Transcript of Finance News Network Interview with Macquarie Group Limited (ASX:MQG) Global Head of Economics, Richard Gibbs Lelde Smits: Richard, welcome back to FNN.
Richard Gibbs: My pleasure.
Lelde Smits: The first quarter of 2014 has seen Australian markets trend higher but where do you see the benchmark index ending this year?
Richard Gibbs: We certainly see that it’s probably got another three to five per cent increase in it this year. Certainly, the earnings period that’s just past us has been more favourable than was first expected although there’s been quite some disparity there. Certainly the momentum is still for the upside in relation to the index and the performance.
Lelde Smits: 2014 has already been marked by fears over emerging markets, US tapering, some disappointing Chinese economic data and rising political tensions in Ukraine and Russia. Which factors do you think will threaten to put the greatest downward pressure on the ASX?
Richard Gibbs: Certainly, how China plays out with its reform package and its financial sector reforms is very important for Australia. Really, the Ukraine and the geo-political issues over there, not so great an impact though we need to watch the impact on gas prices in relation to the Ukraine’s pivotal role with Russian gas supplies.
Lelde Smits: Turning to the RBA (Reserve Bank of Australia) now, it has just kept rates on hold at a record low of 2.5 per cent for its six straight meeting. When do you think we’ll see the next move and what will it be?
Richard Gibbs: We’ve actually recently moved to remove one of our rate cuts that we had in there for this year, so we don’t expect that there will be another rate cut, if there is another rate cut, until the second half of this year and that will be in response to some further deterioration in the labour market and, quite possibly, some extra fiscal drag coming through in the May budget.
Lelde Smits: The RBA has made no secret of its views that the Australian dollar is uncomfortably high. What’s your fair value for the local currency and forecast for its movements?
Richard Gibbs: Fair value is around $US0.85 for the currency which I think is probably the same as the Reserve Bank but we think the Australian dollar is very good at undershooting and overshooting so our undershoot forecast for this year is $US0.82 by the end of 2014.
Lelde Smits: Macquarie Group is Australia’s largest listed investment bank and its most recent outlook noted subdued client activity for some capital markets. What do you believe are the economic factors underpinning this outlook?
Richard Gibbs: Well there’s a big economic financial factor I suppose and that is the lack of credit growth in the global economy and in the Australian economy and the fact that corporates in particular are sitting on quite large war chests of cash. So their unwillingness to invest, so the propensity to invest in terms of the macro-economics, is really one of the restraining factors.
Lelde Smits: Separately Macquarie took the lead for Australian equity underwriters last year for the first time since 2004 and scored roles on some of the year’s largest IPOs [Initial Public Offerings]. So Richard, what’s your outlook for Australia’s IPO market in 2014?
Richard Gibbs: Look, I think it’s going to be reasonably buoyant and where we’ve seen that growth of course has been on the traded services side in relation to the companies that are trade exposed on the services side particularly in education services, health care and the like. Those sectors are set to do well in Australia in 2014 and I think that is going to usher in further IPOs in that area.
Lelde Smits: So Richard for Australian investors what’s your best piece of advice to preserve and grow capital this year and beyond?
Richard Gibbs: I think they’ve really got to look for value in relation to equities. There are a number of industrial companies now that are trading at very, very expensive price earnings multiples, in excess of twenty times. That means they are expensive stocks to buy. You have to think about just where that earnings growth is going to come from. So, I think we’ve got to continue to look outwards and have a nice diversification in relation to asset holdings between domestic assets and, of course, those offshore international assets which have a far bigger universe to select from.
Lelde Smits: Richard Gibbs, thank you so much for your outlook today.
Richard Gibbs: My pleasure.
Ends
