The Organisation for Economic Co-operation and Development (OECD) Composite Leading Indicator is one such measure.

Pleasingly, this indicator has returned to the high levels seen before the COVID-19 pandemic. It rose to 99.4 in December 2020, up from 98.9 in September.

Other leading indicators are also pointing towards continued economic recovery in the December quarter globally.

Growth expectations were further supported by:

• A Democrat win in the US election with President Joe Biden looking likely to embark on more government spending in addition to a December 2020 bill that will provide further support for households and local and state governments.
• Vaccine approvals and the rollout across much of the world. While it is still early days, further progress on distribution should curb the worst of the COVID-19 pandemic and see an earlier return to a pre-COVID-19 world.
• A final deal between the UK and EU ended concerns of a disruptive UK exit from the EU that would have further weakened the region economically.
• In the short term, rising COVID-19 cases are continuing to drag on both the health and economic situation across the world.
• The USA and Europe are among the worst-hit with a more infectious strain in the UK making the situation worse.
• Investors have been willing to look past this in anticipation that vaccinations will put the worst of the pandemic and its impacts behind us in 2021.

Australia
The bounce back in economic activity following the end of Victoria’s lockdown continued during the December quarter.

Small clusters of COVID-19 outbreaks in Sydney and Brisbane disrupted inter-state travel with borders closed once again in December and throughout the Christmas holiday. Measures taken to counteract these have not had a material effect on the economy to-date. However, momentum remains positive into 2021.

We saw continued strength in jobs growth with the unemployment rate falling to 6.8% in November. Job vacancies on online sites such as Seek are now exceeding pre-COVID-19 levels suggesting that jobs recovery will continue. Risks affecting the growth outlook for the economy include the ending of the JobKeeper and JobSeeker initiatives in March 2021 and tensions between China and Australian exporters.

Shares
The Australian share market performed strongly with a 13.6% rise in the benchmark for the S&P/ASX 200 Price Index. At a sector level, this benchmark was driven higher by the financials sector (banks and insurers) (up 26.2%) and the energy sector (up 21.8%). Online pokies and PayID go hand-in-hand in Australia. Experience seamless transactions by visiting payid-online-pokies.com .

The performance of deferred loans was better than expected for the major banks which supported the financials sector. Also, the anticipation of the COVID-19 vaccine rollout and the Australian Prudential Regulation Authority (APRA) approving the resumption of dividend payments for banks and insurers provided further tailwind for the sector.

Oil prices surged due to the anticipation of economic recovery which supported the strong rise in energy stocks. A similar situation occurred overseas where sectors that had performed poorly due to the COVID-19 pandemic saw surging investor support in anticipation of stronger global growth.

Fixed income and currencies
Bond prices fell, driving bond yields higher both here and overseas over the December quarter. Anticipation of a global recovery saw investors sell down bond holdings and seek riskier assets. Riskier, low grade corporate bonds saw strong performance as a result.

A similar story played out in currency markets. Countries with exposure to global growth through their exports such as Australia and Japan rose further while the US Dollar continued to falter as investors bet against it, in favour of ‘pro growth’ currencies like the Australian dollar and Japanese Yen.

Source: IOOF Research

Important Information: This report has been prepared by the IOOF Research team for Lonsdale Financial Group ABN 76 006 637 225 AFSL 246934 (“Lonsdale Financial Group”). Lonsdale Financial Group is a company within the IOOF group of companies consisting of IOOF Holdings Limited ABN 49 100 103 722 and its related bodies corporate. This report is current as at the date of issue but may be superseded by future publications. The information in the report may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of Lonsdale Financial Group. This report may be used on the express condition that you have obtained a copy of the Lonsdale Financial Group Financial Services Guide (FSG) from the website www.lonsdale.com.au. Lonsdale Financial Group and/or its associated entities, directors and/or its employees may have a material interest in, and may earn brokerage from, any securities or other financial products referred to in this report or may provide services to the companies referred to in this report. This report is not available for distribution outside Australia and may not be passed on to any third person without the prior written consent of Lonsdale Financial Group. Lonsdale Financial Group and associated persons (including persons from whom information in this report is sourced) may do business or seek to do business with companies covered in its research reports. As a result, investors should be aware that the firms or other such persons may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making an investment decision. This report has been prepared in good faith and with reasonable care. Neither Lonsdale Financial Group nor any other person makes any representation or warranty, express or implied, as to the accuracy, reliability, reasonableness or completeness of the contents of this document (including any projections, forecasts, estimates, prospects and returns and any omissions from this document). To the maximum extent permitted by law Lonsdale Financial Group, its related bodies corporate and their respective officers, employees, representatives and associates disclaim and exclude all liability for any loss or damage (whether foreseeable or not foreseeable) suffered or incurred by any person acting on any information (including any projections, forecasts, estimates, prospects and returns) provided in, or omitted from this report. General Advice Disclaimer: The information in this report is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this report, you should assess your own circumstances or seek advice from a financial adviser. Where applicable, you should obtain and consider a copy of the Product Disclosure Statement, prospectus or other disclosure material relevant to the financial product before you acquire a financial product. It is important to note that investments may go up and down and past performance is not an indicator of future performance. For information regarding any potential conflicts of interest and analyst holdings; IOOF Research Team’s coverage criteria, methodology and spread of ratings; and summary information about the qualifications and experience of the IOOF Research Team please visit https://www.ioof.com.au/adviser/investment_funds/ioof_advice_research_process.

