Transcription of Finance News Network Interview with Morgans Financial Limited Chief Economist and Director of Strategy, Michael Knox.
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from Morgans Financial Limited is its Chief Economist and Director of Strategy, Michael Knox. Michael, welcome back to Sydney and to FNN.
Michael Knox: It’s great to see you again.
Lelde Smits: Australia’s benchmark index reversed January’s losses in February and is now up about 1 per cent over the year to date. What figure have you put on the S&P/ASX 200 by year’s end?
Michael Knox: By the end of the year we think fair value in this market will have risen to 5,800 points. In the middle of the year we think that fair value is about 5,500 points. So really last week the market had almost fully incorporated our fair value for the middle of the year. So we think it was probably about four months ahead of itself. It was priced on the motto, ‘What could possible go wrong?’ and over the weekend something has gone wrong in Crimea [Ukrainian peninsula].
Lelde Smits: While in Europe attention remains fixed on political tensions between Ukraine and Russia. How is the situation likely to impact global markets?
Michael Knox: What we’ve seen markets do is what they normally do when they’re scared. They sell stocks and they buy bonds and gold, so we saw that. We’ve also seen movements in commodity markets, we’ve seen the wheat price go up and we’ve seen the oil price go up. But we think that both of those commodity market moves were going to happen anyway because we think that brent oil will be higher by the middle of the year and the wheat price will be higher by the middle of the year.
Lelde Smits: Back to the markets, both US and euro zone markets gained more than 4 per cent in February, despite the US Federal Reserve winding back its stimulus measures. What is driving the rally?
Michael Knox: We’re looking at, at least two years of above trend growth. I mean, forecasters say five years of above trend growth. We’ve had flat growth in the US economy since 2008, or below trend growth rate. This year growth should lift from 1.9 per cent last year to 2.7 per cent this year and we should lift to a touch over 3 per cent next year.
The average growth rate in the US economy is only about 2.2 per cent, so we’re going to have terrific years in the US economy this year and next year. And, the stock market is rising, the US stock market is rising, to anticipate that.
Lelde Smits: A sell-off in emerging market assets hit the headlines earlier this year. To what extent do you believe the problems abated or will they come back to bite global markets?
Michael Knox: I think it’s a major problem. I think as we move through the year, particularly in the second half of the year, because the US economy will be so strong, there will be a lot of capital inflow back into the US economy. So, countries that have been running structural budget deficits like India, like Turkey, like South Africa, like Brazil, are going to be in much worse trouble at the end of this year than they were at the end of last year. And, I think what we saw last year was just a curtain raiser for the major price action, particularly in currencies, which we’ll see in the second half of this year.
Lelde Smits: So Michael, how might a potential emerging market crisis impact the gains that you’re forecasting for US markets?
Michael Knox: Well, I think it will still be a good ride but it will make the ride much scarier. Because, many people have put aside this risk of emerging market adjustment, and, I think they’re not taking it seriously enough.
Lelde Smits: Michael Knox, thank you for your insights and outlook today.
Michael Knox: Thank you.
Ends
