The coming year is looking tough to call, so today the views of four major players: three brokers and the country's pioneering international investor.
It is not meant to be a comprehensive round up nor one that examines the prospects of individual companies. It's just the latest thoughts from three brokers: CSFB, Merrill Lynch and Goldman Sachs JBWere and the listed Platinum Capital Group.
In fact the outlook for the Australian economy and investment is more dependent on what is happening overseas in the US and China, than at any time in recent years.
But as the jobs figures yesterday show, we are traveling well. Rates may rise, but that's because of the strength of the economy, not any weakness.
Travel the US, Spain, Britain, Italy, Germany, France, and Japan and the gloom is palpable while in China, the fear is inflation as food costs continue to trouble everyone, from the government down to the lowliest worker.
The US represents the downside and China the counterbalance as it seeks to slow an overheating economy, while the Americans try and keep a tanking economy out of a full blown recession.
One point to remember is; be very wary of gearing and leveraged companies, especially where property of any sort is involved.
Risk is back in fashion and the market has decided that borrowings, leverage and gearing are indicators of possible trouble. So it's now the higher the reward the higher the risk.
That's the message from the treatment of the listed property trusts, especially Centro and MFS.
CSFB believes the market is likely to enter an earnings downgrade cycle, because global growth is slowing to a sub-trend pace.
It said in its latest circular:
Growth in the G3+ economies is slowing sharply, with recession on the cards in the US and Japan. Chinese growth is also likely to be reined in by policy tightening and G3+ slowdown. Negative growth momentum is also consistent with negative risk appetite and PE compression. In our view, the market could experience a prolonged period of negative risk appetite and PE compression because Fed easing is likely to take.
From valuation perspective, the Australian market is slightly overvalued based on PE.
In slowing growth environment, investor risk appetite falls and so do valuations. We, therefore, expect the PE to contract further and eventually end up in undervalued zone, consistent with what has been happening historically.
Ordinarily, in an earnings downgrade cycle with downside valuation risks, high yield stocks (e.g. LPTs and Infrastructure) are the best place to be because of their defensiveness.
However, many high yield stocks are not as defensive as they once were because of their increased use of leverage and financial engineering for growth.
When the shock to world growth and risk appetite originates from credit markets, we would not expect leveraged plays to do well because of higher funding costs (widening credit and liquidity spreads).
Only when Fed easing becomes effective, and spreads normalise, will there be buying opportunities in the high yield space. Until this time, the best defensive options are stocks with strong, non-cyclical earnings growth, and low-leveraged, high-dividend yield stocks.
Broadly speaking, we expect the Australian economy to do better relatively to global economy.
So we believe that Australian banks and consumer stocks should outperform stocks leveraged to global growth.
Merrill Lynch sees the key macro investment ideas which stem from its analysis and economic themes are: as domestic headwinds build (slowing earnings growth into 08-09) and global reflation takes hold. We expect greater investment returns from sectors and companies with global earnings exposure; that are less domestically economically sensitive, have stronger industry structures that support top-line growth; and provide higher relative yield.
In line with our view of the consumer, we prefer the consumer staples sector over discretionary.
GDP growth is forecast at 3.1% in 2008, down from 3.8% in 2007. We expect growth to be stronger in the first half of the year than the second. In 2009, we forecast GDP growth to strengthen to 3.5%.
Consumer spending is forecast to be solid in the first half but weaken in the second as household disposable income growth slows, debt servicing burdens rise and asset market-driven wealth effects fade.
Business investment is forecast to outpace housing investment for the first half of the year, before the relative growth rates between the two sectors start to close in the second half and in 2009.
Both headline and underlying inflation are forecast to rise above 3% in the first half of the year, before moderating later in the year. Late cycle cost pressures will be prevalent.
We believe the RBA is close to the end of the tightening cycle. We expect another rate hike (cash to 7.0%) and significant fiscal tightening.
The tightening in financial conditions since mid-2007 and slowdown in global growth should be sufficient to moderate demand and bring underlying inflation back into the target range over the medium term.
We expect bond yields to stay above 6% in the near term before rallying in the second half of the year and then falling further to 5.5% in 2009.
Commodity prices, growth and interest rate differentials remain supportive of the A$ in the early part of the year, before slowing global growth, softer commodity prices and a peaking in Australian growth weigh on the A$ in the second half.
Ordinarily, we would favour LPT and infrastructure for defensiveness. However, higher funding costs, high leverage and falling asset prices are likely to be negative for those stocks.
Only when Fed easing becomes effective, and spreads normalise, will there be buying opportunities in the high yield space. Until this time, the bes
