Transcription of Finance News Network with Commonwealth Bank of Australia (ASX:CBA) Chief Economist, Michael Blythe
Lelde Smits: Hello, I’m Lelde Smits for the Finance News Network and joining me today from Commonwealth Bank of Australia
(ASX:CBA) for an outlook on the year ahead is its Chief Economist, Michael Blythe. Michael, welcome back to FNN.
Michael Blythe: Thank you.
Lelde Smits: The S&P/ASX 200 index gained 15.1 per cent over 2013, where do you see the benchmark index trading over 2014?
Michael Blythe: We think it is going to move higher. Maybe not quite at the rate that we saw in 2013. Our forecasts have the ASX 200 to about 10 per cent higher at the end of this year, about that sort of 5,750 type number.
Lelde Smits: Which sectors are likely to support these gains and which are at threat of dragging on the broader bourse?
Michael Blythe: I think if you look at what is going to be driving the economy through 2014 it is a lot of those interest rate sectors, that stimulus the Reserve Bank [of Australia] has been pumping in. They are starting to fire up in areas like construction, we think that will flow through to retail.
The other area that we’re watching is going to be those sectors that are exposed to the currency. Obviously the Aussie dollar is a lot lower than it was this time last year, that is taking some of the drag off some of those sort of currency related areas. We would expect to see a better performance there.
What it really means in a bottom line sense is the Aussie dollar, that drop, is now playing the usual sort of buffering job that it does at a time when global incomes are pretty weak. We’re going to get a bigger bang in Australian dollar terms this year because of that lower currency.
Lelde Smits: So Michael where do you see the Australian dollar trading and ending this year?
Michael Blythe: We think the Aussie dollar will end this year at around about $US0.89, not far from where it is today. Now that drop that we saw from $US1.05 this time last year down to $US0.89 now, it was largely in anticipation of that shift in those quantitative easing policies in the rest of the world. One of the ways they’re supposed to work is by putting downward pressure on their currencies, the US dollar in particular. And of course as the US dollar goes down, everybody on the other side of that has gone up, including the Australian dollar.
[With] the process going into reverse we think the US dollar will strengthen and the Aussie dollar will be weaker as a result. But, a lot of that looks to be priced in given where the currency is sitting right now. But certainly the risks do look to be on the downside.
Lelde Smits: As global equity markets rallied in 2013 precious metal prices sank significantly. What do you think is in store for gold and silver this year?
Michael Blythe: I think the big story globally of course has been that extreme monetary accommodation, that quantatative easing as it is called that the major central banks have put in place. It’s encouraged a lot of interest in precious metals in particular.
Well of course we are now seeing the US Federal Reserve start the process of winding back on that stimulus. So some of that support there under precious metal prices we think will actually start to recede as we move through 2014.
Lelde Smits: So what price would you put on the precious metals by year end?
Michael Blythe: So we have gold prices for example dropping back below the $US1,200 mark as we move through this year. Silver prices, we think the current $US20 level is probably around about where we will end up the year as well. That sort of risk focus on those precious metals will recede we think in 2014.
Lelde Smits: Iron ore has seen a soft start to the year with prices hitting five month lows of about $US130 per ounce. What’s your outlook for the steel making commodity?
Michael Blythe: Likewise we think there are some further price drops to come through there. Our commodities team think we’ll see the iron ore price the end of this year at about $US119 per ounce. So, a bit below where we are now but it is very high by any longer run in comparison.
The other thing we need to bear in mind when we’re thinking about it from an Australian perspective what it means for Australian income really depends on the Australian dollar. And, that Aussie dollar, iron ore price and gold price and silver price for that matter will be much better behaved if you like because of the drop in the currency.
Lelde Smits: Michael Blythe, thank you for your insights today.
Michael Blythe: Thank you.
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