The post Economic Update appeared first on Newcastle Financial Planners & Financial Advisors.

The global economy

During February a growing virus outbreak in China known as the Coronavirus or Covid-19 started to feature as a major concern. As of mid-May, there have been over 4.3 million confirmed cases and over 300,000 deaths globally.

Governments all over the world were compelled to impose lockdown measures that shut down businesses and restricted citizens’ freedom of movement. International travel has almost entirely shutdown as countries have closed their borders. The economic damage caused by these measures has been stark, with millions of United States (US) workers filing for unemployment. Economists now expect a global recession to be caused by this shock. An economic recovery is expected towards the end of 2020. Substantial government spending and monetary policy, for example, interest rate cuts, will help with the economic recovery but it will take time for businesses to restart and jobs to return.

A second shock to the economy has been an oil price war that started in early March. Saudi Arabia sparked this price war by increasing production and discounting prices in a bid to punish Russia and other marginal producers. This was their chosen response when talks between global oil cartel, The Organisation of the Petroleum Exporting Countries (OPEC) and other producers failed after Russia refused to impose additional production cuts to increase oil prices. This, in addition to weak demand due to the global Coronavirus shutdowns, has caused oil prices to crash substantially. This is good for consumers due to cheaper petrol prices. However, for oil producing countries and regions in the US, this is expected to compound the economic damage the Coronavirus shutdowns were already inflicting.

Australia

Australia was not immune to the Coronavirus outbreak. The shutdown efforts appear to have been successful in limiting the human cost. As of late May, there have been a total of 102 deaths with only 948 active cases and over 5,700 people who have recovered. However, the economic cost has been substantial with expectations that the unemployment rate will rise to over 10%. Australia is expected to mark its first recession since the early 1990s over the June 1990 and September 1990 quarters.

This quarter saw the Reserve Bank of Australia (RBA) cut interest rates to a record low of 0.25% and actively buy Government bonds to keep long-term borrowing costs low. The Federal Government also intervened with substantial increases to unemployment benefits, for example the JobSeeker Payment, as well as a wage subsidy program called JobKeeper which aims to help keep businesses connected to their employees through this economic downturn. It is expected that lockdown measures will be gradually lifted during the June 2020 quarter following recent announcements by the Prime Minister. The economic recovery is expected to take some time, particularly as authorities want to limit any chance of a new wave of infections.

Shares

During the March quarter, the Australian share market fell (-23.1%). At a sector level, health care (+1.5%) and consumer staples (-4.3%) were the strongest relative performers but could not offset the negative performance in energy (-48.9%) or the financials (-28.7%) and property sectors (-34.8%).

The energy sector fall was due to two factors. First, the global shutdowns to control Coronavirus cases and second, the oil price war during March. These saw oil prices fall 65.6% during the quarter and had a similar impact on the share prices of companies with energy exposure.

Weakness in the property sector was triggered by the pressure of the shutdown on both retail and commercial tenants with landlords compelled to offer rental relief, which is hurting the earnings of the sector substantially in the short-term.

Fixed income and currencies

Bond prices rose, driving bond yields lower both here and overseas. In Australia, the RBA cut interest rates to a record low of 0.25% by 31 March 2020 and signalled its intervention in the bond market to keep the three-year bond yield at 0.25%. These measures supported bond returns as did rate cuts overseas. However, riskier bonds, such as business debt, lost value as investors were concerned about rising bankruptcies due to the economic impact of the Coronavirus. This saw negative returns for corporate bond investments.

