Transcript of Finance News Network interview with National Australia Bank Limited (ASX:NAB) Group Chief Economist, Alan OsterLelde Smits: Hello, I’m Lelde Smits for the Finance News Network and joining me is National Australia Bank Limited's
(ASX:NAB) Group Chief Economist, Alan Oster. Alan, welcome to Sydney and to FNN.
Alan Oster: Thankyou.
Lelde Smits: The Australian share market has just booked its best February return in almost two decades, lifting 4.6 per cent last month. What do you believe are the main factors buoying investor confidence?
Alan Oster: I think when you look at the Australian market is very much following global markets, in fact it’s about 20 per cent lower than where the US market is so you could probably say there’s still more to go.
I think fundamentally what’s driving it is people have previously had a view that the world was going to have another GFC [Global Financial Crisis]. That’s sort of disappeared, and so what you’ve had is not a huge recovery in economic activity but a removal of fear.
Lelde Smits: And with the key index now up almost 10 per cent since the start of the year, what number do you put on the S&P/ASX 200 index by year’s end?
Alan Oster: Well we thought it would be roughly where it is now by year’s end, so I suppose we’d probably say 5 per cent up from where we are now.
Lelde Smits:So what you’re saying is, the rally still has further to go?
Alan Oster: Yes, but not much.
Lelde Smits: And what sectors or equities are looking attractive to you and best positioned to capitalise from this surge in investor confidence?
Alan Oster: Well I’m not an actual equity analyst so I suppose when you’re looking at the economy generally, I would say things like the banks, the big resource stocks, those general sort of blue chip, I think is basically where you would want to be.
Lelde Smits: Ok Alan now, with reporting season just having wrapped up, how did company earnings compare to your expectations?
Alan Oster: I think if anything company earnings were slightly better than what people expected. Again, I emphasise slightly.
Lelde Smits: The mining sector’s results were marked by a series of write-downs following last year’s pressure on commodity prices. What’s your outlook for resources profitability this year?
Alan Oster: I think if you’re talking about coking coal and iron ore it’s fine. I think if you’re talking about thermal coal, that’s a real problem because basically prices have come down. You’ve got a lot of new gas coming onto the market and that’s an alternative for thermal coal and I think there the outlook is much more pessimistic.
Lelde Smits: Amid local market gains and rising investor confidence the Reserve Bank of Australia has just opted to keep the key cash rate on hold at 3 per cent. Alan, where do you see the key cash rate moving this year?
Alan Oster: I think basically rates are on hold for a couple of months and then I see another rate cut in the middle of the year, and most likely another one after that so we still think something like 50 basis points. And, that’s because we see the economy slowing, we see unemployment going up, and basically the Reserve Bank is about the only game in town in terms of an ability to actually strengthen the Australian economy as we go forward.
Lelde Smits: So the gains we’re seeing on the ASX currently do not reflect the current state of the economy?
Alan Oster: If you were to say to me how has the Australian economy gone in the last six months I’d say it’s slowed, which is not normally lining up with 20 or 30 per cent increases in equities.
So I think it’s more to do with global economy or global confidence, it’s got not a lot to do with the Australian local market.
Lelde Smits: Now looking abroad – On Wall Street the Dow Jones Industrial Average just hit a record high close in New York. Is this a sign the US economy is improving or could it be a sign a bubble is growing in capital markets?
Alan Oster: I don’t think it’s a bubble, but I think really what’s happened is you’ve taken five years to get back to where we started from, essentially is a better way to think about it.
The US economy I think, in an underlying sense, is growing ok. There are still issues about debt, we’ve still got sequesters just come in; we’ve still got the debt ceiling. I think the negative GDP [Gross Domestic Product] we had in the last quarter of last year was a one-off, but think of the US economy with a two in front of it, two and a bit, and that’s roughly where I think they are.
Lelde Smits: With US budget negotiations continuing and the future of Europe’s debt situation in question amid political transitions where should Australian investors be looking for direction?
Alan Oster: I think you basically should expect that the Australian currency will stay high, so if you’re after the currency effects. If I was them and I’m not an investor or analyst, I think I would just basically keep to the local market I think that’s fairly strong- of the economies around the world it’s one of the strongest. I’m still very depressed about Europe and I think maybe emerging markets- particularly associated with China and Asia I think are doing very well.
Lelde Smits: Alan Oster, thank you so much for your outlook today.
Alan Oster: Thank you.
Ends
