AUD & ASX stock market outlook 2014


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 very much, I hope you had a great New Year too. 
Lelde Smits: A year ago you told me you saw the ASX 200 pushing up toward the 5,000 level by the end of 2013 and that is exactly what happened. So Shane, what do you see for the year ahead and where do you see the key ASX 200 index sitting by the end of 2014?
Shane Oliver: Well the bottom line is I see further gains in share markets over the course of the year ahead, and there is several reasons for that. Fair enough, the market is not as cheap as it was a year ago but against that, my feeling is that the Australian economy will start to pick up pace. We are already seeing that in the housing sector and I think as that flows through you’ll see retailing start to pick up as well and eventually investment outside of the mining sector. 
So I see growth picking up. That in turn I think will drive stronger profits. At the same time we’re going to have very very low interest rates, both globally and in Australia. And, the combination of all those things I think will push the share market higher – probably up to around 5,800 on the ASX 200.  
Lelde Smits: You mention low interest rates - You told me at the beginning of 2013 you saw the key cash rate moving down to a record low of 2.5 per cent, and again you were right on the mark. So Shane, where do you see the key cash rate moving in 2014?
Shane Oliver: I think the Reserve Bank will leave interest rates right on hold through the course of the year with possible a rate hike or two towards the end of the year. So, by the end of the year we’re looking at the cash rate maybe around 3 per cent. So, on hold – 2.5 per cent for the bulk of the year, then a rise as we come to the end of the year.  
Lelde Smits: The Australian dollar remained stubbornly high throughout last year. What do you think the local currency’s fair value is and how long will it take for it to get there?
Shane Oliver: Well I guess in an environment of strongly rising commodity prices and a strongly performing Australian economy – as we saw most of last decade – it was appropriate for the Australian dollar to go higher. 
Now we have a situation where commodity prices aren’t as strong anymore and the trend if anything has been a bit down. And, on top of that the Australian economy hasn’t been doing as well. And, that all points to the need for a lower Australian dollar. 
So we have seen it come down a bit. I think we’re going to see more downside over the course of the next twelve months – probably taking it down to around $US0.86 by the end of the year. But fair value on my measures is about $US0.80. So bottom line is we’ve still got a fair way to go before we can say that the fall in the Aussie dollar is over. 
Lelde Smits: And should the Aussie dollar fall as you expect which sectors could bear the brunt of the pain and which may get a boost?
Shane Oliver: The big performers over the last few years have been particularly the high yield parts of the market, the banks, and you go back a while ago – Telstra Corporation Limited (ASX:TLS), telcos, utilities and so on. The past year’s been a bit more messy, 2013 was a bit more messy. 
My feeling is that as we go through the course of the next year a lot of the focus will shift to the relative underperformers. Particularly I’m thinking of resources stocks - both mining and energy stocks – industrials, so we’re coming into a phase where the deep cyclicals will really start to outperforms as the cyclical backdrop globally and then eventually in Australian starts to pick up. 
Lelde Smits: So Shane, what are the biggest risks to watch out for in the year ahead?
Shane Oliver: My feeling is that the biggest risk is probably, what we’re also watching over 2013, and that is after a massive, massive rally in bond markets - where bond yields where pushed under very low levels - that at some point investors say, ‘I can’t see the returns in bonds anymore’, they pile out of bond funds, particularly sovereign bond funds and go into other investments. And, in the process of piling out that causes a sharp upwards movement in bond yields – threatening global growth and then maybe the share market. So I think that’s the biggest risk. 
Lelde Smits: Which assets are you overweight or underweight?
Shane Oliver: Right now I think the main opportunities are in international shares. A decade ago I thought it was Australian shares but now I think we’re in an environment where traditional international markets like the US, Europe, Japan are looking a lot more attractive. And, that’s where I see continued strong gains and we’re actually overweight in our funds international shares. 
Australian shares we’ve got a sort of a neutral to mild overweight in. We see gains there but they may be relative underperformers compared to global shares. We also like share markets in North Asia, the Chinese share markets, always hard to tell when that one is going to turn around. But, over all the Chinese share market looks pretty good. And, you’ve got a bunch of other markets in North Asia, such as the Japanese market, good recovery story coming through there and of course Korean shares, which remain very cheap. 
So apart from those share markets the other area which we’ve got fairly solid positions are in commercial property. I think we’ll see pretty continued good gains out of that sector, and, also infrastructure assets. 
Lelde Smits: Shane Oliver, thank you so much for another yearly outlook and all the best for the year ahead.
Shane Oliver: My pleasure, hope you have a great year as well. Thank you.