Global and Australian Economic and Investment Update - September 2014
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Transcript of Global and Australian Economic and Investment Update - September 2014
Slide 1
Baiocchi Griffin Private Wealth
Economic and Investment Markets Update
24th September 2014
Slide 2
General Advice Warning
This presentation and the associated discussion is general in nature and does not take your individual situation into account. You should not act on anything contained
herein, or discussed as a consequence of the contents of this document, without receiving
personal financial advice from a suitably qualified person such as a financial advisor.
Slide 3
What will be covered
A look at the global economic environment
&
Australia: the State of the Nation
&
An update on investment markets
Slide 4
The Global Economy
Slide 5
Revisiting an old theme…
Slide 6
Firstly, the ‘Good’…
The world’s largest economy is firmly in recovery mode, with falling unemployment, rising home prices and increases in business investment
Slide 7
The recovery has been led by energy gains
The timely development of new oil and gas drilling technologies and
discovery of new shale oil reserves have underpinned the recovery
The US now produces more oil and gas than Saudi Arabia
Slide 8
Increased production = lower prices
Note the disparity in US gas prices with the rest of the world (Australian prices are $6 to $7)
A natural gas glut forced US gas prices down to record levels
Slide 9
US energy self-sufficiency is close
Energy self-sufficiency levels are back to the same level as 1987 – total self-sufficiency is expected to occur by 2035 (IEA)
Slide 10
The benefits of cheap energy
All of these companies have announced new or re-opened factories and plants in the US
PricewaterhouseCoopers: One million new manufacturing jobs by 2025 due to cheap energy costs (compare with Australia)
Between 2010 and the end of March 2013, almost 100 chemical industry projects valued at around $72bn were announced
Slide 11
Not everyone will benefit
There will be losers from the US energy boom:
• Other oil & gas producers, primarily in the Middle East
• Australian East Coast LNG operators?
• Those countries which compete with US manufacturers (Europe and some parts of Asia/South America)
Geo-political considerations also apply:
The US may have less interest in the Middle East, given a reduced reliance on oil & gas from the Middle East
Slide 12
It’s not all good news however
The US Federal Reserve’s
Balance Sheet
Various programs to
stimulate the US economy have resulted in the
Fed owning over $4 trillion in
debt securities
Slide 13
A different view of the problem
How does the Fed get back to here?
And what are the implications of this
process?
US Federal Reserve Balance Sheet
On the way up = falling interest rates rising stock, bond & property marketsOn the way down = ?
Slide 14
Normalising interest rates is important
US interest rates cannot remain at close to 0% indefinitely – increasing rates without damaging the US economy will be a delicate (impossible?) task
Slide 15
And now…The ‘Bad’…
Europe survived the sovereign debt crisis
on 2010 (so far), but faces weak
economic growth and the threat of
deflation
Slide 16
Europe’s primary threat:
Inflation in major Euro nations and the Eurozone as a whole are at worrying levels
Annual Inflation Rates 2011 to 2014
Slide 17
What’s wrong with low inflation?
Low inflation itself is not the problem, the problem arises when prices stop rising and begin falling (deflation)
Why is deflation bad?
1. When people expect prices to fall they become less willing to spend and less willing to borrow
2. Deflation worsens the position of borrowers (debts have to be paid back with dollars that are worth more than the dollars you borrowed)
3. Wages tend to fall along with prices and because most people are usually reluctant to accept wage cuts, this is normally achieved through mass unemployment
Slide 18
Slow economic growth is now a long term issue
Eurozone GDP growth rates 1961 to 2013
Slowing economic growth rates are a feature of the Eurozone economies, although the past 5 years have been particularly weak
Slide 19
Fixing Europe
In the short term:
• Earlier this month the European Central Bank announced plans to buy asset-backed securities from banks, hoping to increase bank lending
It is expected that the ECB will have to adopt its own Quantitative Easing, much like the US Federal Reserve adopted in 2008
In the medium to long term:
• Europe will need to undertake long overdue structural reform Labour market deregulation Tighter fiscal integration A Eurozone-wide banking union Increased competition Reduced regulation and administration
NEIN
Slide 20
And finally, …the ‘Ugly’.
