Positive outlook for equities

Funds Management

by Carolyn Herbert

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Transcription of Finance News Network Interview with Ausbil Chief Economist, Jim Chronis
Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network, and joining me from Ausbil to provide an update on the economic environment and its implications for the local market is Chief Economist, Jim Chronis. Jim, welcome to FNN.
Jim Chronis: Thanks for having me.
Carolyn Herbert: Can you start by giving us an update on how the economy is performing?
Jim Chronis: We at Ausbil have been expecting the economy for 2015, to be below trend. Trend is at 3.25 per cent; the economy is now running at a pace of 2.5 per cent. The drivers of growth to date have been private consumption, dwelling investment, a low level of unemployment, which is supporting retail sales. Unfortunately, private business investment hasn’t picked up to the degree that we would desire, at this point of the cycle. So the economy will continue to grow at a below trend pace.
Carolyn Herbert: What impact is the lower Aussie dollar having on business demand, manufacturing and the export sector?
Jim Chronis: In the last 12 months, the Australian dollar against the United States dollar, has depreciated by 20 per cent. And on a trade weighted index that has fallen by 15 per cent. The first area that you will see the benefits of the decline in the Australian dollar is the business surveys. So the NAB Business Survey covering conditions and confidence for most of 2015 has risen, and will continue to stay positive.
The second area that we’re seeing the immediate benefits of the lower dollar is in those sectors that are competing, in the international environment. That includes tourism, education and business services; they’re all seeing material increases in output for those sectors. And the unsung hero for the Australian economy is that services as a share of our exports, is actually rising at a rapid rate since 2013, on the back of the fall in the Australian dollar. So we are becoming competitive on the world stage.
Carolyn Herbert: With the RBA taking a wait and see approach with respect to further rate cuts. When do you think it’s going to move again?
Jim Chronis: The hurdle for further rate cuts is high. For 2015 at the beginning of this year, we at Ausbil were expecting two rate cuts from 2.5 to two per cent, on the basis of non-mining investment not picking up. That’s happened. Going forward, the currency has depreciated, it’s a level of 72 cents against the US dollar. It’s at a level that the Reserve Bank is comfortable with and you are now starting to see, export sensitive sectors respond to the lower Australian dollar.
So the cash rate can remain at this level for lower and for longer, until December 2016. If we get a further deterioration in non-mining investment, which leads to a lower level of GDP, then the Reserve Bank has room to lower rates. But the hurdle is very, very high for them to cut.
Carolyn Herbert: Taking a look overseas now. What would you say are the major international macro economic factors that are affecting the outlook for markets, at the moment?
Jim Chronis: Our outlook at Ausbil is one of optimism and continuing growth for the world economy. By region, the United States is recovering and recovering at a very, very rapid and robust pace. It’s achieved its goals of full employment. Inflation’s coming back to two per cent and the US Federal Reserve is ready to tighten rates, in the December quarter of this year. Europe is recovering, last year it looked dreadful, this year it’s recovering and recovering at a good pace of 1.5 to two per cent.
China is in transition, growth rates of eight or nine per cent will not return. The economy will transition from reliance on manufacturing and heavy industry, and commodity intensive sectors, to more services. So we’re talking growth rates of seven that will then go down to six that will then go down to five, but we’re talking this happening over the medium term, not immediately. So that’s a positive environment to which the Australian economy through its export is exposed to, and will derive a benefit.
Carolyn Herbert: Finally Jim. How do you expect local markets to react if the Fed decides not to hike rates in September?
Jim Chronis: The US Federal Reserve for this year has telegraphed, well in advance that they want to tighten rates. And in the last few weeks, we’ve had members of the FOMC (Federal Open Market Committee), including the Chairperson Janet Yellen, amplifying their intentions to tighten rates. We at Ausbil believe rates will be hiked by the December quarter of this year, by 25 basis points.
The market, based on the information that was released last week, has moved from a September tightening to a December tightening. The date of the tightening is in our opinion, not relevant. What is relevant is when they do commence to tighten rates, the final cash rate that the Federal Reserve will take the Fed funds rate to, will be less than what is currently being priced into the markets. And it will be conducted over a longer timeframe, than what is currently expected. So if they don’t tighten rates in September, you’ll see a relief rally in all equity markets.
Carolyn Herbert: Jim Chronis, thank you for your insights.
Jim Chronis: It was a pleasure.