8/4/2019 Olivers Insights How Vulnerable is the Australian Economy and Investment Markets

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8/4/2019 Olivers Insights How Vulnerable is the Australian Economy and Investment Markets

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likelytotakeahitintheshorttermfromreducedbusinessandconsumercondence,thelossofsharemarketwealthandrisingunemployment,growthislikelytoreceiveaboostfrommonetaryandpotentiallyscalstimulusthroughnextyear.

ButhowareAustralianassetsplaced?

SharesOurassessmentremainsthatAustraliansharesaregoodvalueforlong-terminvestors(particularlygivengrossedupdividendyieldsareover6%,bondyieldsarejust4.3%andbankdepositratesarenowfallingrapidly).Nevertheless,justbecausesharesaregoodvaluedoesntmeantheyhavebottomed.1However,thestartingpointforrecentweaknessismorefavourablethanitwasin2007:

WhenAustralian(andglobal)sharemarketstoppedin2007,itcameafteralongcyclicalbullmarketwhichhadleftforwardpricetoearnings(forwardP/E)multiplesat15timesforglobalsharesand16timesforAustralianshares.Earlierthisyearwhensharespeaked,theforwardP/Ewasjust12.4timesforglobalsharesand13timesforAustralianshares.Soshareshavecommencedtherecentslumpatrelativelymodestvaluations,implyingmorelimiteddownside.

Thelevelofgearinginthesharemarketisfarlessthanitwasfouryearsagogivenasharpdeclineinmarginlendingandreducedlevelsofcorporategearing.

Thissuggeststhedownsidepotentialforsharesshouldbeless

thanwasthecaseintheGFCwhichsawAustraliansharesfall55%andglobalsharesfall56%.

Commercial propertyCommercialpropertyvaluesfellaround20%over2008and2009,reectingforcedsellingbylistedpropertytrustsinanefforttoreducegearinglevelsandpressureoninvestmentfundstoselldirectpropertyasthefallinsharemarketshadpushedpropertyweightingstoexcessivelevels.However,thereareseveraldifferencesthistimearound.

Listedpropertytrustshavesubstantiallyreducedtheirlevelofgearing.Sotheriskofrenancingproblems,andhenceforcedselling,islow.

Averagecommercialpropertyyieldsarewellupfromtherecordlowsthatprevailedinlate2007.Inlate2007,averagecommercialpropertyyieldswerearound5.9%comparedtobondyieldsofaround6.3%.Nowpropertyyieldsarearound7.1%,comparedtobondyieldsofjust4.3%.Inotherwordscommercialpropertyvaluationsprovideafarmoreattractivebufferthistimearound.

Commercial property yields are much higher relative to bond yieldsthan was the case beore the GFC

Source:REIA,Bloomberg,AMPCapitalInvestors

Sowhilecommercialpropertyisatriskfromslowerspacedemandandrentalgrowth,asharp2008-09stylespikeinpropertyyields(andassociatedlossofvalue)islesslikely.

Residential property

Australianresidentialpropertyhasbeensofteningoverthelastyearonthebackofpooraffordabilityandbuyercaution.Averagehousepricesareoffbyaround2-3%.Furtherweaknessislikelyoverthenextsixtoninemonthsasbuyersremaincautiousinthefaceofeconomicuncertainty,investorsstayawaygivenlowyields(seethepreviouschart)andrisingunemploymentputsupwardpressureonthesupplyofpropertyonthemarket.However,intheabsenceofaserious

recessionitshardtoseepricesfallingmuch(maybeanother5%orso)andfallinginterestrates(andmaybeanotherroundofrsthomeownerboosts)willlikelystarttoresultinrisingpricesfromaroundmidnextyear.

The Australian dollar

TheAustraliandollariscaughtbetweentwoconictingforces.Ontheonehand,adownturnintheglobaleconomythatresultsinasharpfallincommoditypriceswillputmoredownwardpressureontheAustraliandollar.Thisisarguablythekeyriskintheshorttermnowthattheglobalgrowthoutlookhasbecomemuchmoreuncertain.Assuch,afallbelowparitycannotberuledout,particularlyiftheRBAcutsinterestratesasweexpect.

However,againstthistheUSdollar,theeuro,theBritishpoundandeventheJapaneseyenalllooktobeinaracetothebottomonthebackofacombinationoflong-termdebtproblems,morequantitativeeasingandmoreinterestratecuts(inthecaseoftheEuropeanCentralBank).Againstthisbackdrop,investordemandforhedgesagainstongoingweaknessinmajorcurrencieswilllikelyremainstrong.

Goldislikelytoremainakeybeneciary,withUS$2,000anouncesettobebreachedsoonandmuchhigherlevelslikelyovertime.Emergingmarketcurrenciesarealsolikelytobekeybeneciariesbuttheysufferfrominterventiontolimittheirgains.ThisleavesthecommoditycurrenciessuchastheAustraliandollarandtheCanadiandollar,whicharelikelytobenetaslong-termcommoditydemandremainsstrong,andthesedonthavethestructuralproblemsfacedbytheUS,Europe,JapanandtheUK.

WhiletheRBAislikelytostartcuttinginterestratessoon,AustralianinterestratesarelikelytoremainwellaboveUSlevelsandovertimetheimpactislikelytobeswampedbymorequantitativeeasingintheUSwhichhastheeffectofincreasingthesupplyofUSdollars.

Sowhiletheshort-termoutlookfortheA$isuncertain,longerterm,theoutlookislikelytoremainup.

Dr Shane OliverHead o Investment Strategy and Chie EconomistAMP Capital Investors

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1990 1993 1996 1999 2002 2005 2008 2011

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Rental yield on 3bedroom houses

10 year bondyield

GFC

Unlisted commercialproperty yield

1SeeThesharemarketpanic,OliversInsights,#24,August2011.