Is Australia the next big 'Big Short' for global investors?

 abc.net.au  11/10/2018 7:18:11 PM  3  business reporter Stephen Letts

Updated November 11, 2018 07:14:36

When the Reserve Bank trotted out its most recent robust prognosis of the Australian economy there were more than a few sceptical eyebrows raised.

The RBA's quarterly Statement on Monetary Policy (SoMP) nudged up GDP growth to 3.5 per cent by the end of the year and has it still motoring along above 3 per cent well into 2020.

Westpac's veteran chief economist and RBA watcher, Bill Evans, adopted a rather Sir Humphrey Appleby tone on what looks like a courageous call from Martin Place, particularly given the housing market's well chronicled funk.

"There appears to be a degree of, in my opinion, over confidence around the current dynamics of the housing market and the potential impact on activity and inflation from these developments," Mr Evans said of the SoMP's outlook.

"Indeed, we assess that the growth momentum has already eased significantly from the 4 per cent annualised pace in the first half of 2018 and therefore find it entirely reasonable to expect the slowdown to extend into 2019.

That slowdown, coupled with a rethink on the US economy and interest rates, has seen Mr Evans and Westpac take a knife to their forecast for the Australian dollar.

Westpac binned its target of the Aussie dollar trading at 72 US cents by the end of next year, and replaced it with "a further leg down" to 68 cents by next September.

If Westpac is correct, then there is a fair bit of easy money to be made shorting the little Aussie battler.

To short, or not to short

Global investment strategist Gerard Minack spends a lot of his working day (and night) talking to seriously big investors around the world.

He says while there are risks aplenty in Australia, he's not convinced it is worth taking a punt on things falling apart.

"Some investors are more bearish; they see Australia as the next 'Big Short'," Mr Minack said.

Mr Minack says the bear case on Australia is easy to make.

"House prices are at nosebleed levels relative to history and relative to global peers, households are highly leveraged, the household saving rate is low and national net saving rate is negative and there is much less room to cut interest rates now than in prior cycles.

"Importantly, this is the first house price decline in Australia not associated with RBA policy tightening or rising unemployment. The housing market spontaneously started to combust."

All of which is rather disquieting. However, they are "known knowns" and a lot of it has already been priced in by markets.

The Australian dollar has fallen more than 10 per cent since its heroics above 80 cents earlier this year.

US equities, despite some notable stumbles, have outpaced Australia by some way — rising 5 per cent, while ASX is well down on where it started the year.

The bedrock of the ASX, Australian banks have cracked, and not just because their the royal commission rap sheets now run to thousands of pages.

They are, after all, glorified building societies, so the property market's woes are being priced in as well.

It's not all bad

However, Mr Minack argues to keep playing this trade successfully you probably need a recession.

It is not out of the question, but not the most likely scenario.

There are some countervailing positives that don't often make the headlines.

  • The mining bust has almost run its course
  • Residential housing is still being powered by population growth
  • Population growth is also driving infrastructure spending and jobs
  • LNG exports are rising steadily and filling government coffers

Mr Minack points out, while housing construction will probably slow, the residential sector is unlikely to deliver the same "king-hit" it did in US during the GFC.

Mr Minack doesn't believe the positives are enough to power-up economic growth, but will put something of a floor under things by offsetting the impact falling house prices will have on consumer spending.

"[A recession] is not my base case. I will be watching credit approvals for housing and leading indicators of employment to judge whether the recession risks are rising," he said.

Wages likely to pick up (a little bit)

Stemming the threat of recession would certainly be helped by something more than the current meagre wage growth.

A fresh read on the Wage Price Index this week (Wednesday) should show a sprinkling of growth. It won't be a drought breaker though.

Unemployment has edged down, as have broader measures of slackness in the labour market, such as the underutilisation rate.

The minimum wage rise of 3.5 per cent kicked in July — at the start of the third quarter — a slightly more generous increase than in 2017.

Hardly a huge leg up, but it is something — not that last year's 3.3 per cent increase did much.

The market consensus is wages grew by 0.7 per cent over the quarter, which would kick the year-on-year measure up from 2.1 per cent to 2.4 per cent.

A fresh batch of jobs data follows (Thursday) and if it maintains September's lead, it should be a surprise packet.

September saw a smaller than expected number of new jobs, but a drop in the number of people looking for work meant the unemployment rate fell to 5 per cent — an 8 year low and a figure that had been associated with full employment.

If more people were encouraged to look for work in October, unemployment could again rise, despite an expected creation of another 20,000 or so more jobs.

