A look into 2017 for Australian Investors

A look into 2017 for Australian Investors

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A look into 2017 for Australian investors as at December 2016

2017 Key Takeaways – Australia’s capacity hangover & Trump uncertainty

  • Australia’s economy has significant excess capacity and lacks the momentum seen in the rest-of-the-world
  • Australia’s economy is lacking income impetus > export income, investment income, household income & corporate profit momentum (excluding resources) is weak
  • Australia is unlikely to benefit under a Trump administration
  • The Australian Dollar WILL FALL given its weaker growth fundamentals.
  • Investment market uncertainty will rise under Trump given his inexperience in political office and the absence of many fully-formed policies
  • Investment market volatility will rise as stimulus shifts from monetary instruments to fiscal instruments – US interest rates will rise faster, and the Federal Reserve ‘Put’ will disappear
  • The bull-market in global bonds is over and bonds will now begin a secular bear-market – risk-free returns will rise ensuring investors demand higher returns from riskier assets

What are the key Trump policies?

  • Fiscal expansion – Committee for Responsible Government see cumulative spending in the Federal Deficit of ~$5tln over 10 years
  • Infrastructure spending plans – seen to be $500bn to $1tln > policy is currently light on detail and centred on tax-incentives for new private infrastructure.

US debt to GDP at 75% currently to rise to 105% in 10 years (Australia currently   44%)

  • Lighter government regulation – specific reference to banking regulation and healthcare (examples Dodd-Frank and Affordable Care Act)
  • Tax cuts & code simplification – corporate tax cut from 35% to 15% and personal income tax ‘cuts’ and consolidation of tax brackets (House plan is a cut to 25%; note too Trump’s lowest tax-rate of 12% is above the current 10% minimum)
  • Tax cuts & code simplification (2) – one-off amnesty for repatriation of corporate cash held offshore at 10% tax-rate
  • Immigration – restricting visa’s, enforce existing immigration laws, deport ‘criminal’ illegal immigrants

What are the perceived implications of key Trump policies?

  • Rising inflation & wage growth – fiscal expansion and a focus on domestic employment > U.S. wage growth is at a 7 year high already and the US economy is at full-employment
  • Rising U.S. interest rates & a steeper bond curve > shift from monetary policy to fiscal policy
  • Rising protectionism > U.S. policies will likely promote trade responses from China and the European Union
  • Negative for Emerging Market economies > EM countries tend to be net exporters
  • TRUMP POLICY SEEN AS BEING CONTRARIAN TO CURRENT INVESTMENT MARKET THINKING > OLD ECONOMY VS NEW ECONOMY > LABOUR VS CAPITAL > LOCAL VS GLOBAL > SMALL BUSINESS VS BIG BUSINESS > ‘DEPLORABLES VS ADORABLES’
  • TIMING OF POLICY IMPACT IS A VITAL CONSIDERATION.

Australia – levered & lacking economic catalysts

  • Australian interest costs will rise > Australia is a current account deficit country so finances much of its excess spending from foreign creditors > bond yield rises will raise funding costs for banks and the like > BIG RISK IS AAA RATING DOWNGRADE.
  • AUD is highly likely to fall > excess domestic capacity remains Australia’s single biggest problem and is unlikely to be impacted by higher U.S domestic growth > rising U.S. interest rates reduce attraction of AUD cash.
  • Household incomes remain pressured > wage growth is at a 20+ year-low > higher funding costs will put upward pressure on domestic Australian mortgages > will likely keep pressure on the RBA to keep rates low or lower them further > falling AUD will initially raise domestic living costs.
  • Australia is unlikely to be materially benefited from a Trump fiscal expansion > United States represents ~8% of Australian trade, as against ~32% for China
  • AUSTRALIAN HOUSEHOLDS ARE ASSET-RICH, CASH-FLOW POOR. THERE ARE NO SIGNS OF CASH-FLOW RESPITE IN 2017. FALLING AUD COULD PRECIPITATE 2018 ECONOMIC REBOUND.

Economic ‘Surprise’ – Australia’s (white) economic momentum not following the Rest-of-World (red)

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Consumer Confidence – Australia’s (green) economy lacks genuine momentum in spite of household wealth creation > recovery is hollow relative to the United States (red)

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NAB Business Confidence – Trading Conditions (sub-index) > rolling over

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Australian Building Approvals – 2017 construction a worry

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Australian Construction Outlook – Private House Approvals (red) & New Flat/Apartments Approvals (white) falling off a cliff

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Excess Capacity – Workforce not working hard enough > Employment Participation Rate at 10-year low

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Excess Capacity – Unemployment rate falling (green) > flatters to deceive > ‘Underemployment’ (white) is rising

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Housing soon to become a negative catalyst – Home Buyers increasingly see little value > clearance rates are ‘peak’

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House price surge – centered on east-coast metro > Sydney 4-year growth +12% annualized > 60% absolute.

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Household Debt to GDP – Australia (green) & United States (red) > post  GFC, Australian households re-levered.

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Australian Household debt – a problem if house prices fall.

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Disclaimer:
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

 

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By | 2017-06-16T15:16:14+00:00 December 8th, 2016|Economy, Market Summary|0 Comments

About the Author:

As the Chief Investment Officer (CIO) for Prime Financial Group, I work closely with the national advisory team, high net worth individuals, family groups and Prime’s broader accounting network to provide considered and pro-active investment advice.