The Australian dollar acted as a buffer for overseas investors, falling 12.7% during the quarter. Investors sold Australiandollars because they expect global economic weakness to reduced demand for commodities. This fall in the Australian dollar helps investors with unhedged overseas investments but raises the cost of imported goods.

Talking to a financial planning professional can help to ensure you’re following a strategy to achieve your financial goals.  Speak with LT to see how we can help, call (02) 4926 2300.

Source: IOOF

The post Economic Outlook appeared first on Newcastle Financial Planners & Financial Advisors.

In Australia, the Reserve Bank of Australia (RBA) left cash rates on hold at 2.5 per cent throughout the third quarter of 2014. In July, RBA Governor Stevens enhanced their efforts to talk the currency downward. Australia’s terms of trade worsened as the drop in export prices exceeded the drop in import prices. August saw the Governor discuss currency intervention, noting that it was an option on the table, despite the fresh talk of intervention from the head of the RBA, solid domestic data kept AUD well supported throughout the month. However, disappointing reads on the Chinese economy, concerns over the current global geopolitical climate and improving US domestic data in September, saw a dramatic fall in the AUD of -6.4 per cent.
 

The European Central Bank (ECB) left their key interest rates unchanged through July and August, however President Draghi increased the likelihood of additional ECB policy easing at the August FOMC meeting, acknowledging the sharp drop in inflation expectations. Market commentators are concerned with the economic impacts of geopolitical tensions in Ukraine on the Euro-area and the likelihood of downside risk to growth. At the September meeting the ECB cut all the key rates by 10 basis points. They also announced a purchase of asset backed securities and covered bonds, with details to come in October.
 

The Bank of Japan (BoJ) left its monetary policy stance unchanged at their July meeting, maintaining their monetary policy statement’s positive outlook for both growth and prices. Monetary policy stance remained unchanged through August, but a larger-than-expected drop in GDP growth in response to the consumption tax hike and a further widening in the trade deficit increased pressure on the BoJ to revise its outlook. By September slowing domestic data prompted concern around further BoJ easing, and expectations of impending Government Pension Investment Fund reform, contributed to a weaker JPY which tested levels not seen since 2008.
 

Source: BlackRock
 

Call (02) 4926 2300 or email us here at Leenane Templeton.
 

Speak to our award winning financial planning team today to discuss this economic update further as well as investment options.

The post Economic update – third quarter appeared first on Newcastle Financial Planners & Financial Advisors.

The Australian dollar has been accused of inflicting all sorts of economic ills as it traded above US$1 for most of the past three years.

People would be forgiven then for thinking that the dollar’s drop from its post-float record high of US$1.10 in 2011 to below 90 US cents will be a big relief. Alas, it’s not so simple. As with most things economic, there are pluses and minuses whatever the value of the Australian dollar. Those who whinged about the “overvalued” Australian dollar crushing exports overlooked its benefits. They may well be the ones who moan loudest about a falling dollar. One upshot of a declining dollar is that it reinforces one of the most basic principles of investing – diversifying.

There are two main benefits of a mighty dollar. The first is that a higher currency, in effect, means that every Australian has had a pay rise. For a stronger dollar allows us to buy more imports. This is the mechanism by which all Australians benefited from the mining boom. The second benefit is that a rising currency reduces inflationary pressures as the prices of imports decline in Australian dollars. That allows the Reserve Bank of Australia to set interest rates at a lower level than otherwise.

In theory, a lower dollar helps Australian exporters (and adds to output) because our goods are cheaper for foreigners. This is the break exporters have been pleading for, even if in practice exporting is more complicated than just hoping the currency drops a bit.

We may not want our dollar to fall too far too fast, however, as side effects emerge. These disadvantages are, in fact, the opposite of the advantages of a rising dollar. Inflation could emerge as a threat if the dollar slumps too much. That would mean higher interest rates. Ouch for those with home loans. Some businesses might scrap plans to invest, thus lowering employment prospects.

Bad as that might be for many, the big hit for all of us from a lower dollar is that we have effectively just had a pay cut as import prices go up.

