The case for optimism on the Oz economy and stocks, which at times seems to be the sole domain of me, is now starting to be shared by the likes of the Australian Financial Review and more and more chief economists.
So what are the more compelling arguments to explain such optimism? Let’s start with the AFR’s Jacob Greber’s take on the subject under his heading of “Economy gathering steam on global pick-up.”
The following words were music to my eyes, if that’s possible: “Australia’s economy is set for a bumper second half of 2017, spurred by the best manufacturing sector conditions in 15 years, falling unemployment and a widespread global upswing that is raising demand for exports from iron ore to tourism, say some economists.”
Well done, Jacob!
This is what has driven his newfound optimism:
- GDP growth is expected to spike, with year-end economic growth at 3.3%, if HSBC’s chief economist, Paul Bloxham can be believed.
- Last week we saw the biggest upgrade in planned investment spending since the GFC.
- The Budget Deficit is $8 billion lower than expected. That reflects better profits, more jobs and greater tax collections.
- A part of the good news for Australia and rising commodity prices has been the arrival of synchronized economic growth around the world, which hasn’t been seen for seven years. But it’s not just an economic thing. It’s a market thing as well.
“We expect all the major markets to report healthy EPS growth in 2017. That’s the first synchronized upturn since 2010,” wrote Robert Buckland, chief global equity strategist at Citi Research, in a recent note.
“That’s a big change compared to recent years, when we had various regions and countries moving in and out of EPS recessions,” he added. (CNBC)
- OK, that’s another plus but what’s the outlook for commodity prices? Morgan’s chief economist and one of the best commodity prices forecaster in the country isn’t tipping that gravity will pull these crucial Australian export prices down. He also has a more positive view on local stocks than he did six months ago. Meanwhile, Macquarie has just upgraded its iron ore price outlook, which is not only going to be good for the likes of BHP, Rio and Fortescue, it should help the overall stock market index.
- And while reporting season and the associated outlook statements weren’t great, after doing the numbers from our top 200 companies, an expert business assessor like Contango Asset Management’s George Boubouras can see our S&P/ASX 200 index beating the 6000 level by at least mid 2018, then going higher over the remainder of the year.
- Another help to our economic and then market outlook is the Oz dollar. The bets are still being piled on an eventual depreciation. This is what the NAB economics team is thinking: “Until we see that ingrained US dollar bearishness has run its course, at least for now, then setbacks for AUD/USD are likely to be shallow and a move to above 80 cents hard to argue against with any conviction,” they said.
“We’d also note that while AUD/USD is now looking rich to our short term fair value (STFV) model estimate (0.7910 vs. 0.7690 STFV) this is inside the model’s ‘ fair value range. Typically, reliable buy/sell signals only emerge when AUD/USD is about 4 cents away from STFV.,” NAB adds.
“We maintain our 0.70 year-end /early 2018 forecasts for AUD/USD while acknowledging that the level from which we still expect a 5-6 cent fall into year-end is currently several cents higher than when we made the forecast.”
A lower dollar would not only push up economic growth but will help all those great Aussie stocks, such as CSL, Macquarie, etc. that have better bottom lines when the dollar falls.
All the above reinforces my optimism about stocks and even though September and October can be two challenging months (and we have to remember that), I also like the latest reading from the closely-watched Citi Economic Surprise Index.
Recently, the Yanks saw their economic growth spike up to 3%. And given Citi’s recent take on economic surprises, the USA could remain a good driver of world economic growth and stock markets.
Adding to the story, Reuters last week told us that “Citi Research’s gauge on Friday turned the least negative since early May as unexpectedly strong data on domestic manufacturing offset weaker-than-forecast readings on non-farm payrolls and consumer sentiment.”
The Citi barometer CESIUSD, a measure of economic data that can come in weaker or stronger than forecast, fell to its lowest level since July 2011 on June 26, when it hit -78.5.
It’s now at only -18.5 and is on a nice trend away from a worrying slide in some key US economic indicators.
And Hurricane Harvey, while being a social negative, might be an economic positive.
“On net we think the GDP impact from Hurricane Harvey to be positive over time as the activity during the reconstruction phase are likely to offset the lost activity. However, this does not necessarily mean that the economic effect is positive,” Bank of America Merrill Lynch economists wrote in a research note on Friday.
Obviously, the geopolitical issues linked to North Korea can’t help stocks now but if this hothead battle between Kim Jong-un and Donald Trump can be hosed down, and the US President pulls off a tax play before year’s end, which his Treasury Secretary, Steve Mnuchin predicts, then our stock market could have numerous reasons to head higher.
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