Paul Taylor, the Portfolio Manager of the Fidelity Australian Equities Fund,
talks about the outlook for the Australian economy and why Australia’s stock
market is more than a resources play.
What's your outlook for the Australia's economy?
What are the key risks? The Australian economy has seen uninterrupted growth for more than 20 years and its economic fundamentals remain strong, which is why Australia is one of the few triple-A-rated countries in the world. I see this positive trend continuing for the next five years.
Consumption, which comprises about two-thirds of GDP, is poised to drive the economy in coming years for three reasons. The first is that Australia’s population growth is among the fastest in the world. It is expected to outpace the OECD average growth rate by four to five times over the next decade. This will be the most important consumption driver for Australia. Second, cuts to interest rates are helping spur spending. The Reserve Bank of Australia cut the cash rate five times in 2012 and once so far in 2013. There is a likelihood of one more rate cut in 2013. Lastly, despite falls in commodity prices, mining activity should hold up, and income from this sector supports the economy. Australia is a low-cost producer, giving miners strong incentive to expand production even when commodity prices are low.
Australia is a small open economy that would be hampered if the world economy were to experience another economic shock stemming from the debt crisis in Europe or something else. However, I believe Australia would still fare better than most countries because interest rates in Australia are significantly higher than other developed countries. This gives the RBA enough room for further easing relative to other countries. In addition, the government has low debt levels and could undertake a large stimulus program to assist economic growth, if required.
The Australian dollar has been strong in recent years. Where is it headed?
The Australian dollar has been strong in recent times due to a number of reasons such as overseas investor appetite, strong commodity prices, attractive interest rates and high dividend yields as well as due to Australia’s stronger economic fundamentals compared with other countries.
The future direction of the Australian dollar might be more about what other countries do with their monetary policies than with anything that happens here. The interplay of these factors is hard to predict and is likely to result in volatile shifts in sentiment.
The strong currency has been a headwind for miners, other exporters and tourism. Any decline will help these sectors while hampering the importing sectors.
What’s the outlook for commodities given that Chinese demand could slow?
Slower growth in China would reduce demand for Australian commodities and, to an extent, such fears are reflected in the share prices and capital expenditure plans of the miners. However, the longer-term impact on Australian commodity producers is likely to be limited. The amount mined from Australia should still grow. Arguably, in many cases, a drop in commodity prices would help Australian low-cost miners because their higher-cost competitors could become unprofitable.
It is important to note that Australia is undergoing a significant shift in the composition of its exports. In coming years, energy exports, led by LNG gas and thermal coal, are expected to rise as large investment projects are completed. Demand for energy from Asia is expected to grow at a robust pace, fuelled by the needs of a rising middle class there. In addition, services exports, particularly in education, should provide additional support for the economy.
Important information
Any references to specific securities should not be taken as recommendations and may not represent actual holdings in the portfolio at the time of this viewing.
Indices:
The Australian All Ordinaries Index has moved up increasing +1.5% since closing last Friday to 02:00 pm today.
What's your outlook for the Australia's economy?
What are the key risks? The Australian economy has seen uninterrupted growth for more than 20 years and its economic fundamentals remain strong, which is why Australia is one of the few triple-A-rated countries in the world. I see this positive trend continuing for the next five years.
Consumption, which comprises about two-thirds of GDP, is poised to drive the economy in coming years for three reasons. The first is that Australia’s population growth is among the fastest in the world. It is expected to outpace the OECD average growth rate by four to five times over the next decade. This will be the most important consumption driver for Australia. Second, cuts to interest rates are helping spur spending. The Reserve Bank of Australia cut the cash rate five times in 2012 and once so far in 2013. There is a likelihood of one more rate cut in 2013. Lastly, despite falls in commodity prices, mining activity should hold up, and income from this sector supports the economy. Australia is a low-cost producer, giving miners strong incentive to expand production even when commodity prices are low.
Australia is a small open economy that would be hampered if the world economy were to experience another economic shock stemming from the debt crisis in Europe or something else. However, I believe Australia would still fare better than most countries because interest rates in Australia are significantly higher than other developed countries. This gives the RBA enough room for further easing relative to other countries. In addition, the government has low debt levels and could undertake a large stimulus program to assist economic growth, if required.
The Australian dollar has been strong in recent years. Where is it headed?
The Australian dollar has been strong in recent times due to a number of reasons such as overseas investor appetite, strong commodity prices, attractive interest rates and high dividend yields as well as due to Australia’s stronger economic fundamentals compared with other countries.
The future direction of the Australian dollar might be more about what other countries do with their monetary policies than with anything that happens here. The interplay of these factors is hard to predict and is likely to result in volatile shifts in sentiment.
The strong currency has been a headwind for miners, other exporters and tourism. Any decline will help these sectors while hampering the importing sectors.
What’s the outlook for commodities given that Chinese demand could slow?
Slower growth in China would reduce demand for Australian commodities and, to an extent, such fears are reflected in the share prices and capital expenditure plans of the miners. However, the longer-term impact on Australian commodity producers is likely to be limited. The amount mined from Australia should still grow. Arguably, in many cases, a drop in commodity prices would help Australian low-cost miners because their higher-cost competitors could become unprofitable.
It is important to note that Australia is undergoing a significant shift in the composition of its exports. In coming years, energy exports, led by LNG gas and thermal coal, are expected to rise as large investment projects are completed. Demand for energy from Asia is expected to grow at a robust pace, fuelled by the needs of a rising middle class there. In addition, services exports, particularly in education, should provide additional support for the economy.
Important information
Any references to specific securities should not be taken as recommendations and may not represent actual holdings in the portfolio at the time of this viewing.
Indices:
The Australian All Ordinaries Index has moved up increasing +1.5% since closing last Friday to 02:00 pm today.
The rest of the world as measured by the MSCI index increased +1.9% in A$ from closing last Friday to end of trade Thursday.
Have a good weekend,
The Team at IPS
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