This hit to living standards from a declining Australian dollar forms one of the most basic cases for why Australians should invest in foreign assets such as equities. If your portfolio only holds Australian assets, your ability to purchase imports drops in line with the dollar’s decline. If you own some foreign assets, however, the value of these foreign investments rises in Australian-dollar terms when our dollar drops. This mechanism compensates, to some extent, for your reduced ability to buy imports. In more technical terms, it’s called diversifying currency risk.

Our award winning and professional team are at hand to discuss any financial planning and economy questions you may have.
Call (02) 4926 2300 or email us.

Disclaimer

If you wish to discuss the benefits of a low and high Australian dollar further, please do not hesitate to contact Leenane Templeton.

Financial information comes from Bloomberg unless stated otherwise.
Source: Fidelity, May 2014

The post The benefits of a low and high Australian dollar appeared first on Newcastle Financial Planners & Financial Advisors.

US

Key considerations for fixed income investing

The Federal Reserve has continued to partially remove stimulus via further reductions in quantitative easing (QE) this year. Despite this reduction, US 10 year treasury yields have fallen from 3% in January to approximately 2.5%. We are not particularly concerned about the risk of inflation, which is usually the key driver of higher interest rates. There is too much excess capacity and structural unemployment in the global economy (especially in Europe) for us to be overly concerned of an inflation spike. However, The US Federal Reserve owns close to 35% of all US Treasuries with more than 5 years of duration remaining. There is a risk that rates could rise with the removal of Federal Reserve buying. As a result, we recommend investors allocate a significant proportion of their defensive assets to credit funds with minimal duration exposure, to reduce the risk of loss of capital if US 10 year government bond yields do indeed rise significantly.

Will stronger GDP growth lead to strong earnings growth and market gains?

Despite slow growth in the first quarter which was largely weather related, we believe US GDP growth in 2014 is likely to be in the vicinity of 2.5-3%, which is higher than the growth rates of 2013. Importantly, public sector revenues have improved due to stronger consumption and higher asset prices, which has led to higher tax receipts. The budget deficit is likely to decline to 3 to 4% of GDP, negating the need for major expenditure reductions or tax increases. The outlook for corporate capital expenditure is positive, and consumer confidence is robust due to recent gains in housing and equity prices as well as employment growth.

While the outlook for US GDP growth is reasonably positive, the outlook for corporate earnings is not particularly promising. First quarter earnings grew at close to 2%, and we are doubtful that consensus expectations for 8% earnings growth this year will be achieved. Tailwinds of reduced interest expenses, no real wages growth, productivity gains and US dollar weakness have been key drivers of US corporate margin expansion in recent years. A number of these earnings tailwinds have abated. Corporate margins may hover at their current historically high levels, but further margin expansion is unlikely to be significant. The U.S. dollar has strengthened against most major foreign currencies over the past year, which is a headwind for earnings growth (earnings from subsidiaries are worth less in US dollar terms and exports priced in local currencies are also worth less in US dollar terms).  Interest rates are likely to gradually increase in the years ahead, providing a further headwind to earnings per share growth. The consequences of this is not necessarily poor share market performance – but further price earnings multiple expansion is likely to be a prerequisite for any further equity market appreciation of considerable magnitude.

Europe

Expect slow growth and diversity in GDP growth rates

We expect Europe to exhibit slow, albeit positive GDP growth throughout 2014. Business and consumer confidence have improved, and this could lead to more robust business and consumer spending. The medium term inflation outlook in Europe is low, and is likely to fluctuate around 1% or less. Given the very high unemployment rate of close to 12% (with significant disparity between countries), and low workforce participation rates, wage inflation pressures are minimal. The output gap is also wide in Europe, with significant excess capacity. As such, with nominal GDP likely to grow at about 2%, European nations are less able to inflate their way out of their high net debt levels.

Banks remain in deleveraging mode, and credit conditions remain relatively tight. Growth rates between European nations are likely to remain varied – Germany is likely to exhibit more positive growth, with Spain and Italy continuing to lag.

The outlook for UK GDP growth is more promising – consumer spending is growing and business investment has finally started to exhibit some robustness. Inflation is also higher, equating to significantly higher nominal GDP growth than continental Europe.

Japan

Japan is likely to experience slower growth this year, mainly due to the sales tax increase in April 2014 from 5% to 8%, which is likely to dampen consumption, and also due to more constrained government expenditure post extraordinary stimulus in 2013. GDP growth is likely to be in the vicinity of only 1%.

