Economic Insights
Economics | July 12015
2014/15: A Year of Consolidation Economic & financial perspectives Unfulfilled expectations: Total returns on Australian shares (All Ordinaries Accumulation index) grew by 5.7 per cent over 2014/15 after rising by 17.6 per cent in 2013/14 (20-year average +10.3 per cent). Notably, back in late April, the total return index was at record highs and on track to 14.5 per cent annual gains. Other returns higher: Returns on dwellings grew by 14.1 per cent in 2014/15 with returns on government bonds up by 5.8 per cent. So for the second year, bonds, property and shares have all lifted. The report is useful to assist investors to start planning for 2015/16
What does it all mean? In late April, total returns on Australian shares (shares prices and dividends) were at record highs. And the ASX 200 was on the cusp of breaking through 6,000 points. But a raft of jitters served to drag the sharemarket lower over the final two months of the 2015 financial year. So, 2014/15 can be best described as a year of consolidation for investors. Greece returned to haunt investors. Interest rates were trimmed to all-time lows. A stimulatory Federal Budget was unveiled. China continued to rebalance its economy, as did Australia. The US Federal Reserve still hadn’t decided to lift interest rates. And higher bond yields served to check the upward progress of global sharemarkets. But despite the challenges, returns on shares, residential property and bonds all lifted over the past year while interest rates and the Aussie dollar ended lower than a year ago. And the record economic expansion continued. The economy probably grew by around 2.5 per cent in 2014/15 and we expect growth of around 3.0 per cent in 2015/16. Underlying inflation may lift from 2.25 per cent to 2.75 per cent over the coming financial year while unemployment may ease modestly from 6 per cent currently to around 5.5 per cent. Overall, you would describe the economic and financial performance as good, but not great. Investment returns lifted again despite challenges and inflation remained under control. And record low interest rates, budget stimulus and a lower dollar all served to maintain the record economic expansion.
Craig James – Chief Economist (Author)
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Economic Insights: A Year of Consolidation
What does the data show? International economy The International Monetary Fund estimates that the global economy grew by 3.4 per cent in 2014, just below the long-term average growth rate of 3.6 per cent. In April the IMF estimated the global economy would grow by 3.5 per cent in 2015 and 3.8 per cent in 2016. China is tipped to grow by 6.8 per cent this year after 7.4 per cent growth in 2014. The IMF expects the US economy to grow by 3.1 per cent in both 2015 and 2016 after 2.4 per cent growth in 2014. Domestic economy The Australian economy grew by 2.5 per cent in both 2012/13 and 2013/14 and will probably grow by around 2.5 per cent in 2014/15. In the year to March 2015 the economy grew by 2.3 per cent – below the decade average of 2.8 per cent and the 15-year average of 3.0 per cent. The inflation rate stands at 1.3 per cent with the underlying rate at 2.3 per cent. For 2014/15 as a whole, the headline rate of inflation should be around 1.8 per cent with the underlying rate around 2.3 per cent. In June 2014 the jobless rate was 6.1 per cent and the latest rate (May 2015) is 6.0 per cent. Interest rates The cash rate fell to a record low of 2.00 per cent, down from 2.50 per cent at the end of June 2014, and courtesy of quarter per cent rate cuts in February and May 2015. The market-determined 90-day bank bill rate fell from 2.79 per cent to 2.15 per cent over 2014/15. Yields on the long bond – 10-year government bond – held between 2.32 per cent and 3.73 per cent. Long-bond yields hit record lows on March 26 and ended 2014/15 near 3.00 per cent. Currencies The Aussie dollar fell by around 23 per cent (Australian dollars per US dollar) over 2014/15. When measured the other way, in US dollars per Australian dollar, the decline for the Aussie was 18.5 per cent. The Aussie started the year around US95 cents and ended the year near US76.80 cents. We have calculated that the Aussie was the 18th weakest against the US dollar of 117 currencies tracked. The strongest currencies were the Guatemalan quetzal (up 1.8 per cent), Costa Rican colón (up 1.7 per cent) and Maldives rufiyaa (up 1.6 per cent). Weakest currencies were the Russian rouble (down 64 per cent), Syrian pound (down 45 per cent) and Brazilian peso (down 41 per cent). In the six months of 2015, the Aussie dollar fell by around 7 per cent against the US dollar, making it the 34th weakest of 117 currencies tracked. The strongest currencies were the Swiss franc (up 7 per cent), Seychelles rupee (up 6.7 per cent) and Malawi kwacha (up 5.3 per cent). Weakest currencies were the Ghanaian cedi (down 41 per cent), Azerbaijani manat (down 33 per cent) and Madagascar ariary (down 24 per cent).
