Will Australia's luck last?
31 March 2014
Many analysts are arguing that the US stockmarket is too high, which is a cautionary note for DIY investors thinking of investing offshore to take advantage of the high $A. It is also a caution for the Australian stock market. About half of the ASX is foreign owned, so if things suddenly turn bearish internationally, that will result in money being pulled out of the Australian stock market as well. The Economist has this to say:
HIGHER profits are generally seen as the most positive factor for stockmarkets. Over time, such profits should lead to more cashflows for investors in the form of dividends or buy-backs. American profits have rebounded very strongly since the 2009 recession and relative to GDP are close to a post-1945 high. In cyclically-adjusted terms, share prices are very high relative to profits (the Shiller p/e is 25.4). Just as a stock with a high p/e implies market expectation of rapid future profits growth, the same must apply to the overall market.
The graph below is revealing:
American corporations have benefited greatly from globalisation, finding new markets and cheaper labour. But the suspicion is that the process is slowing, the benefits in terms of profits are wearing off. Capital Economics has this to say:
"Corporate America is much more active in the rest of the world today than it was at the turn of the century. Although US-based “parents” continue to account for the lion’s share of the output of US MNCs, the share accounted for by their majority-owned foreign affiliates (MOFAs) has risen sharply.
This rapid growth at US MOFAs owes much to the expansion of Corporate America in emerging markets. The value added by those in developing countries nearly quadrupled between 2000 and 2011, whereas the value added by those in other advanced countries merely
Such a shift in production has reduced average labour costs at US MNC’s international operations. And it has also exerted downward pressure on wages in the US economy itself. The flipside of falling labour costs has been increased profitability. Over the same period, pre-tax profit per unit of output rose from 28% to 41% at US MOFAs, and from 21% to 25% at US parents."
It all suggests that everything is more integrated than it was before, which is something worth remembering for self managed super investors. In many ways, Australia has very successfully stayed out of sync with the rest of the world economy. But how long can it last? Saxo Bank economist Steen Jakobsen has this to say in the AFR:
“You like to call yourselves the lucky ones, I like to call you the isolated ones. I think Australia is very much in its own world in terms of the monetary cycle and you’re probably the only housing market in the world that’s going up right now. Certainly the only one where the government and central bank support the housing market.”
That isolation may not last. Jakobsen has a few predictions. he does not think the US economy is in true recovery. And he has this to say about Australia:
"Don’t be surprised if the Reserve Bank of Australia cuts the official cash rate to 1.75 per cent, down from its current record low level of 2.5 per cent.
Two, there’s more chance of him being selected to play football for Denmark than the official cash rate rising.
Three, the Australian dollar might have a run up to US95¢ or US96¢ in the short term but by the end of the year it will be closer to US80¢.
Four, stand by for some clarifying comments from the governor of the RBA Glenn Stevens following his remarks last week on the Australian dollar.
Five, the Dow Jones could fall as much as 30 per cent from its peak.
Six, China will grow at 5 per cent not 7 per cent and, finally, the US Federal Reserve will soon be forced to taper its own tapering program."
If he is right, the investment environment is set to become more difficult for DIY super investors.
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