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Michael Savy Blog post by Michael Savy

2015 Share Market & Equities Outlook – Part 2

Hard Minerals & Global Market – Asia, US & Europe

Ben: Let’s talk about hard minerals and hard resources. Obviously iron ore is the big talking point down from peaks of $150 a ton thereabout down to earlier in the $130 a ton, now down to collapsing sub $65 a ton.

Michael: Similar to the oil market story, it is a discussion area on the supply and demand factors. But we saw the noticeable drop in August or as we came into the new financial year. In part, that was due to the fact that the Chinese were starting to slow down. The Chinese economy has slowed to a point where some commentators forecasting or expecting that the GDP growth rate would actually be sub-seven. The bulk, we’re still saying that it could be 7.1, 7.2, which we will take. But others are actually quoting a figure of sub-seven.

Ben: Yeah. The Chinese do have a big war chest so they could put some stimulus into their marketplace. They’re obviously concerned about that just to – obviously the Chinese house prices have been a real problem as well. So they’re keeping that powder dry for now and from a point of view around our markets, that obviously has had a big impact in terms of the confidence on our markets and our mining sector, hasn’t it?

 

China

Michael: Look, certainly, I’m a little bit more optimistic with China at this stage heading into the next 12, 18 months in that it has slowed down. Part of the reason why they were slowing it down, it was an intentional slowing. If we go back a few years where Chinese inflations were above five, that was a concern. Growth rate is at 10 percent. It’s a concern for the government.

So it has been a strategic decision by them to slow it down a little bit and also reengineer their economy to go from an export base to more a consumer base.

Ben: Yeah.

Michael: And one of the key things that has come out of that is that the inflation rate is actually down to around the two percent mark, which is that natural rate that most – the federal reserves or the treasury is generally trying to target.

So with that coming down to the two percent level, we’ve seen that the Chinese government is prepared to stimulate where need be to keep that growth rate above seven and we saw that late last year where they cut rates for the first time in about two years or so.

Ben: I mean if we keep it simple, their agenda is they want to see their nation, their people having a better quality of life and a better standard of living. So through that comes consumption of goods and drives service industry, the manufacturing industry and that’s what they’re talking about, 1.3 billion people, getting an economy moving internally as opposed to be a net exporter of goods.

Michael: It’s interesting in that – yeah, this year 2015 is coming to the end of the Chinese five-year plan which they announced back in 2010 and at that time, the key three things that they were talking about with regards to the five-year plan was to go west, to go internal and to go green. So that is around about essentially making a better life for the Chinese people.

Ben: So, does that tell a story around the markets? Let’s just fly around the globe and have a look at the different marketplaces and then come back to that story, because what I want to get out of you before we finish today is an insight into areas of industry and certain business ideas. Are you big on energy? Are you looking at defensive stocks? What’s the sort of play that you’re looking at around that?

 

USA

So let’s start with the US, the biggest economy in the world. Where do you see the markets?

Michael: Look, the US has been a stellar performer over the last 2014 I should say and it has still got the key ingredients or characteristics for them to push forward with regards to the economic growth of that side of things. With the drop in oil prices, again that theoretically can push their GDP up a bit further as well.

Last year in fact the GDP numbers were right above five percent. So again, the drop in oil prices, that would be a lot of benefit to them. So what we’re looking at there overseas or in the US particularly is the consumption.

Now US unemployment has actually dropped to a point where it’s less than Australia. It’s currently 5.8 and they generally take off around about 0.1 of a percent every month. So to get to that natural rate of unemployment where we see 5 to 5.5, we’re talking somewhere between March 2015 to June.

Once we get to a full employment scenario, that’s where we may see three or four months or so. We will see price or salary inflation.

Ben: Yeah.

Michael: Because one of the issues that the US is going through is that whilst employment has actually been filled up, their salary increases haven’t necessarily caught up.

Ben: Yeah, there has been wage stagnation. We’ve obviously got the quantitative easing, so the rollback of that type of thing and that’s being well-communicated to the market. Are we seeing that sort of – those steps taking place sort of second half of 2015?

Michael: Yeah, look the – last year, one of the big concerns was about the quantitative easing and when it would start. We’ve certainly gotten past that. So the question now is, “When will the interest rates officially increase?”

Again if we went back six months ago, the expectation was that the first rate increase would be March of this year. But with the oil prices going down again impacting the inflation numbers, it gives the federal reserves some capacity to hold off.