The data calendar also has a couple of important forward looking reads on the economy this week; business conditions (Tuesday) and consumer confidence (Wednesday).

Business is likely to keep rolling along at well above average levels, while consumer sentiment may well be pulled down by falling house prices and fairly rocky month on equity markets.

Markets stumble again

After a pretty solid week, global equity markets stumbled on Friday on weaker oil prices and some poor data out of China.

Wall Street's S&P500 lost almost 1 per cent, but still ended the week up more than 2 per cent.

The ASX gained 1 per cent last week, but looks like giving up most of it on Monday's opening.

Markets on Friday's close:

  • ASX SPI 200 futures -0.7pc at 5,874 ASX 200 (Friday's close) -0.1pc at 5,921
  • AUD: 72.3 US cents, 63.7 euro cents, 55.7 British pence, 82.2 Japanese yen, $NZ1.07
  • US: Dow Jones -0.7pc at 25,989 S&P500 -0.9pc at 2,781 NASDAQ -1.7pc at 7,407
  • Europe: FTSE -0.5pc at 7,105 DAX flat at 11,529 EuroStoxx50 -0.3pc at 3,229
  • Commodities: Brent oil -0.7pc at $US70.18/barrel, Gold -1,2pc at $US1209/ounce, Iron ore $US76.90/tonne

The falling oil price while starting to trickle through to petrol pumps, is certainly spooking the market at the moment.

Lower demand for oil points to a slowing global economy, although there are supply issues as well — principally US action against Iranian exports wasn't as tough as expected.

Falling Chinese factory gate prices also could be seen as indicator of slowing global trade.

It might just be a coincidence, or something more sinister, but two of the world's biggest economies are expected to report shrinking GDP this week.

The consensus is Japan will report GDP of -0.3 per cent over the quarter (Wednesday). Germany (Wednesday) may go backwards as well.

There a fair few one-offs in both calculations, but if they were stronger they wouldn't be close to such an economic embarrassment.

Trade data stripped out of various manufacturing surveys point to an underlying weak trend around the world.

Export orders from a composite global PMI are now in contractionary territory, while most other measures are on the slide.

Currently few economists are predicting the global economy will tank, but the trade enmity between the US and China, and the US and anybody it runs a deficit with, is a worry.

Strength in the US is still keeping things afloat, but its fair to say the global economy is past its peak and the risks of slowdown are mounting.

Australia

DateEventComment

Tuesday

13/11/2018

Business surveyOct: NAB series. Conditions rose last month & remain well above long term average
Incitec Pivot FY resultsUnderlying profit forecast to rise around 5pc to $3.6b

Wednesday

14/11/2018

Wage Price IndexQ3: Increasingly important, should be driven up by minimum wage decision that came into effect on July 1
Consumer confidenceOct: Popped up last time, in line with long term average. House price falls & wobbly equity markets may knock it down
Dulux FY resultsUnderlying profit forecast to rise around 3pc to $1.8b
AGMsMedibank Private, Fortescue, Nine Entertainment, Seven West Media, Ramsay Healthcare

Thursday

15/11/2018

Employment/unemploymentOct: Another strong month of job creation expect and unemployment to stay at 5pc
Financial regulators speakRBA deputy governor Guy Debelle, ASIC chair Greg Medcraft and APRA chair Wayne Byres on a panel in Melbourne
Graincorp FY resultsDrought is expected to bit, profit down 10pc to $4.1bn
AGMsWesfamers (including vote on Coles spin-off), Lend Lease. Mirvac

Overseas

DateEventComment

Tuesday

13/11/2018

US: Budget statementOct: Deficit around $US120bn and getting wider

Wednesday

14/11/2018

US: InflationOct: Core CPI holding around 2.2pc YoY
EU: GDPQ3: Pretty weak around 1.7pc YOY
JP: GDPQ3: Industrial production is slowing, forecast -0.3pc QoQ

Thursday

15/11/2018

CH: Monthly dataOct: Retail sales up, infrastructure spending supported by new stimulus but industrial production slowing
US: Retail salesOct: Should rebound from weak September, higher fuel prices will have an impact
EU: Trade balanceSep: Solid surplus, interest will be in tariff affect

Friday

16/11/2018

EU: InflationOct: Headline CPI around 2.1pc, core inflation 1.7pc YoY

Topics: business-economics-and-finance, economic-trends, stockmarket, currency, trade, australia

First posted November 11, 2018 06:17:02

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