreign markets but you need to hedge the currency exposure."
He has good news for anyone whose portfolio is loaded with resources and energy stocks. "The low in the commodities cycle in my opinion will be tied very closely to the first Fed hike," he said. "We're very close to the low of the commodities cycle."
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$3.3bn to transform farming landscape
Kylar Loussikian
[Image: kylar_loussikian.png]
Journalist
Sydney
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Ross Keeley, general manager of Australia’s largest cotton growing operation, Kia Ora, near St George in southwest Queensland. Picture: Lyndon Mechielsen. Source: News Corp Australia
[b]Filipino bankers, Chinese conglomerates, Canadian pension funds and Australian business tycoons. These are emerging as the new faces of rural Australia, with a once-in-a-generation change poised to transfer the ownership of $3.3 billion worth of agricultural lands.[/b]
More than $1.27 billion in agricultural assets have already changed hands this year, according to figures compiled by The Weekend Australian, with a further $2bn worth on the market. In total, farms sold this year and on the market represent 18 million hectares, almost as big as the size of Britain.
Despite the federal government’s last-minute intervention to stop the sale of the sprawling S. Kidman & Co pastoral company to a Chinese firm, more than half the agricultural sales this year were to foreign investors.
The strong demand for some of Australia’s most prized agricultural assets is due to the increasing need to secure supply chains for export to Asia, according to Sam McClure, the head of KPMG’s agribusiness, food and beverage finance division.
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“Australia has always been a very safe jurisdiction to produce and export protein and food from, but really we’re on the doorstep of Southeast Asia, where the demand for protein consumption and what we call safe food — which essentially just means you can consume it safely as opposed to some other jurisdictions — is continuing to grow, and investors are recognising that,” Mr McClure said.
“We are seeing a lot of state-owned enterprises and private Chinese investors, but for us it’s more the case of dealing with pensions funds out of North America.”
The Kidman portfolio, one of Australia’s largest landholdings spanning 1.3 per cent of the county’s total land area, was set to sell as early as this week after the Chinese giant Shanghai Pengxin was chosen as the preferred bidder for the 116-year-old company founded by Sir Sidney Kidman.
Others, including Hong Kong-based fund Genius Link Asset Management, were poised to lob bids of up to $370 million if Pengxin was not able to close the deal.
Treasurer Scott Morrison’s intervention, however, has scuttled those plans, with the Kidman family and their advisers at Ernst & Young now in discussions with the federal government on how to proceed, potentially carving off the contentious Anna Creek cattle station, which partially overlaps the Woomera military zone.
Other Chinese groups have already acquired sizeable holdings this year. Manufacturing billionaire Ma Xingfa paid $47m for the 705,000ha Wollogorang and Wentworth stations on the Gulf of Carpentaria, while Chinese companies — property developer Hailiang and conglomerates Dashang and Fucheng — have purchased stations worth more than $100m from long-term family owners.
North American funds have also been active, with Canada’s Ontario Teachers’ Pension Fund and Public Sector Pension Investment Board both taking separate stakes in beef and almond operations. While overseas pension funds have taken an interest, Australian funds have, with a few exceptions, been noticeably absent. Mick Keogh, executive director of agricultural think tank the Australian Farm Institute, said Australian superannuation funds and investment managers had been largely disinterested “because it’s a long-term play”. “They are very much focused on quarterly returns, and agriculture, with its volatility, doesn’t fit into that model even though the longer term returns have been very good,” he said.
The figures compiled by The Weekend Australian, which take in farm sales and listings worth more than $10m, show a diverse range of major investors, including Filipino real estate developer and former banker Romeo Roxas, who recently paid $20m for the Murray Downs and Epenarra stations in the Northern Territory.
Several large properties — and the prized Consolidated Pastoral Company worth more than $700m — remain on the market.
Ray White Rural, which is one of Australia’s largest agribusiness realties, has properties worth more than $500m on the market. Bruce Gunning, its principal agent, declined to provide details, citing the sensitivity of the listings.
Mr Gunning yesterday warned the government’s decision to block the Kidman deal could mean some potential buyers could look elsewhere, including the vast cattle stations of South America.
Near St George in southwest Queensland, the sale of Australia’s largest cotton growing operation, Kia Ora, is drawing closer.
Owned by Eastern Australia Agriculture, and overseen by general manager Ross Keeley, the 37,600ha farm could fetch as much as $180m. It is being sold by Colliers International and Cushman & Wakefield.
“It’s been an honour to be involved in what is such a fine agricultural asset,” Mr Keeley said.
A spokesman for Eastern Australia Agriculture said the lower Australian dollar had created “a clear buy signal” for investors.
Rawdon Briggs, who heads the Colliers agribusiness practice, said the Australian dollar was trading below the 30-year average, while the China-Australia free-trade agreement had boosted interest from firms hoping to export into China.