So it could quite be foreseeable in the latter half of this year or even carried over into 2016.

Ben: So equity markets have had a fairly good run over there, obviously outperformed our local market and a lot of that potentially through the governed stimulus that’s going on. Do you still see some scoping in their marketplace improving over the course of the next 12 months?

Michael: Look, I think the – certainly no doubt over the last six years, the quantitative easing has allowed the markets to run quite hard over the US with respect to the earnings, and that was the concern last year when we thought that when quantitative easing comes back, the money is out of – earnings will come off.

However, on the flipside of that is that if the US consumer starts spending, the real numbers will start to pick up and therefore the top line, the profit numbers should hopefully be able to be maintained. Should that be the case, then it’s quite possible for the US to maintain their trajectory.

Ben: So your read is more optimistic than pessimistic on the US market?

Michael: I’m probably on the neutral side of things because it’s still hard to gauge the reduction in – or the increase in interest costs from the quantitative easing, but also the flipside, the pickup in revenue of consumer spending.

 

Europe

Ben: OK. So neutral in the US. Let’s move across to Europe. Let’s have a look at the Europe story and what do you read into that.

Michael: Europe may not necessarily be a popular view but I’m probably more optimistic in terms of where to place your money in Europe than I am in the US.

Ben: OK.

Michael: In part because their inflation rates are quite low. The unemployment levels – not withstanding the fact that the European Union is a collective of a number of countries, that doesn’t necessarily want to do everything the same way.

Ben: Yeah.

Michael: Not withstanding that, there is a little bit more capacity. So what I’m looking at is predominantly around capacity.

Ben: Yeah.

Michael: The US, as it approaches full employment, will have capacity issues whereas Europe necessarily won’t.

Ben: So there’s a lot of upside in capacity and political stability. Can I interrupt there and ask about – so obviously that’s going to be a big read for the market to …

Michael: That’s right. So the two big issues there in Europe is that the market generally will – a lot of commentators are expecting that the European Union will start their version of quantitative easing soon. So that’s other reason why we’re a little bit more bullish in that space.

On the other hand, this year we will see quite a few elections in Europe starting with Greece. We’ve got the UK coming up as well.

Ben: Yeah.

Michael: Now a lot of these elections are around – well the Greeks had to actually call an early election because there is a large portion of the population that doesn’t necessarily agree with the austerity policies that have been in place.

Ben: Look, nothing has really changed in that sense. They’re not seeing any quick runs on the board. So I think from that point of view, you’re absolutely right. I mean they talk about them leaving the union. So that could stir up a little bit of uncertainty. But on the whole, do you think that there’s a little bit more upside?

Michael: On the whole, there’s a little bit more upside. We’re not talking ridiculous three plus numbers in terms of GDP, but to go probably – even if we go in the mid-ones, it’s certainly a little bit more …

Michael: Some opportunity there.

 

Asia

Ben: Japan, you want to make a comment on Japan?

Michael: Look, I will probably put Japan and the whole Southeast Asian region, including China together.

Ben: OK.

Michael: In part because the Japanese have been working on their quantitative easing policies over the last couple of years. There’s probably a little bit left to go on that. The reason why I put it together with that – the Asian area is again addressing the consumption factors with regards to the US but also domestic Chinese consumption and also Japanese consumption.

Coming back to the emerging markets, maybe jumping the gun a little, but with regards to the emerging market side of things, with regards to the oil, certain emerging markets such as Russia and Venezuela will struggle a lot with regards to the oil price whereas emerging market countries that are more manufacturing-based that can fulfill the requirements of the consumers will actually do better.

Ben: So India.

Michael: So India, China, Taiwan. Not so much Brazil. They’re more commodity-based.

Ben: OK, OK.

Michael: But certainly India, Taiwan, China, the manufacturing base.

Ben: So a little bit more bullish in that sector.

Michael: Absolutely.

Ben: Fantastic.

Michael: Not withstanding, there’s always a caveat …

Ben: Of course, always a caveat, always a caveat.

Michael: It’s again with regards to the oil price, what it’s actually doing to some of these other countries, emerging market countries. It has a political impact on some of these countries with respect to there’s less revenue coming into their economy. Therefore they will have fiscal issues. So if we look at Russia, which we had a little bit of a scare late last year, should they default, they will have obviously impacts with the emerging market economies.

Ben: So let’s look at the sectors. So …

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