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The high for the Aussie dollar in 2014/15 was US95.04c on July 1 2014 and the low was US75.30 cents on April 2 2015. Commodities The Commodity Research Bureau index of commodities prices fell by around 28 per cent over 2014/15, under- performing the Aussie dollar (down around 23 per cent). In terms of those commodities with particular relevance to investors or the economy as a whole, crude oil (down 43 per cent in 2014/15, nickel (down 37 per cent), iron ore (down 37 per cent), copper (down 18 per cent), thermal coal (down 14 per cent), gold (down around 11 per cent) and beef (down 1 per cent). Amongst the gains has been wool (up 24 per cent in Australian dollar terms) and wheat (up 3 per cent). Sharemarket The Australian sharemarket started 2014/15 with the All Ordinaries at 5,382.0 and the ASX200 at 5,395.7. The All Ords ended the year at 5,451.2 points (up 1.3 per cent) with the ASX200 at 5,459.0 (up 1.2 per cent). Mid-sized companies out-performed over 2014/15 with the MidCap50 index up by 7.0 per cent, ahead of the 0.8 per cent growth of the large cap ASX50 index and the 2.8 per cent fall of the smaller company index, the Small Ordinaries. Of the 21 current industry sub-sectors, 14 sectors rose over 2014/15. The key under-performer was Energy, down by 23.7 per cent, followed by Capital Goods (down 23.1 per cent) and Media (down 19.4 per cent). Strongest growth was recorded by Consumer Durable & Apparel sector (up 42.1 per cent), followed by Pharmaceutical & Biotechnology (up 29.6 per cent) and Transportation (up 25.8 per cent). The large Banks sector lifted by just 0.1 per cent with the Resources sector down 19.8 per cent (largely Materials & Energy) but the A-REIT sector (Property Trusts) rose by 15.5 per cent. We estimate that Australia was 41st of 73 global bourses over 2014/15, or a little worse than the mid-point of bourses. Best performer was Venezuela (up 525 per cent) followed by China (up 98 per cent) and Argentina (up 43 per cent). Worst performers were Greece (down 34 per cent), Russia (down 32 per cent) and Columbia (down 27 per cent). In the six months of 2015, the All Ordinaries rose by 1.3 per cent, ranking Australia 41st of 73 nations. The strongest performer was Venezuela (up 242 per cent), followed by Argentina (up 32 per cent) and Hungary (up 30 per cent). Worst performer was Greece (down 17 per cent), Columbia (down 12 per cent), Cyprus (down 10 per cent), Ukraine (down 9 per cent).
AUSTRALIAN INDUSTRY GROUPS percent change 2014/15 Consumer Durables & Apparel 42.1 Consumer Services 4.2 Pharmaceuticals & BioTech 29.6 Commercial & Professional Services 1.3 Transportation 25.8 ASX 200 1.2 Health Care Equipment & Services 22.6 Banks 0.1 Diversified Financials 22.2 Software & services -1.4 Telecom 19.9 Food, Beverages & Tobacco -3.1 Real Estate 15.5 Materials -10.0 Autos & components 15.3 Food & staples retailing -15.5 Utilities 8.3 Media -19.4 Insurance 7.8 Capital goods -23.1 Retailing 4.6 Energy -23.7 Source: Iress, CommSec
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Investment returns Total returns on Australian shares (All Ordinaries Accumulation index) grew by 5.7 per cent over 2014/15. Returns on dwellings lifted by 14.1 per cent while returns on government bonds rose by 5.8 per cent. A relatively rare event – bonds, property and shares all rising over the past year.