Source: IOOF, May 2014

Our financial planners are ready to help with any economic or finance questions you may have.
Call (02) 4926 2300 or email us.

Disclaimer

The team at Leenane Templeton are here to help with any questions you may have in relation to economic growth, your investment strategy and the general economic outlook as a whole. Give us a call.

The post Economic outlook appeared first on Newcastle Financial Planners & Financial Advisors.

Google search
 

Total advertising spend globally is expected to grow to around US$720 billion by 2020 (in line with World GDP growth). In the online space this growth is likely to be even faster as advertisers continue to align advertising dollars with consumer habits. The chart below shows that in spite of the explosive growth in the time spent by consumers online and increasingly also on mobile platforms, advertising dollars have been relatively slow to follow.

If we assume that growth in digital advertising continues to grow in line with media consumption habits to 36 per cent of all advertising spend by 2020 (from 22 per cent today), then this would represent 13 per cent p.a. growth in Google’s core market to $260bn by 2020. Assuming Google can grow its market share of this market to 50 per cent from 45 per cent today, core Google search could command $130bn p.a. in gross revenue.
 

You Tube and Android

Adding to the above opportunity, Google has further growth avenues via its YouTube and Android businesses. You Tube is going after TV advertising budgets, which still remain the dominant category for advertising spend globally. YouTube is the largest online video site globally and as such is uniquely positioned to drag advertising dollars away from TV. It’s currently estimated that YouTube has captured just 1.8% of the current $230bn plus global TV advertising budget. If this were to increase to 6 per cent by 2020 this would represent a further $20bn revenue opportunity for Google.  Adding to this success is Android, the mobile phone operating system Google gives away free to “smart phone” manufacturers including HTC, Samsung and Sony. Google benefits from users being directed to Google Search and Google Maps, but also via users being directed to the Google Play store which sells apps and where Google earns a commission. Android has grown from essentially zero users 4 years ago to over 1 billion now. Assuming continued growth in activations and US$5 in revenue per device via downloads from the Google Play store, this represents another US$12.5bn revenue opportunity by 2020.
 

So how do we get to $1 trillion?

Adding these core revenue drivers together and subtracting traffic acquisition costs, we estimate that Google can achieve US$130bn p.a. in revenue by 2020 (a 15% p.a. growth rate from around $50bn net revenue today). This should equate to roughly $65bn of EBITDA in 2020. Rolling that forward one year and applying the same 12x EV/EBITDA multiple that Google trades on today, achieves an enterprise value of $895 billion by 2020. Add back the estimated $120 billion in net cash that the group is expected to have accumulated by 2020, we arrive at a market capitalisation of over $1 trillion. Google’s current market capitalisation is US$343bn with US$60bn in net cash. Our estimates represent a 260 per cent rise in the share price over the next 7 years.
 

While clearly the actual outcome is likely to be different from the expectations above, the assumptions used are not aggressive for a company with a dominant position in an area of strong secular growth that will benefit from improved earnings largely independent of economic conditions. The bulk of Google’s growth will come from consumers shifting to online media, a world which Google dominates now and is expected the company will extend its dominance in the future.
 

To determine whether these investments are suitable for your personal circumstances, speak with one of our financial planners today.
 

Source: K2 Asset Management, February 2014
 

Disclaimer.
 

The post Google: The $1 trillion question appeared first on Newcastle Financial Planners & Financial Advisors.

The Australian economy remains in very good shape, both in the context of its own historical performance and when compared to other developed economies. Very few developed nations can match Australia’s combination of vital economic statistics: low unemployment (5.6%), solid credit rating (AAA rating), low government debt/GDP, low inflation (2.4%), solid economic growth rate (3.1%) and strong relationships with global economic powerhouses. We expect to see reasonably strong GDP growth in the domestic economy driven by export growth and a gradual recovery in consumer demand in 2014. Interest rates remain at historically low levels and the Reserve Bank of Australia has shown little inclination towards a tightening of monetary conditions in the short to medium term.
 

State and federal governments are expected to take advantage of the low interest rate environment to embark on a number of infrastructure projects. This, along with productivity improvements as corporates maximise operating leverage, will support employment growth stability.
 

Economy in transition
 

The stability of the Australian economy is dependent on a transition from mining capex led growth to an increase in domestic consumption. And while the transition is unlikely to be orderly, we believe all the necessary ingredients are in place for a gradual lift in the non-mining economy.
 