“The market in America is pretty well overheated, a number of states have had declines in the value of their land, so investors are more uncomfortable about placing more capital there,” he added.
Danny Thomas, director of agribusiness for realtor CBRE, said it was the Australian dollar and lower returns in other investment classes that had prompted “an unprecedented” level of interest from institutional investors.
But it wasn’t just overseas interest, he said. Many Australian rich-listers have begun buying up substantial rural holdings as well. Gina Rinehart, Gerry Harvey, Brett Blundy and Kerry Stokes have spent a combined $220m this year alone to snap up 1.8 million hectares across the country. Mr Thomas said despite the attention foreign buyers were receiving, three of the biggest deals this year in the agribusiness sector had been by domestic groups.
“You’ve had Webster’s takeover of Tandou and Bengerang, Australian Country Choice’s joint venture with the Acton Family, and First State Super’s purchase of Select Harvest’s almond plantations,” he said.
“It is very good to see the domestic groups so active and for Australian companies and capital to be investing in Australian agriculture,” he said.
One of the biggest landholders, Consolidated Pastoral, could yet fall to an Australian fund after it was put up for sale by its owners, London-based private equity firm Terra Firma, which acquired it from James Packer in 2009. It is believed the Queensland government’s investment vehicle, the Queensland Investment Corporation, is closest to securing those properties.
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With el nino set to hit australia pretty badly in 2016 causing high temps and droughts, these funds have literally "bought the farm"
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22-11-2015, 11:26 PM
(This post was last modified: 22-11-2015, 11:26 PM by greengiraffe.)
(22-11-2015, 11:11 PM)BlueKelah Wrote: With el nino set to hit australia pretty badly in 2016 causing high temps and droughts, these funds have literally "bought the farm"
sent from my Galaxy Tab S
I think yr one liner fear factor needs justifications... I think all these funds are not run of the mill type of fun managers.
Mr Kelah, so far your bearish outlook on Aussie economy has been proven wrong... so far
i) Turnbull really turning into BULL
ii) Chinese appetite for strategic assets Down Under and globally remain strong
iii) The A$ appears to have bottomed and reversing a long term trend notwithstanding the continued decline in commodity prices
iv) The service and niche manufacturing sectors have been strong with the tailwind of the rebalancing of A$ and job creation has been strong.
I think, to be really objective in one's macropicture views, one has to be very hardworking as it will filter down to micropicks.
May I suggest that you work harder to provide better discussion on various issues especially those pertaining bigger picture analysis.
Regards
Expired Analyst
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I am not so articulate. Can only say let's talk again in 3-5 years time with next milestone to be turnbull election next year
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(23-11-2015, 12:10 AM)newbie11 Wrote: I am not so articulate. Can only say let's talk again in 3-5 years time with next milestone to be turnbull election next year
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Aussie politics unlike Singapore are always unstable... what is more important from my understanding is to get a leader that will implement changes and getting it off the ground fast... frommy understanding, Labour is in disarray currently and hence Turnbull has his time to get the house in order quickly...
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Treasury, Reserve Bank tell Australians to be ready for slower growth
5 things Glenn Stevens just told banking economists
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by Jacob Greber
The federal Treasury officially downgraded Australia's potential economic growth rate just as Reserve Bank of Australia governor Glenn Stevens told Baby Boomer shareholders to curb their expectations of ever-rising dividends.
In an acknowledgment that the below-par economic growth of the past three years will persist, the Treasury's top forecaster, Nigel Ray, said next month's budget update would assume long-term growth of 2.75 per cent, down from about 3 per cent.
A sharp slowdown in population growth since export prices peaked in 2011 means the economy won't expand as fast as previously assumed. Lower growth could mean a future of fewer jobs and poorer investment returns. It would hit taxes, making it harder to pay for promised rises in defence, education, old age and welfare services.
"This has immediate and unavoidable consequences for the economy's potential," Mr Ray told the Australian Business Economists annual function in Sydney. "Fewer people means a smaller supply of employees. So for a given capital stock and level of productivity, we can now produce less output overall than we previously estimated."
[img=620x0]http://www.afr.com/content/dam/images/g/k/w/b/x/p/image.related.afrArticleLead.620x350.gl6sqt.png/1448355744527.jpg[/img]Reserve Bank of Australia governor Glenn Stevens has told Baby Boomer shareholders to curb their expectations of ever-rising dividends. Luis Ascui
UNSUSTAINABLE DEMAND
Speaking at the same event, Mr Stevens warned older shareholders that their appetite for constantly rising dividends were unsustainable unless they accepted the need for companies to take on more risk to generate higher profits.
