Transcription of Finance News Network Interview AMP Limited’s (ASX:AMP) AMP Capital Investors Head of Investment Strategy and Chief Economist, Dr Shane Oliver.
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from wealth manager, AMP Limited
(ASX:AMP) is Head of Investment Strategy and Chief Economist, Dr Shane Oliver. Shane, welcome.
Shane Oliver: My pleasure, thank you.
Lelde Smits: The reporting season is approaching, where so you expect to see strength and weakness?
Shane Oliver: Well, I will start with the bad news first and that is, it will be another tough reporting season. We’re probably looking at overall profit growth for the financial year ended June [2012] of around zero, in other words, no profit growth. The weakness there will be concentrated, and this might sound a bit surprising, in the resources sector. Commodity prices have come down, so that’s weighing on resources stocks, so their profits will be off about 10 per cent.
If we move though, finance sector, we’ll probably see growth there of around 3 per cent. Banks sort of doing OK and insurance companies doing fantastically. And then at the other end, you have non-resource industrials, they’re probably going to do about 5 per cent profit growth overall.
But, by and large, a pretty tough reporting season. I guess the good news though is that everyone knows that and that everyone has been talking about a tough reporting season. We’ve seen lots of downgrades. So when the results come out they shouldn’t be a big damper on the market. Hopefully there might be a bit of upside surprise in there.
Lelde Smits: The latest production reports from major miners, BHP Billiton Limited
(ASX:BHP), Rio Tinto Limited
(ASX:RIO) and Fortescue Metals Group Limited
(ASX:FMG), failed to impress the market despite some solid results and each positing higher iron ore production. Shane, how do you explain the subsequent share price falls?
Shane Oliver: Well there is no doubt the production numbers coming out of the miners have been OK. I think what’s weighing on investment sentiment though is this concern that China will collapse, that the global economy will collapse, that will result in more downwards pressure on commodity prices. So, if anything when the production reports came out they were used as a bit of an excuse to sell. I would say though that the mining stocks are getting very, very over-sold though and they are probably due for a bit of a bounce here. But, it’s largely these worries about the global backdrop that are weighing on the mining sector.
Lelde Smits: Now as you mention, the financials and industrials have been performing well of late, where do you expect to see the sectors moving in the current half?
Shane Oliver: I think through the current half you’ll probably see continued gains in the finance sector, pretty good value there. The yields are extremely high. You look at the banks, you’ve got dividend yields of about 8/9 per cent, you add in the franking credits, they’re easily up about 10 per cent or more. So, I see further gains in that sector. And, I think also you’ll see gains in the other the industrial part of the economy, as investors start to anticipate a pick-up in economic activity.
So, the Reserve Bank [of Australia] has been cutting interest rates. That should set the scene for stronger conditions ahead. And then finally, I think the resources sector are way overdue for a recovery. So, I don’t know about the next few months, I think it will remain volatile, but I think by year end most sectors of the share market will look quite a lot stronger.
Lelde Smits: More broadly, let’s look at your forecasts for the S&P/ASX 200 index by year end. Last year the key index lost 14.5 per cent to finish at 4,057. Where do you believe the the S&P/ASX 200 index will finish 2012?
Shane Oliver: Well I must say that, fingers crossed, I’m still pretty optimistic we’ll see the market up closer to the 5,000 level by year end. I’ve got a number on 4,800. You’ve got to treat that with a grain of salt. Economist numbers are often wrong. But I think I’ll be right directionally and we will see further good gains into year end. So, we’ve seen modest gains for the year to date. But, I think as investors get a bit more confident that global growth will continue, we’ve got very easy monetary conditional globally, term deposit rates are coming down, that’s forcing investors to think more beyond bank deposits. And, I think ultimately that will set the scene for much stronger share prices into year end.
Lelde Smits: Another favourite investment for Australians is the housing market but you recently wrote that Australian housing remains chronically weak and overvalued. Now Shane if this is the case, how much further do you think house prices will fall?
Shane Oliver: Well, in the very short term they could come off another 2/3/4 per cent over the next few months. And that’s basically as investors and buyers hold back given the uncertain economic environment. But I think by year end we’ll start to see a recovery coming through in housing. We’ve seen prices already come off, affordability has been improving. I think we’ll see more interest rate cuts from the Reserve Bank and as people gradually start to get more confident that they will keep their job, then I think we will see a recovery starting to come through.
Lelde Smits: And where do you see interest rates moving by year end?
Shane Oliver: Well by year end I see the cash rate, that’s the official rate set by the Reserve Bank, falling to around 3 per cent, maybe 2.75 per cent. And, I think the Reserve will probably do it in 0.25 per cent increments. So that means another two or three more rate cuts by year end.
Lelde Smits: Shane Oliver, thanks for your insights.
Shane Oliver: My pleasure, thank you.
Ends