Australia’s prosperity is not about resources alone. The services industry continues to grow in Australia in sectors such as tourism and financial services, while manufacturing and agriculture still make a meaningful contribution to GDP as Australia embarks on niche products and value add production lines. Despite Australia having likely witnessed the peak in mining capex, bulk commodity and LNG exports are forecast to grow significantly in 2014 pushing the balance of payments into surplus. Retail sales are showing signs of improvement from a fifty year trend low with the 2013 Christmas period expected to be very strong.
 

Contributing to the improved retail outlook has been the increase in household wealth. The savings rate remains above historical averages. Combined with an average 10 per cent increase in house prices, there is a strong ‘wealth effect’ for Australian households with significant pent-up demand. The very high savings rate in Australia is likely to fall, funding an improvement in discretionary spending.
 

China is now the third largest source of inbound tourists to Australia and increasingly a significant investor in the Australian housing and commercial property market. The falling Australian dollar will see this trend strengthen and also encourage domestic travellers to holiday within Australia. A substitution of domestic for international tourism will also provide a fillip for the non-mining economy.
 

Australian equities for income
 

After a strong 2013, we are still positive on the outlook for Australian equities in 2014. We believe the market is still attractively valued given a price-to-earnings ratio of 14.7x which is around the historical average. The dividend yield of the market also remains highly attractive versus other asset classes with a gross franked yield of 6.2 per cent, significantly better than cash (2.6 per cent) and bonds (4.3 per cent). We expect to see continued improvement in market earnings revisions and growth as indicators for world economic growth are strong into 2014 and the domestic benefits of lower interest rates and Australian dollar flow from house prices to construction to broader domestic activity. We view the tapering of quantitative easing as confirmation of a lower macro risk environment which will see higher returns from higher beta, or more cyclical stocks, that have not been rewarded in the last few years of high uncertainty, especially in Australia. Australian equities as a global source of income wwill remain a very strong theme. Income will be a large percentage of total return in 2014 with high quality companies with minimal income risk a key focus for the income portfolios.
 

If you would like to discuss the market further or any other investment and financial planning matters, please do not hesitate to contact our professional and award winning team.
 

Source: Legg Mason, February 2014
 

Disclaimer
 

The post What to watch in 2014 appeared first on Newcastle Financial Planners & Financial Advisors.

However, it is not clear whether the recovery is sustainable and structural problems remain hidden below the surface.

Global growth forecasts have continually been revised down during 2013, with the IMF recently reducing its 2013 growth forecast to 2.9% from 3.2%. A new trend of slowing growth in emerging economies and recovering growth in developed economies has emerged.

Despite the global slowdown, there is growing optimism that the US is gaining momentum and that Europe is showing the first signs of recovery. In addition it seems China has stopped slowing and has stabilised at around 7.5% growth. Indeed, it is expected that emerging economies will soon benefit from a recovery in the developed world and hence global growth should rebound in 2014 to around 3.6%, according to IMF forecasts.

Structural issues

Despite increased momentum leading into 2014, there remains structural problems in each region.

In the US, the recovery is patchy and requires extraordinary monetary stimulus from the US Federal Reserve (the Fed) to keep interest rates very low and the USD weak. The tricky part for the Fed will be exiting this program. We have already seen markets ‘front-running’ the Fed when it indicated mid-year that it was considering tapering its bond purchasing program. Bond yields rose aggressively, the USD rallied and capital began to flow out of emerging markets and back into the US. The Fed seemed to be alarmed at the sharp market reaction and subsequently delayed plans to taper in September 2013.

In addition, the issue of reducing the US budget deficit and public debt without harming economic growth remains a divisive issue for Congress. The public debt has grown to US$16.7bn, or 100% of GDP, while the budget deficit is around US$650bn, or 4% of GDP. To be fair, the budget deficit is the lowest deficit in 5 years and has been reduced from around US$1.2 trillion in the years immediately following the GFC.

However, the public debt will continue to grow unless the deficit is returned to surplus and hence the Republican controlled lower house is becoming increasingly active over the budget and the self-imposed US$16.7bn debt ceiling. The recent budget stand-off in Congress forced a government shutdown that may hurt the US recovery but financial markets remained calm on the assumption that the budget and extension of the debt ceiling would eventually be approved, which indeed it was.