He predicted that global interest rates would remain "very low" for most of the decade ahead, and that yields for most investors would remain depressed for the foreseeable future.
"In a low interest rate world, the problems of providing retirement incomes will become ever more prominent," Mr Stevens said.
"The very low level of yields on fixed income assets means that it is very expensive today to purchase a secure stream of future income, which is what someone who is retiring is usually seeking. And there are more of such people, living longer."
With most Australians living increasingly into their late 80s, Mr Stevens suggested many retirees dismayed by low fixed-income yields had shifted into more dividend-paying stocks – effectively distorting asset markets by forcing companies to favour capital returns over investment.
"It certainly seems that many Australian-listed corporates feel the pressure from shareholders to deliver that, even some whose earnings are inherently volatile," he said.
"Can the corporate sector realistically promise growing dividends over a long period? Not without being prepared to take the risk on investment in new products, processes and markets.
"How much of that risk an older shareholder base will allow boards and managements of listed entities to take is an important question."
LOWER POPULATION FORECASTS
Treasury's economic growth downgrade, weeks from the government's mid-year budget update, is based on lower population forecasts at a time when the demographic wave of Baby Boomers is only just starting to become apparent.
Mr Ray, who heads Treasury's macroeconomic group, said the downgrade would, "everything else equal", make it harder to return the budget to a surplus.
Indicative analysis suggests the growth downgrade will worsen the budget by around $5 billion a year, potentially delaying the return to sustained surpluses indefinitely without extra spending cuts or tax hikes. In May, Treasury forecast a return to surplus early next decade.
Modelling by PwC for The Australian Financial Review published last week showed the nation would lose $288 billion worth of growth over the next decade, if trend growth was 0.25 of a percentage point less than the long-assumed rate of 3.25 per cent.
In the May budget, Mr Ray said potential – or "trend growth" – was estimated to be 3 per cent. "We now think potential GDP will grow by around 2.75 per cent over the next few years," he said on Tuesday.
Critically, the estimate still assumes that productivity growth, a key driver of living standards, will continue at the 30-year annual average of 1.6 per cent in coming years, effectively accelerating from the 1.5 per cent rate of the past five years.
A survey of economists released on Tuesday by the Australian Business Economists shows most expect the headline budget deficit to narrow from $37.9 billion in 2014-15 to $35 billion in 2015-16 and $26 billion in 2016-17.
Mr Ray said Treasury was finalising its estimates for Australia's so-called "output gap", given the lower potential growth assumption.
Mirroring the practice of fiscal bodies such as the US Congressional Budget Office and the UK's Treasury, Treasury in Canberra bases its longer range forecasts on an assumption that growth will accelerate above the potential rate until unemployment falls to a neutral level where it neither adds to nor detracts from inflation.
LONG-TERM GROWTH AROUND 3.25PC
With the jobless rate still significantly above that level, next month's mid-year update will almost certainly include a long-term growth assumption of around 3.25 per cent for several years over the latter part of the coming decade.
In the May budget, Treasury assumed the economy would return to a 3.5 per cent growth pace for five years after 2017-18.
"Because we think potential is a bit lower, the output gap will be a bit smaller," Mr Ray said. "It's likely that on average we won't have to grow quite so fast to get there as we previously thought.
"The economy will still, by definition, have to grow a bit faster than potential [to get the jobless rate down]."
Mr Ray warned that Treasury could be wrong on its latest analysis if productivity growth is considerably lower than it has assumed. "As services become a bigger part of our economy, productivity growth could ease. Equally, breakthrough innovation and the realisation of productivity gains from current technologies could see productivity grow faster than it has in the past."
In a wide-ranging speech, Mr Stevens said while the US Federal Reserve would most likely hike the funds rate next month, or soon after, the European Central Bank and Bank of Japan were still "a long way from even thinking about higher interest rates".
"My guess is that global interest rates are still going to be very low for a good part of the decade ahead."
Mr Stevens' challenge to older investors comes amid a growing realisation that the relatively easy sharemarket gains since the global financial crisis may no longer be sustainable.
"Overall, in a world where a higher proportion of the population wants to be retired and living (even if only in part) off the return on their savings, those returns are likely, all other things equal, to be lower.
"Part and parcel of the same adjustment may be higher real wages for the smaller proportion of the population that is working. These changes, driven by demographics, may require some adjustment to our collective thinking about what is 'normal', not just for rates of return on assets but also for returns to labour."
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RBA boss Glenn Stevens says GFC novices in for a shock- JAMES GLYNN
- THE AUSTRALIAN
- NOVEMBER 25, 2015 9:03AM
RBA governor Glenn Stevens. ‘It will be very new experience for quite a lot of Australians.’ Picture: Aaron Francis
[*]
The next major shock to the economy will be amplified because a huge proportion of the population has not experienced a severe downturn, Reserve Bank governor Glenn Stevens has warned.
