Transcription of Finance News Network Interview with Citibank Investment Strategist Toby Lewis
Lelde Smits: Hello, I’m Lelde Smits for the Finance News Network and joining me from Citibank is Investment Strategist Toby Lewis. Toby, welcome to FNN.
Toby Lewis: Good to be here, thank you.
Lelde Smits: Australia’s first quarter growth figures have just printed better than expected. What was your take, is this reason to celebrate?
Toby Lewis: That’s right, there was definitely a surprise to the upside. Unfortunately we don’t think the news is quite as good as the headline number suggests. There was a very strong bias to trade in the mining sector. We saw CAPEX a little bit lower this time, not really a surprise there, but also some fairly robust exports. But, it’s a little bit too early to extrapolate that into the rest of the economy. So, crucially for us we don’t think that the Reserve Bank of Australia (RBA) is going to pay too much head to that and the outlook for interest rates remains pretty much the same.
Lelde Smits: While on The Reserve Bank of Australia, it has yet again decided to keep rates at a record low of 2.5 per cent for its ninth straight meeting. When are you predicting we’ll see the next movement and what will it be?
Toby Lewis: We think it’s probably going to be on the upside, but it will take some time yet. So, our current thinking is that it will be most likely in the second quarter of next year.
Lelde Smits: The Australian dollar has remained stubbornly high despite low rates and softening commodity prices. Where do you see the dollar trending over this year?
Toby Lewis: Trending is perhaps not the right word. We think that there’s a very good chance that it will be very close to the current levels for a considerable period of time. As we said, our outlook for monetary policy is stable both in Australia and in the US and where growth is likely to travel we think that somewhere in the $US0.90 to $US0.95 range is where we could be for some time to come.
Lelde Smits: Falling commodity prices, especially the price of iron ore, has hit the miners hard. When do you think we’re likely to see a pick up or are we set for more falls?
Toby Lewis: We’re slightly more positive than we were earlier this year. So, when we looked at the start of 2014 we were seeing some downwards pressure on commodity prices generally across the board - perhaps with the exception of gold which was quite responsive to the crisis that we saw in the Ukraine. Having said that though, commodity prices have fallen quite a bit, as I’m sure everyone is aware, over the last few months. And, we think they might have fallen a bit too far. Iron ore could rise a little bit from where we are at current levels, back towards $US100 [per tonne] but we don’t see a strong resurgence in commodity prices going forward.
Lelde Smits: So Toby, which sectors or asset classes are you most bullish about in the Australian economy and where could we be likely to see some pain?
Toby Lewis: We think that the resources sector is probably the best place at the moment but it’s really driven from the valuation perspective. There is a lot of bad news around China, a lot of concerns about China. There is still concerns about how commodity prices have fallen and that means that the major miners in particular look reasonably priced compared to the broader market.
But really, the best opportunities that we’re seeing are really overseas at the moment. So, if we look to Europe we have some changes in monetary policy, potentially some easing on the cards from the ECB [European Central Bank]. Also in Japan we are expecting further monetary easing at the end of this year. And the UK in particular is doing very, very well at the moment and surprising to the upside in the growth numbers. And, if we see that continue then that is going to be ultimately very good for the stock market.
Lelde Smits: So are you saying there are more opportunities overseas than in Australia?
Toby Lewis: Current levels in the market are not unattractive. I don’t think that the market is going to run away to the upside. It’s going to continue to deliver strong levels of income though, and that can’t be discounted. So, we see a fairly average year. Our expectation is for the ASX 200 to finish the year around about 5,850 – so some reasonable returns there if you factor in dividends and franking credits as well. But, if investors are looking for growth then we could certainly be focussing on Europe with the UK in particular, Japan and China, which again is offering very cheap valuations.
Lelde Smits: Toby Lewis, thank you for the outlook from CitiGroup.
Toby Lewis: My pleasure, thank you.
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