Transcription of Finance News Network interview with UBS Investment Bank Chief Economist Australasia, Scott Haslem Lelde Smits: Hello, I’m Lelde Smits for the Finance News Network and joining me from UBS is its Chief Economist, Scott Haslem. Scott, welcome to FNN.
Scott Haslem: Thank you.
Lelde Smits: The Australian share market is continuing to climb on the back of Wall Street’s record run, but Scott, how much steam do you think is left in this rally?
Scott Haslem:I think one thing we’re seeing at the moment is a lot of the risks we faced last year appear to have diminished; China hard landing, the US fiscal cliff, risks of a break up in Europe, so that’s helping the market move higher as risk comes down. The economic data is looking a lot better as well, broadly across the global economy. So a combination of lower risks, better data is continuing to push the market higher. We’re tending to think the market can go a little bit higher from here.
Lelde Smits: Now you’ve just noted global problems appear to have diminished but have
not disappeared. Which spot fires do you think threaten to reignite?
Scott Haslem: Well I think there are still issues in Europe, that’s the one area that worries us the most. We still have Spain and how they’re going to approach the ECB’s OMT [Outright Monetary Transactions], we think they need to issue more debt than the market realises so that could be a spot fire that comes up. We still need to negotiate through the sequester in the US, that’s another spot fire. So there are these issues of populist politics, trade wars and there’s all these things that could come up across the course of the year. But our judgement is that these are more manageable than some of the risks the market faced last year.
Lelde Smits: Now as someone who has worked for the Reserve Bank of Australia for seven years do you believe the current cash rate of 3 per cent is appropriate and where do you see rates trending this year?
Scott Haslem: I was certainly quite worried last year and I certainly think we needed to cut the interest rate down to 3 per cent, and had we not got the interest rate down to 3 per cent I’d be quite worried about the outlook from now. But I think 3 per cent is the right rate for where we are today, I think we’re starting to see the domestic economy lift and I think rates are going to remain on hold for all of this year.
Lelde Smits: Now Europe’s debt crisis really chipped into confidence last year but Commonwealth Bank of Australia’s
(ASX:CBA) stock has just soared through a record high of $70.00. How do you see the financial sector faring this year?
Scott Haslem: I think one of the things we’ve seen over the next couple of years post the global financial crisis, is a real negative attitude toward credit growth amongst households and businesses; noone’s really wanted to borrow money and indeed banks have been quite un-excited about lending to particular sectors of the economy. I think as we move forward now, we’ve still got very good deposit growth in Australia, the economy’s looking a little bit better, credit growth’s pretty subdued. I think we’re likely to see a little more top line growth in credit and lending across the course of the year, we’re certainly not returning to the double digit days but I think we’ll see a little bit more top line growth in revenues for the financial sector.
Lelde Smits: Now Scott as you mentioned,fears of a hard landing in China last year really weighed heavily on the mining sector, but which commodities do you think could fuel a pick up this year or perhaps be poised for weakness?
Scott Haslem: Our view has been that post the Chinese new-year that economic activity in China was starting to pick up. We can see the total social financing and the lending data in China has been quite strong, property is starting to improve. So if we do see a continuation of that strength and that build in China we’d expect to see a little bit more demand for iron ore coming through so we are looking for a little bit of upward pressure in prices in the very near term. But we do look out into the second half of this year and the mining companies are going to provide a lot more supply of these commodities. So we’ve got a bit of a short term squeeze in commodities but we think they’ll end the year much more around where they are or even lower.
Lelde Smits: As the peak of the resources investment boom approaches and investment starts to tip into sectors outside of mining, which sectors do you believe are best positioned to benefit from this rebalancing?
Scott Haslem: Well one thing we’ve seen- well we’ve seen a couple of things over the last couple of weeks - and that is that the investment intentions for the non-mining part of our economy- whilst they’re pretty soft near-term- have picked up quite a bit out into ‘13/’14. So there is a broad range of sectors that are suggesting they’re going to do a little bit more investment over the next couple of years. That’s not manufacturers, but outside of manufacturers and miners there does seem to be more interest in investing over the next year or so.
Lelde Smits: Finally Scott, with investors enjoying a brighter outlook this year which asset classes are set to lead an uptick in momentum?
Scott Haslem: We certainly still like risk, and we’re still overweight equities, we’re underweight bonds. We have been trimming the allocation to equities a little bit, we’re still overweight- particularly world equities, a little bit overweight Australian equities, and we think credit spreads have tightened a lot now so we’re much more neutral on credit, and we think bond yields ultimately are going to rise over the course of the next 18 months.
Lelde Smits: Scott Haslem, thank you for your outlook today.
Scott Haslem: Thank you.
Ends
