Transcription of Finance News Network interview with Morgan Stanley Chief Economist, Gerard Minack Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Morgan Stanley is its Chief Economist, Gerard Minack. Gerard, welcome to FNN.
Gerard Minack: You’re welcome.
Lelde Smits: While you have a reputation for being one of the biggest bears on the Australian economics’ scene the Australian share markethas had an unprecedented run and is up about 20 per cent over the year. Where do you see the ASX trading and ending this year?
Gerard Minack: Well I think we’ve run pretty hard and I don’t think the world is going back to normal so I think there’s a risk that we get a correction globally, which would filter through to here. I’ve got more concerns about next year then this year, both domestically and globally.
Lelde Smits: And what is most concerning to you next year?
Gerard Minack: You know, this year looks OK because central banks have responded to a crisis that was caused by interest rates that were too low; and we have an excess build up of debt, and we were mispricing risk. The central bank response has been to run even lower rates leading to a new build up in debt and a new round of mispriced risk. When this cycle ends - I don’t think it will be this year- but when it does end I think it’ll be an omnishambles, so I’m still quite bearish on a two or three year outlook.
Lelde Smits: So how do you see these risks unfolding in Australia?
Gerard Minack: In Australia the risks I see are much more a 2014-2015 story; and the risk there is what’s going to replace this massive boom in mining capex [capital expenditure]. On our numbers it’s going to get to almost 10 per cent of GDP [gross domestic product]; were that to fall precipitously that would cause a lot of difficulty for the economy, but that’s not an issue for this year- the capex is going to hold up. So the bottom line is, look there’ll be a correction, we’ll probably finish up for the year which is nice; I just wouldn’t extrapolate the extreme gains of the last three months and think that’s going to continue.
Lelde Smits: Now over seas the Dow Jones index has just soared to record highs on Wall Street despite lingering concerns about US budget talks. So Gerard how long can market optimism disguise the balance between US spending and revenue?
Gerard Minack: We can’t wait for much longer. What we’ve had is an outcome on those budget talks in the US and they weren’t pretty, clearly. But we did see quite severe fiscal tightening implemented. On our numbers they will be tightening fiscal policy by about 1.75 points of GDP, and that’s one of the most severe fiscal tightening(s) we’ve seen in the last 50 years.
So we do think it will knock around US growth, we don’t expect a recession, but to the extent that markets have been rallying on this great combination of decent macro data and very low interest rates; the data may not stay so magnificent over the next three months.
Lelde Smits: So could you put a date on when you expect America’s monetary policy to tighten?
Gerard Minack: I’m telling people I’ll be retired before they tighten. Mr Bernanke’s told us that he won’t tighten until the US unemployment rate gets to about 6.5 per cent. Most plausible forecasts suggest that won’t happen until late 2014 or 2015.
Lelde Smits: Closer to home the Reserve Bank of Australia has predicted Australia’s mining investment boom will peak this year. Would you agree?
Gerard Minack: This is the year that’s close to the top; the big question is how quickly it tapers off next year. Yeah, I agree with that.
Lelde Smits: Despite concerns of a China slowdown last year, China’s leaders have recently pledged a growth target of 7.5 per cent this year. Is there a chance the correction in the mining sector may have already occurred and we could be in for some upside this year?
Gerard Minack: I think part of the problem for the miners now is not just that demand’s been looking a little soft last year- at the margin it’s picking up. The bigger problem is that supply is coming on, and I think that’s why we’ve not seen the response in commodity prices and we’re seeing some caution with equity investors and their approach to the big mining companies.
Lelde Smits: So Gerard if the mining boom is peaking or indeed over, which sector do you expect will hold up the Australian economy or market?
Gerard Minack: In a market sense I still think the hunt for yield will drive equities this year so I’ve got a preference for companies that pay a decent yield. But over the medium term I’m fairly cautious on returns; we know with bond yields very low as they are now- not just in Australia but globally- you can’t get much of a return there.
I’d also say that equities are not as cheap as many people make out; valuations look reasonable but the big question for me is whether we can sustain what is - in Australia and globally - very elevated earnings, and I’m not so sure that we can.
So I’m looking for quite low returns in equities over the next three or four years, and to the extent that we had better than average this year, then we’re going to have a payback next year. So that’s the predicament that investors find themselves in at the moment; there’s no really cheap asset where you can buy with confidence and think I will get a decent return on a multi-year view.
Lelde Smits: Gerard Minack, thank you for your insights today.
Gerard Minack: You’re welcome.
ENDS
