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.
Shane Oliver: Thank you. My Pleasure
Lelde Smits: At the beginning of the year you told me the S&P/ASX 200 index will climb up to about 5,800 level by the end of the year. We’re now sitting at around 5,500, are we tracking better or worse than you expected?
Shane Oliver: I think by year end we’ll still get there. But I have to admit, the first six months have been a bit slower than I would have thought. And, there are several reasons for that but the two main reasons are – The fall in the iron ore price, below $US100 per tonne, and the impact on confidence from the sort of ‘toughish’ Federal Budget in May. So, those things have really taken a toll on the Australian share market – both in terms of the miners and retailing stocks.
But, by the year end I still think we’ll get to 5,800 – the share market certainly doesn’t look expensive. And, I think that confidence will start to lift, particularly if the budget has to be softened to get it through the Senate. And, we’ve still got an environment of very low interest rates which looks like it’s going to continue for some time to come. So therefore, the chase for yield, the search for high returns will continue – a lot of that money will go into the share market.
Lelde Smits: Defying the dooms-dayers US and local shares have continued to rise, but are vulnerable to a correction and what is likely to be the catalyst?
Shane Oliver: Well, there is often a correction in markets around the middle of the year. The old saying used to be and it still is, “Sell in May and go away”. So far we haven’t seen the correction, but we are in the middle of the year and we’re still in a vulnerable period. US shares have had reasonable gains year to date. And, there are a few triggers out there. For example, Ukraine situation still unresolved, the situation in Iraq could threaten oil prices. We’ve got the risk, at some point, that the [US] Federal Reserve will become more hawkish regarding the outlook for interest rates. So, there’s plenty of triggers out there for a potential correction. So, at this stage I certainly wouldn’t rule one out. And, over the last few years we have seen corrections around the middle of the year.
Lelde Smits: Reporting season is almost upon us. What are some of the themes you’ve noted from confession season?
Shane Oliver: Obviously the big negative has been the retailers, lots of retailers downgrading particularly since May, that period that was impacted by the budget. But, if you strip them out, not too bad. The confession season hasn’t been too bad. There hasn’t been as many downgrades, profit warnings as I would have feared.
Lelde Smits: What’s your outlook for reporting season. What sectors are likely to fare well and which will come under pressure?
Shane Oliver: My feeling is that reporting season will be OK. So, we’ll get results for the last financial year, 2013/14. They’ll show profit growth in aggregate for the market of around 13 per cent. So, even if you are worried about the impact of the May budget on spending and the economy – don’t forget that was right at the end of the financial year, that was in May, so it’s impacted May and June – so only a couple of months.
But, the basic picture will be reasonably good profit growth – around 13 per cent. The resources sector will be the bright shining light there. They had a tough year the previous financial year, profits went backwards. Now they’ve got their costs under control, the mining investment phase is winding down, they’re starting to see their exports pick up. And, of course, we’ve seen a lower average level for the Australian dollar over the last 12 months than we did over the previous 12 months, so that also helps in translating earnings.
So, resources shooting the lights out with 30 per cent profit growth. Drilling down a bit further, financials will be doing pretty well, low double digit profit growth there. Banks seems good, good return, good profit growth, around 10 per cent. And then we go down a bit further and we’re looking at the industrials, excluding the financials, and profit growth should be somewhere in the order of 4/5 per cent, the sort of range it has been in for a while now.
I reckon retailers will probably struggle a little bit. At one end you might have media stocks, they’ll be doing OK, I think profits there will be up like 25 per cent. But, the industrials, manufacturers and so on, they’ll probably see profit growth of minus 20 per cent. So, a bit of a range coming through outside of the resources and financials, where a lot of the profit growth will be.
Lelde Smits: And Shane, as we enter the start of the new 2015 financial year what will be some of the key factors to watch?
Shane Oliver: I think there are a few things that will play out over the next year. Firstly, the global economy, I think, will continue to grow and pick up pace. Monetary conditions globally, by and large, easy. But, in various points in time there will be a debate about when the Fed will raise rates, and that will cause bouts of volatility, so give us occasional corrections in markets.
But generally speaking, monetary conditions internationally pretty good. Chinese growth, I think, stabilising around the 7.5 per cent mark. That will give a bit of confidence to commodity markets. So, commodity markets probably not going to surge, but they’re not going to collapse either as some people were fearing, they’ll probably end up recovering a little bit of their recent losses.
And then likewise in Australia, I think we’ll see a pick-up in confidence – partly on the back of continued very low interest rates. And, that in turn should underpin ongoing faith that the Australian economy will sort of transition from mining investment growth to more broad based growth. So basically, a reasonably good environment for share markets over the next twelve months.
Lelde Smits: Shane Oliver, thank you for the outlook for fiscal 2015.
Shane Oliver: My pleasure, thank you.
Ends
