Heading into the New Year we have greater conviction that Australia’s pace of economic growth can accelerate in 2014. Therefore, we expect to see further signs of rebalancing in the economy, but only in a gradual fashion.
Capital spending by mining businesses on plant and equipment should hold up for the time being, given the high level of work yet to be done on committed projects (especially for LNG) and the continued strong commodity demand in China.
While we agree that growth is likely to remain sub-par at around 2.5%/year or slightly better, there could be upside risks to the RBA’s forecasts given the moderate pick-up in consumer spending, alongside the recovery in housing and improving global backdrop.
We expect inflation to edge higher in 2014, towards the upper limit of the RBA’s target range of 2% to 3%. Unemployment is expected to peak at around 6.25% next year, according to RBA projections.
Our base case scenario is that with global growth closer to trend next year, the Fed finally ‘tapering’ its monetary stimulus (placing downward pressure on the Australian dollar) and domestic monetary policy already stimulatory, the RBA will keep interest rates on hold at 2.5% until late 2014. Once the tightening cycle commences, rate increases are likely to be very gradual, given the protracted drag from declining mining capital expenditure and the benign inflation outlook.
For investment markets, we remain cautiously optimistic for 2014. The backdrop for shares should enable them to push higher as the global recovery picks up pace, driving earnings growth. After strong gains in the past two years though, shares are no longer cheap and as such, returns are likely to be more constrained. We expect the increase in global bond yields to continue, meaning corporate debt remains in a good position to outperform government bonds. The ongoing chase for yield should driver solid returns from income focused commercial property and infrastructure investments. House prices are likely to see a continued upswing on the back of low interest rates and strong investor demand. Below is a table produced from a variety of sources indicating some forecast for the next 12 months.
|Investment returns for major asset classes Total return %, pre fees and tax|
|Global shares (in Aust dollars)|
|Global shares (in local currency)|
|Asian shares (in local currency)|
|Emerging mkt shares (local currency)|
|Global bonds (hedged into $A)|
|Global listed property securities|
|Aust listed property trusts|
|Unlisted non-res property, estimate|
|Unlisted infrastructure, indicative|
|Aust residential property, estimate|
Source: Thomson Reuters, Morningstar, REIA, AMP Capital
Overall we believe 2014 is likely to be more volatile than 2013, and also with more constrained returns. However, overall we believe it should be a positive year for investment markets given the easy monetary conditions which are set to remain in place.