In Europe, the recovery is fragile and there still remains sovereign debt and bank solvency issues in the southern countries. There is also the larger question:  can the European monetary union succeed without a proper fiscal, banking and political union (of the kind that we see in the United Kingdom or the US)? Lonsec suspects not but we expect the EU to forge closer integration over the long term.

In China, its economic model for the past 40 years of export and investment led growth is becoming unbalanced and unsustainable. There is a concern that property and infrastructure development has become too large at 50% of the economy and has run ahead of income growth. More wealth needs to be distributed to its citizens to boost incomes and hence consumption.

China’s new leaders recognise the need for reform to drive the economy towards more sustainable and diversified growth across consumption, business investment, housing, government spending and net exports.

In Japan, the new Abe government is trying to get the country out of a debt deflation trap that has existed since the 1990 property bubble burst. Japan’s sovereign debt is very high at 240% of GDP and the central bank has a substantial money printing program aimed at keeping interest rates low and encouraging inflation but also keeping the currency weak. In addition, Japan is also dealing with an ageing population and increased competition from South Korea and China.

The structural issues mentioned above are all major issues and are not going to be solved overnight. It will take many years for each issue to be resolved or in the worst case, emerge as a crisis. We can’t know how they will all turn out but it pays to be aware of them when investing.

Australia

Compared to the US, Europe and Asia, Australia has relatively few issues. The budget deficit and public debt are low to moderate, the banking system is strong, the economy is diversified and the government should be more functional, after the recent election. The issues in Australia are more around encouraging growth outside of the mining sector and improving productivity.

However, one structural weakness could be the build-up of housing debt which is relatively high at around 100% of GDP. But the debt is being serviced and impairments are very low. Household debt is not likely to be an issue unless unemployment rises and/or credit becomes much more expensive, both of which seem unlikely given the economy continues to grow, inflation remains subdued and the banks are well capitalised.

Conclusion

A recovery in the US and Europe should lead to a rebound in global growth in 2014. However, we remain wary that the recovery is still fragile and there are still some major problems below the surface.

At this stage, we are retaining our largely neutral growth, underweight bonds and overweight cash stance. If we can gain greater comfort on the sustainability of the global recovery, we will look to increase growth weightings and reduce cash.

Source: Lonsec, October 2013

Disclaimer

The post Growth delicately poised appeared first on Newcastle Financial Planners & Financial Advisors.

China’s growth is expected to slow to 7.5% this year; the offi cial government target in its 2011-2015 fi ve-year plan is for an average growth rate of 7.0% per annum. Growth is slowing partly because Europe’s recession has crimped exports but also because China’s central bank is deliberately seeking to tighten credit conditions to stop speculative investment into property and other assets.

China launched a credit-fueled investment boom in 2008/09 in response to the Global Financial Crisis (GFC), which saw total debt rise from 160% of GDP to 210% of GDP according to official figures. While these debt levels are manageable, there is a lingering concern that more debt has been accumulated in the ‘shadow banking system’ and that property speculation is continuing. Accordingly, the central bank recently moved to tighten credit conditions more aggressively with a particular focus on non-bank fi nancial intermediaries.

Even if growth slows to 7.0%, this is still a significant growth rate considering China’s annual GDP is now over US$8.2 trillion, ranking it as the second largest economy in the world (after the US at nearly US$16 trillion and excluding Europe as a region rather than a country).

However, China’s growth is likely to be less investment-intensive in the future given investment has grown to over 50% of the economy and China’s new leaders aim to rebalance the economy towards consumption.

A slowdown in investment will obviously reduce demand for steel and other building materials, which will impact many commodities like iron ore, coal, copper and alumina – all of which are key exports of Australia. At the same time that China’s demand for commodities is slowing, global supply is set to increase, so it is likely that commodity prices will continue to weaken and that Australia’s export income will be under pressure.

The rebalancing of China’s economy is important for its long term stability and it will remain an important market for Australia; however it is likely that we have seen the end of the global mining boom. We see a long period of lower commodity prices and reduced mining activity ahead.

A slowdown in mining will obviously be a drag on Australian growth, particularly in the mining states of Western Australia and Queensland, but surely lower interest rates and a falling AUD will offset the mining slowdown?

In the past, the answer would be a resounding yes, but this time other sectors of the economy – such as retail, housing construction and business investment – are only showing modest signs of recovery. Lonsec believes there are a number of reasons for this including:

1 Attitudes to debt have changed post GFC, with companies, households and government all seeking to increase savings and reduce debt levels.