Australia’s largest trading partner faces an uncertain short-term future
Slide 21
China: major challenges
In our view China must deal with three major issues in the short to medium term:
1. Transition of the economy from a reliance on infrastructure spending and government stimulus
2. Managing the fallout from a significant property and credit bubble
3. Balancing increased economic freedoms with restrictive political freedoms (a topic for another day)
Slide 22
1. Economic transition
From this…
…To this
Slide 23
Progress has been made
China needs less growth from
Investment and more growth
from Consumption
Slide 24
But more work is required
Very high relative to
other Asian nations
Slide 25
2. A property and credit bubble
Cheap Expensive
In 2011 China had some of the most expensive housing in the world
Slide 26
Now: house prices are falling
Slide 27
And credit growth is slowing
The rise and fall of the ‘shadow banking’
sector
Slide 28
Implications for Australia
Iron ore exports were worth $60 billion last yearThe WA 2014-15 budget assumed an average price of $122 p/tonne
The May Federal government budget assumed a price of $110 p/tonne
Slide 29
Australia: State of the Nation
Slide 30
Undergoing our own transition
From this…
…To this
Slide 31
Why we have a problem
By 2016 annual mining
investment expenditure
will fall to nearly zero, down from over $100
billion at the peak
Slide 32
The RBA’s response:
Real interest rates are
once again negative, almost at the same level as
during the GFC
Slide 33
The housing market is responding…
Slide 34
…though building approvals have slowed
Jan-2007
Mar-2007
May-2007
Jul-2007
Sep-2007
Nov-2007
Jan-2008
Mar-2008
May-2008
Jul-2008
Sep-2008
Nov-2008
Jan-2009
Mar-2009
May-2009
Jul-2009
Sep-2009
Nov-2009
Jan-2010
Mar-2010
May-2010
Jul-2010
Sep-2010
Nov-2010
Jan-2011
Mar-2011
May-2011
Jul-2011
Sep-2011
Nov-2011
Jan-2012
Mar-2012
May-2012
Jul-2012
Sep-2012
Nov-2012
Jan-2013
Mar-2013
May-2013
Jul-2013
Sep-2013
Nov-2013
Jan-2014
Mar-2014
May-2014
Jul-2014
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
Australian Home Building Approvals 2007 to July 2014
Slide 35
Mining remains important
Contribution to GDP Growth:
Year-ended June 2014
Positive, but still too low
Slide 36
Weak economy ~ Strong GDP
GDP = C + I + G + Net Exports
Weak WeakStable Strong
Mar
-200
5Se
p-20
05M
ar-2
006
Sep-
2006
Mar
-200
7Se
p-20
07M
ar-2
008
Sep-
2008
Mar
-200
9Se
p-20
09M
ar-2
010
Sep-
2010
Mar
-201
1Se
p-20
11M
ar-2
012
Sep-
2012
Mar
-201
3Se
p-20
13M
ar-2
014
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Australia - Quarterly GDP Growth Rates (%)
Slide 37
Strong exports ≠ Strong jobs
No growthWe may be exporting more than ever, but this does not necessarily result in more jobs
Slide 38
Our economy is getting some help
Australian Dollar/US Dollar Exchange Rate – May 2006 to Sep 2014
A weaker Australian dollar will provide assistance to sectors such as agriculture, tourism, manufacturing and mining
Slide 39
Two important indicators:
An improvement in credit growth hints at signs of economic growth &Low wage growth means that wage-drive inflation is not an issue
Slide 40
Overall a mixed outlook
Housing construction Unemployment
Interest rates Mining slowdown
Weakening AUD US economic growth
Slide 41
9/19/2
013
9/27/2
013
10/5/2
013
10/13/2
013
10/21/2
013
10/29/2
013
11/6/2
013
11/14/2
013
11/22/2
013
11/30/2
013
12/8/2
013
12/16/2
013
12/24/2
013
1/1/2
014
1/9/2
014
1/17/2
014
1/25/2
014
2/2/2
014
2/10/2
014
2/18/2
014
2/26/2
014
3/6/2
014
3/14/2
014
3/22/2
014
3/30/2
014
4/7/2
014
4/15/2
014
4/23/2
014
5/1/2
014
5/9/2
014
5/17/2
014
5/25/2
014
6/2/2
014
6/10/2
014
6/18/2
014
6/26/2
014
7/4/2
014
7/12/2
014
7/20/2
014
7/28/2
014
8/5/2
014
8/13/2
014
8/21/2
014
8/29/2
014
9/6/2
014
9/14/2
0145,000
5,100
5,200
5,300
5,400
5,500
5,600
5,700
ASX 200 Index – Past 12 Months
Annual Return: 2.83%
Ukraine crisisEmerging markets worries
Significant falls during September
The stock market
Slide 42
Recent market volatility
Company Capital loss in September
Westpac Bank -6.37%
ANZ Bank -5.98%
Commonwealth Bank -4.86%
National Australia Bank -4.86%
All Ordinaries Index -3.25%
• Overseas investors
• Capital adequacy requirements
Slide 43
8/3/1
984
5/3/1
985
2/3/1
986
11/3/1
986
8/3/1
987
5/3/1
988
2/3/1
989
11/3/1
989
8/3/1
990
5/3/1
991
2/3/1
992
11/3/1
992
8/3/1
993
5/3/1
994
2/3/1
995
11/3/1
995
8/3/1
996
5/3/1
997
2/3/1
998
11/3/1
998
8/3/1
999
5/3/2
000
2/3/2
001
11/3/2
001
8/3/2
002
5/3/2
003
2/3/2
004
11/3/2
004
8/3/2
005
5/3/2
006
2/3/2
007
11/3/2
007
8/3/2
008
5/3/2
009
2/3/2
010
11/3/2
010
8/3/2
011
5/3/2
012
2/3/2
013
11/3/2
013
8/3/2
014748.00
1,496.00
2,992.00
5,984.00
Long-term view – ASX Ords Index
1987 crash
‘Dot com’ bubble
Pre-GFC peak
Market low – Mar 2009
“The recession we had to have”
Slide 44
A note on portfolio construction
The role of cash in a portfolio
Cash
Liquidity
DefensiveDiversification
Active“Dry Powder”
Acknowledgement: Pimco Asset Management
Slide 45
Finally, our expectations
• We still expect that underlying Australian economic growth will be weak for the next 12 to 18 months (ignoring the impact of mining exports)
• Interest rates are likely to remain on hold until early or mid-2015, subject to an improvement in housing construction & business investment
• The prospect of higher US interest rates will result in significant levels of market volatility
• Key issues to focus on in the short to medium term:− Mortgage delinquencies & loan arrears− Increased levels of debt, particularly the commercial property sector− Private equity transactions− ‘Funny money’ and financial engineering
Slide 46
?Any questions before I hand over to Ray?
Slide 47
• Recent events in the financial planning/advice industry
• Looking forward
Some comments on the industry
“FOFA reforms sell retirees short” SMH May 12
“Scandal shows its time to clean up financial planning industry” SMH June 26
Slide 48
?Thank you
Please join us for morning tea