Outlook for 2015/16 Global economy The global economy is growing at a pace close to what many would regard as “normal”. That is, economic growth is just below the 30-year average of 3.5 per cent. China continues to lead the way forward in terms of its contribution to global economic growth. But the US is not far behind, followed by India. The Chinese economy continues to grow at a solid pace, but authorities are actively trying to re-balance the economy away from reliance on production to greater reliance on consumer spending. In 2007, China grew by 14.2 per cent, adding $1.3 trillion yuan to the economy in constant price terms. This year the economy is tipped to grow by 6.8 per cent, adding $1.3 trillion. The economy is double the size, but still growing at a solid pace. The US economy is continues to expand at a solid pace, creating jobs, but with inflation under control. We expect the Federal Reserve to start lifting interest rates late in 2015, but there is no rush. The European economy is improving. In 2013, the euro area contracted by 0.5 per cent. The economy expanded 0.9 per cent in 2014 and is expected to lift 1.5 per cent in 2015 and 1.6 per cent in 2016. The Greek debt drama poses as a speed hump to growth. But once the issue is dealt with, Germany and France remain well placed to reinstate the positive momentum. Domestic economy If the Reserve Bank had one complaint about the economy it would be that it isn’t growing fast enough. But interestingly, growth over the past year has been only around 2.5 per cent and job growth has lifted with unemployment lower. The long-held belief is that economic growth near 3.00-3.25 per cent is required to make major inroads into unemployment, so that perception may come in for re- evaluation. The economy is expected to grow around 3 per cent in 2014/15 with inflation in the top end of the Reserve Bank’s 2-3 per cent target band and unemployment between 5.5-6.0 per cent. The economy will continue re-balancing. Mining production has taken over from mining construction. And home
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building is strong around the nation, underpinning economic growth due to its substantial multiplier benefits. There is a risk that the economy will continue to under- perform. But confidence levels are improving, and consumers and businesses are expected to respond more enthusiastically to low interest rates and budget stimulus. Strong home construction in Sydney and Melbourne poses risks of ‘indigestion’ when the large pipeline of apartments filter onto the market. Financial markets The Commonwealth Bank Group (includes CBA, CommSec, BankWest and Colonial First State) currently expects no change in official interest rates over the coming year. But risks still remain more skewed to the downside, rather than the upside in the next six months. At present economists are divided about the next move in interest rates. Those that believe rate cuts have ended are more likely to believe that rate hikes begin in 2016. As it was the case in 2014/15, much depends on the “animal spirits” of Australian businesses. If businesses remain reluctant to spend, invest or employ, then the Reserve Bank will leave rates at record lows for longer. The Aussie dollar is expected to hold between US75-80 cents over much of 2015/16. But in a “normal” year, the Aussie dollar moves by around US13 cents on average. If the US Federal Reserve was more aggressive in lifting rates than we expect and the Reserve Bank was content to leave rates at lows, then the Aussie dollar may drift into the US70-75 cent range. Alternatively, if the US Federal Reserve remained patient about lifting rates, the Chinese economy strengthened and businesses and consumers in Australia were more confident about spending and investing, then the Aussie dollar may lift to the low 80s against the greenback. Investment markets Since the Global Financial Crisis investors have been more reticent to embrace shares or listed equities. Households, companies and fund managers are maintaining historically-high cash holdings. Now while the proportion of assets held in cash has started to ease, investors are far more conservative than in the past. When it comes to ‘riskier’ assets – assets other than cash, such as property or shares – property has been favoured by retail investors. Having said this, Sydney and Melbourne property markets have out-performed markets in other capital cities and regional areas. But the strength in Sydney and Melbourne is slowly filtering through to other markets. Sydney and Melbourne residential property markets are supported by strong population growth (both above decade averages), low interest rates, interest from foreign investors and relatively tight rental markets – especially Sydney. But over 2015/16, the higher home prices will choke off some demand and lead to higher investment in equity
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markets. The ratio of share prices to company profits (PE ratio) is close to longer-term averages. But the question is whether investors are seeking even lower share prices in relation to earnings (lower PE ratios) as a signal to move more money into equities. Last year we stated: “Total returns on shares and residential property are expected to grow by 10-15 per cent over 2014/15 while returns on bonds are likely to be closer to 0-5 per cent.” Those projections were largely met, but the sharemarket lost annualised gains of around 15 per cent late in the year with the return on the Greek debt crisis. Looking ahead, we expect firmer economic growth in Australia, lifting corporate revenues, profits and share prices. Global uncertainties still remain though – Greece; rebalancing of the Chinese economy; geopolitics, especially involving Russia; ISIS; and the potential for higher US interest rates. CommSec expects the All Ordinaries index to be between 5,800-6,000 points at end-December 2015 and 6,000- 6,200 points in June 2015. Daily sharemarket volatility lifted late in 2014/15 with the Greek debt crisis and rising bond yields. But interestingly the difference between highs and lows for the sharemarket in 2014/15 was just 17.1 per cent – the least volatile year in 14 years. But looking ahead, the sharemarket is likely to remain volatile on a daily basis early into the 2015/16 year as the Greek debt situation finds some resolution. Total returns on shares are expected to grow by 10-15 per cent in 2015/16; returns on residential property are expected to grow by 8-12 per cent over the year; and returns on bonds are likely to be closer to 0-5 per cent.
Craig James, Chief Economist, CommSec
Savanth Sebastian – Economist, CommSec
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BEST & WORST STOCKS, ASX 200 percent change 2014/15
Best Worst Qantas Airways 150.4 Arrium Ltd -80.5 Select Harvests 113.8 MMA Offshore -74.0 M2 Group 85.3 Bradken -62.6 Liquefied Natural Gas 78.0 Senex Energy -59.7 Northern Star Resources 75.4 Metcash Ltd -58.5 Evolution Mining 74.9 Fortescue Metals -56.3 Sirtex Medical 71.6 Cardno Ltd -48.9 Domino's Pizza 66.5 Kathmandu Holdings -47.0 TPG Telecom 63.3 Santos -45.0 Corporate Travel Management 61.9 Bluescope Steel -44.7 Source: Bloomberg, CommSec
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