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)
Consumer Confidence – Australia’s (green) economy lacks genuine momentum in spite of household wealth creation > recovery is hollow relative to the United States (red)
NAB Business Confidence – Trading Conditions (sub-index) > rolling over
Australian Building Approvals – 2017 construction a worry
Australian Construction Outlook – Private House Approvals (red) & New Flat/Apartments Approvals (white) falling off a cliff
Excess Capacity – Workforce not working hard enough > Employment Participation Rate at 10-year low
Excess Capacity – Unemployment rate falling (green) > flatters to deceive > ‘Underemployment’ (white) is rising
Housing soon to become a negative catalyst – Home Buyers increasingly see little value > clearance rates are ‘peak’
House price surge – centered on east-coast metro > Sydney 4-year growth +12% annualized > 60% absolute.
Household Debt to GDP – Australia (green) & United States (red) > post GFC, Australian households re-levered.
Australian Household debt – a problem if house prices fall.
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