Transcription of Finance News Network Interview with 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 from AMP Capital Investors is Head of Investment Strategy and Chief Economist, Dr Shane Oliver. Shane, welcome back to FNN and happy New Year.
Shane Oliver: Thank you and I hope you have a great New Year too.
Lelde Smits: The S&P/ASX 200 recovered some of 2011’s losses in 2012. What do you think have been some of the key themes in that period?
Shane Oliver: I think as it turned out 2012 was a pretty good year for investors despite a lot of worries. We had all the worries about Europe, renewed worries about a double dip in the US and of course the China slowdown. So all of those things weighed on investors and then of course we had concerns about Australian economic growth as well as the mining sector starting to slow down.
But against all of that we saw quite decisive action in Europe- well more decisive action than we’re used to- trying to settle the European crisis down. So yes we had a recession in Europe, but it wasn’t a very deep one and there’s signs that it might be starting to fade a little bit. We’ve also seen continued growth in the US, signs that China seems to be bottoming, and then of course in Australia we’ve seen big interest rate cuts. So all of those things I think have helped share markets to record positive and decent gains.
Lelde Smits: Ok Shane and where do you expect the key index will trade over 2013?
Shane Oliver: By the end of the year I see the ASX 200 pushing up to around the 5,000 level providing another year of pretty good returns for investors, obviously a few bumps along the way- there’s still issues in Europe and the US and so on- but I think by and large we’ll see another pretty good year for markets.
Lelde Smits: So which sectors can we expect to drive those gains?
Shane Oliver: The last year saw a mix of defensive and high yield plays doing well. The year ahead I think we’ll still see the high yield players doing pretty well because investors when they come into the market will be wanting a degree of security and obviously high yield stocks provide that; like the banks, the telco’s and so on, those stocks will do quite well but by the same token I think some of the cyclical laggards from 2012 will do pretty well in the year ahead. For example materials stocks as the China recovery comes through, that’ll underpin gains in resources stocks, energy plays and consumer discretionary stocks I think will see a bounce as people start to spend a little bit more on the back of lower interest rates.
Lelde Smits: Interest rates are now at a GFC [Global Financial Crisis] low of 3 per cent, Where do you expect the key cash rate will move in 2013 and how do you expect this will impact market movements?
Shane Oliver: My feeling is that the Reserve Bank’s job isn’t done yet- they will need to cut the cash rate again- probably down to 2.5 per cent. There is a risk it could go a little bit below that, down towards 2 per cent but my base case is a full 2 to around 2.5 per cent. That will be necessary to get the standard variable mortgage rate down to around 6 per cent, discount rates will obviously also be below that but I think the Australian household sector and the Australian corporate sector still needs lower interest rates which in turn I think will ultimately add to confidence that we still start to see a recovery coming through.
Lelde Smits: Generally when rates are cut you would expect the currency to follow but it hasn’t, instead remaining stubbornly high. Where would you expect the Australian dollar to trade 2013?
Shane Oliver: My feeling is that we’ve probably seen the best in terms of the Aussie dollar; that high point of $1.10 that we got to in 2011, I think will probably prove to be the high. For the next year I think a range-bound environment will probably prevail but with a gentle downtrend, so we’ll probably end the year around parity.
Lelde Smits: Now Shane as you mentioned last year investors worried about European debt, the US economy and China’s growth. What do you think threatens to un-nerve investor sentiment this year?
Shane Oliver: Bond yields globally have fallen to very, very low levels and in Australia the risk is that as the global environment picks up and global growth picks up, that bond yields will start to rise and at times that can cause a bit of uncertainty for investors as we start to see the interest rate structure in the economy- globally, not in Australia but globally- start to back up a little bit.
Lelde Smits: And where do you see global growth trending in 2013?
Shane Oliver: Well through 2012 global growth on our measures- and there is lots of different measures on this- slowed to around 3 per cent. That’s a little bit below the 4 per cent pace we saw in the previous two years. For 2013, in other words the year ahead, we see growth picking up probably to about 3.25 per cent. Obviously Europe’s still remaining in recession but that recession will be starting to fade particularly through the second half of the year, US growth picking up to about 2.5 per cent helped by housing recovery, ongoing boom in the energy sector in the US of course, and of course Chinese growth sort of bottoming out and starting to edge up a little bit; sort of in a zone around 7.5-8 per cent.
Lelde Smits: And on the local front how does that forecast compare with expectations for Australia’s growth?
Shane Oliver: In Australia I think in the very short term we’re in for a tougher ride, Australian growth is probably going to head down to possibly a low of around 2 per cent. It’ll probably end the year though with growth of around 2.5 per cent. So growth coming down below trend in Australia- a bit subpar- that’s on the back of I think excessively high interest rates over the last few years and the dampening impact of the Aussie dollar, and of course as the mining sector slows down. But as we go through the year we should see more signs that areas like housing construction, consumer spending; particularly retailing, tourism- should start to pick up.
Lelde Smits: So considering all these forecasts Shane, how would you advise that investors position their portfolio in 2013?
Shane Oliver: Well my feeling is that we’re coming into a pickup in global growth and that as we go through the year Australian growth will start to pick up as well. Against that backdrop I think, yes, there’s a strong case to maintain an exposure to yield players- telco’s and banks for example- but I think there’s also a strong case to start edging towards resources stocks and I think resources stocks could be the big surprise of the next 12 months.
Lelde Smits: Shane Oliver, thank you so much for your time and forecasts today.
Shane Oliver: Thank you, my pleasure.
Ends