Mr Stevens said half the workforce had not seen the impact of sharply rising unemployment and many in business would be similarly unprepared.
“There will be economic downturns from time to time,” he told a conference of economists last night.
“If one of those turns out to be a big one, it will be a very new experience for quite a lot of Australians. Close to half the workforce has never seen really high, nationwide unemployment. A lot of people in business have, I suspect, not seen how tough conditions can become when virtually every industry and region is contracting. That they have not seen this is a good thing … but if one comes it will be a shock.”
Australia has not had a recession in nearly 25 years. The country avoided the worst of the 2008-09 global financial crisis due to a rapid budgetary expansion, massive interest rate cuts, a collapse in the dollar, and China’s decision to spend massively on infrastructure.
Mr Stevens was not forecasting an imminent shock, saying instead that recent data had pointed to improvement in the economy. “A number of data points over recent months suggest that prospects for firmer conditions in the non-mining economy are improving.
“Business surveys indicate that firms report conditions to be, if anything, above their long-term average in some key sectors. Firms seem to have stepped up their hiring. Job vacancies have been increasing, hours worked have been increasing and employment growth, even before the most recent month’s data, have strengthened noticeably over the past year.”
At a question-and-answer session after his speech, Mr Stevens debunked suggestions the economy would not be able to offer enough jobs, arguing instead that there would not be enough workers to support the ageing population
Australia’s economy has been sluggish in recent years, stung by the end of a decade-long mining investment boom, falling commodity prices and a slowdown in China. The RBA recently forecast below-average growth for the years ahead as weakness in investment continues to put a brake on activity. Still, recent low inflation readings meant the RBA had scope to cut interest rates further if the economy needed support, Mr Stevens said.
Financial markets have been winding back bets on a near-term cut in interest rates in Australia as evidence of a steady, albeit slow, recovery becomes visible in economic data.
Mr Stevens said China, Australia’s biggest trading partner, would grow more slowly in the coming decades, but would still be significant. “It is not very controversial to suggest that China will grow more slowly on average than in the past decade, but it will still be a big deal given its overall size,” he said.
Global interest rates were set to remain low over coming years, he added. The US Federal Reserve looked set to hike rates next month, but tightening beyond that would be slow.
The Wall Street Journal
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Business investment spending falls 9.2 per cent in September quarter- DOW JONES
- NOVEMBER 26, 2015 2:38PM
[*] Business investment has suffered its biggest quarterly fall in the 28-year history of the official survey.
And while business investment is at a four-and-half-year low, the good news is that the outlook isn’t getting any worse.
Australian business investment fell by 9.2 per cent to $31.4 billion in the September quarter, the lowest quarterly amount of investment since the March quarter of 2011, and a much steeper drop than expected.
The Australian dollar fell from US72.63 cents to US72.25c after the figures, which suggest estimates for the September quarter GDP will be revised down, rekindling speculation of another interest rate cut.
The quarterly fall was the largest in the history of the survey, which started in 1987.
Investment intentions for 2015/16 are 20.9 per cent lower than the corresponding estimate made for 2014/15, the main contributor to the decrease is mining, the ABS said.
However the good news is that businesses collectively expect to spend $120.4 billion in the 2015/16 financial year, which is four per cent higher than the estimate made three months ago.
JP Morgan chief economist Stephen Walters said the September quarter investment figures will be a drag on next week’s economic growth data.
He’s revised down his forecast for September quarter gross domestic product (GDP) growth to 0.6 per cent, from 0.8 per cent. “The mining capex is plunging, that’s not a surprise but there’s just not enough lift in those other bits of the economy,” he said. “I think it’s optimistic to think that manufacturing would be providing much lift here given what’s happening with carmakers and steelmakers and the like.
Mr Walters said it is up to the services part of the economy to start spending more.
“It’s happening but it is a very slow rotation,” he said.
ANZ economist Daniel Gradwell said the non-mining parts of the economy are failing to pick up the slack left by the end of the mining boom.
“Above average non-mining business conditions and profitability are not resulting in these firms wanting to invest more,” he said. “But they are hiring, particularly in the services sector.” Mr Gradwell said that’s why he believes the RBA has become a bit more comfortable with the weak non-mining business investment outlook.
“Our view remains, however, that the strong jobs growth will eventually soften amid less support from the lower Australian dollar.”
UBS economist George Tharenou said next week’s GDP growth figure will still be a solid 0.8 per cent, despite the fall off the capex cliff.
“A period of ongoing record low interest rates and sustained Australian dollar depreciation ahead seems likely to be needed to help support demand,” he said.
“For the third quarter real GDP, capex will be a very large drag on growth, but net exports are likely to make such a huge contribution.”
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