2 Low business confi dence on poor profi t growth and burdensome government policy has led to a focus on productivity measures rather than investment.

3 Job insecurity stemming from business and government reducing employees, in a number of sectors, has led to cautious consumer behavior.

These factors are not going to change overnight but falling interest rates, a falling currency and a clear Federal election result should eventually see the broader economy rebound. Accordingly, we expect the Australian share market to retain an upward trend but recommend investors tilt their portfolios towards financials and industrials.

William Keenan – General Manager Equities Research – Lonsec

The post Economic update – China slowdown looms appeared first on Newcastle Financial Planners & Financial Advisors.

We thought it interesting to read the following article by Alan Kohler.  Four years on from the great crash of 2008, world governments and central banks have managed to prevent a 1930s-style debt deflation. They're still shovelling, but so far so good.

However the question still hangs there: has deflation just been postponed, or will we end up with the opposite – inflation?

The actions of governments, now exhausted due to lack of money, and central banks, still printing, have led to sovereign debt levels that are way beyond serviceable and central bank balance sheets that are, to put it politely, experimental.

The European Central Bank is focused on shielding governments from the debt markets to buy time while a more durable fiscal and banking union can be cobbled together.

To appease the Germans, the ECB must not only neutralise the monetary effect of bond purchases but also impose strict conditions on governments whose bonds it buys. The effect of that is simultaneously to weaken its own balance sheet, since it's selling good bonds while buying bad ones, and to make it virtually impossible for the supplicant nations to break out of their deflationary spirals.

It is obvious that austerity does not work and none of the actions by the ECB deal with the fundamental problems of the eurozone: namely the crushing debt and the fact that Portugal, Italy, Ireland, Greece and Spain – the PIIGS – need deep micro-economic reform and deregulation to become competitive against the northern eurozone members.
But with unemployment of up to 25% there is no political capital to do anything meaningful.
 

Most importantly, private capital is staying away in droves; or rather it is being mobilised to run away from the PIIGS. And now 'conditionality' on the ECB's bond purchases leaves open the prospect of devaluation. The ECB is NOT doing "whatever it takes", as promised, because a country that fails to meet the conditions will not be supported, which means it will have to leave the euro.
 

So those five countries can reform their labour markets and deregulate all they like, but unless they can attract capital to invest it will be in vain. And capital will not invest if there is a material prospect that devaluation will wipe out half of it. In the United States the Federal Reserve appears to be delivering on "whatever it takes" by announcing an open-ended bond and mortgage securities buying program at $US40 billion a month, for as long as necessary.  At that rate it will take 15 months for QE3 to equal QE2's $600 billion, and that didn't work even though it came all at once, so you've got to wonder about the benefit of spreading it out over a year and a quarter.

But at least there's no sign of deflation and the economy is not spinning into recession again as Europe appears to be.
 

As in Europe, the problem is a lack of productive investment, as opposed to speculation. American corporations are sitting on a cash pile of about $US2 trillion, even though the interest on that money is tiny, and banks are likewise sitting on the money they are getting from the Fed in return for selling bonds and mortgages, or else they are using it to speculate.
To work, capitalism requires long-term, illiquid bets to be made: someone has to build a factory or dig a mine or tie up money in a software start-up.

But these days the world has gone short. Cash is king and derivatives are its queen. Even on the stock exchange most of the turnover is now high frequency computer traders who start and finish each day owning nothing.
And why would anyone lock up their money in a factory or a mine? Money is being debased so that when it comes out of the prison of productive investment it will be worth much less, either because there has been a devaluation or because of inflation, or both.
 

QE3 is more likely to lead to an M&A boom than productive capital expenditure.

In Australia, investors are pulling back from long-term commitments as fast as they can, with resources projects being abandoned where possible or scaled back where it's not. The fear in this country is not devaluation, but the opposite – as the US and Europe debauch their currencies ours goes up, ruining our export industries.
Somehow capital needs to be persuaded to go long again, to commit to taking risk in the expectation of gain in 10 years rather than 10 minutes.

In the meantime, all the money printing will probably inflate the prices of assets, as well as commodities, so the short-termers may have another ride for a while, and forget about the debt for a while.

Source: Alan Kohler   Via: smartcompany.com.au

To speak with a Newcastle financial advisor call us today.

The post The Global Economy Won’t Improve Until.. appeared first on Newcastle Financial Planners & Financial Advisors.