Chief Economists Forum

Recently, we had the opportunity to attend a Chief Economists Forum with 5 high calibre economists providing their market outlook for 2014.

The concerns for 2013 were:

  • U.S. to double dip
  • China was to have a hard landing 
  • Europe was to fall apart

None of which happened. Instead there was strong global share market growth. 

There was general consensus regarding the views for the coming year as opposed to previous years that held lively debates, the key themes that emerged from the discussions were: 

  • Globally the consensus is positive, with a move back to the markets however there is a mixed reaction to the end of the GFC shock. World growth has stabilized and is expected at 3.5%
  • China is less competitive compared to previous years (predicting 6.7% compared to 10% growth). Wages will increase, profits will suffer, currency will appreciate and inflation is on the rise
  • Japan has seen rapid growth 
  • U.S – Rising wealth as wages in China are less competitive, demand for luxury leisure increasing, unemployment rate decreasing and reduction in fiscal drag, 2013 was the year of tax increases and spending cuts. Another good year for the stock market with companies in good shape. U.S corporate balance sheets have never been as strong. The U.S is showing real signs of improvement with inflation being the lowest since 1950
  • U.S Federal cash rate should rise around the middle of 2014 which is sooner than previous consensus as the unemployment rate has improved rapidly
  • Europe is emerging from the recession, however the region can’t put together a sustainable recovery
  • As central European banks pull back liquidity 2015 could be the year to watch
  • There are concerns around developing countries tapering into the future however not enough to cause systematic risk. Problems could occur in 2015 as there needs to be structural reform not only quantitative easing but also fiscal stimulus
  • Australian sentiment has shifted from denial to doubt with policy leadership being essential to restoring economic growth as deflation still represents the biggest risk to macro stability. Australia is lagging other economies
  • The mining boom has been a victim of its own success; subdued domestic demand is taking its toll on operating conditions, companies are now looking at reducing costs. Australia is at a critical juncture needing a new growth champion
  • Affordability of housing is clearly under pressure. If you brought residential property in 2010 and were to sell today you would take a loss. The trend in Self Managed Super Funds owning property is fraught with danger despite the housing market boom continuing in 2014 as a result of low interest rates
  • Australia will need to adjust to the decline of the mining boom, which will result in a slowdown in spending, depreciation of the Australian dollar, reduction of real income as import prices rise, drop in wages for trades that were previously sought after in mining
  • It is expected that the RBA may need to start considering lifting rates in the second half of 2014, which could have dampening influence on equity prices later in the year and could see a further sell off in the bond market
  • With low interest rates and a low A$, Australia will be more competitive (imports more expensive)
  • The Australian labor market outlook held up well during the GFC however is now sluggish, a fall in participation partly due to people now retiring and people not applying to fill their places
  • Australian unemployment rate is said to rise above 6%
  • Whilst Australian banks are expensive, they continue to pay a good level of dividends 
  • The Australian job demand will be dominated in future by the health and social assistance areas

In Summary

Gradually improving global and Australian growth is likely to help drive solid profit growth in 2014.

Combined with still reasonable valuations, and investors searching for better returns from low yielding cash and bank deposits, this is likely to ensure another year of solid share market returns.

Share market gains may slow a bit from the pace of the last two years though, and as a result, they are likely to be around 10 per cent, with global shares having a slight edge over Australian shares, reflecting somewhat more attractive valuations. 

 

Please note that any advice contained in this alert is to be regarded as general investment advice and factual of nature rather than personal advice. As it is not possible to take into account each clients individual circumstances, before acting on the recommendations contained in this report clients must determine the appropriateness of a particular recommendation in the light of their investment objectives and financial situation.