Q: What have you seen in terms of macro-economic trends?
A: Well 2015 has been a rather messy year. It started off with a degree of optimism and then as time wore on, globally there were renewed worries about global growth. It was partly driven by a flare-up in Greece again. But that one quickly faded and then more significantly around China and at the same time US growth has sort of been running a bit hot and cold. Of course global growth forecasts have yet again been revised down. So the global economy still remains fairly constrained and growth is uneven, mind you we’ve been going through a similar pattern for the past five years now so it’s a bit like ground hog day all over again.
Q: In your view will it get worse?
A: I don’t think it will get worse, I think it will just continue to meander along. We’re probably half way through the unwinding of the mining investment boom, so as mining investment continues to decline that acts as a contraction on economic growth. But there’s been a rebalance and now it’s a more even economy. We’re seeing growth coming out of NSW and Victoria that wasn’t there before, in fact NSW economy looks very strong.
Q: So the issues around the two speed economy is starting to dissipate?
A: Yes the two speed economy that was once there has gone in reverse. The mining states like WA have slowed dramatically and they’re big under performers nationally. Whereas housing construction and retailing, on the East Coast (NSW and Victoria) generally are quite strong. This is very different to the booms of the past.
When we used to have booms they all boomed at the same time so when they went bust they all went bust at the same time. That hasn’t happened this time. The mining sector has gone bust and everything associated with it has too. But it’s far from a disaster because the previously supressed parts of the economy have picked up and helped fill the gap. But this hasn’t solved everything that’s why we’re still in this uncertain period. Where normally Australia would grow at around three per cent or a little bit more, it’s running at about two per cent.
There are still challenges out there because I would argue the Australian dollar is a little bit higher than it needs to be. I think it needs to about 60 cents and that will probably happen next year. At the same time housing productivity which helped us grow over the past few years is topping out. We need to see other sectors of the economy kick in to an even greater degree; areas like tourism, higher education and manufacturing. So there’s still issues around the economy but so far so good we’re not sliding into recession that’s why the Reserve Bank of Australia at times can refer to the glass being half full on the economy. It isn’t compelled to cut rates at the moment, even though I personally think that we need a bit more help with the economy. Ultimately they might have to cut again but it’s not a disaster out there and if you’re in any of the sectors that a few years ago were struggling at the peak of the mining boom you’re probably saying it’s ok. If you’re a manufacturer that survived the period of time when the Aussie dollar went to a $1.10US you’d be feeling more optimistic about things.
Q: Do you anticipate that concerns over China’s economy will get worse, how do you see that playing out?
A: I’m not in the hard landing camp for China. I think the Chinese have proven that they are quite adept at managing their economy in contrast to many other countries and particularly in relation to many emerging countries. I think they realised that you can’t just encourage consumer spending and deficit financing. So I think by and large China has been managed reasonably well but it does have imbalances. There is still too much of a reliance on investment relative to consumption and they’ve built too many properties which need to be unwound or corrected.
China faces a difficult balancing act, wanting to open up but not wanting to unleash forces that they then can’t control. I think also the Chinese have created uncertainty because they realise that you can’t grow by ten per cent plus anymore, it has to be a sustainable number like six or seven. But allowing growth to come down to a more sustainable pace has created uncertainty.
The Chinese have shown that if there is anything that ends up threatening growth and their objective to double their capital income by 2020 compared to where it was in 2010, then they are quite willing to act to support growth and that’s what we’ve seen recently. So debate about China will continue but at the end of the day I think the Chinese authorities have plenty of scope and plenty of incentive to keep the economy growing at a reasonable rate.
Q: Turning to investment strategies, what are the determining factors for you in terms of what a good investment is and what’s not?
A: I think it’s always key to have a solid process and you’ve got have a mix of art and science. The science is looking at the hard indicators, as to what investments are offering in terms of value. Are they undervalued or overvalued? And whether the crowd loves them or not. If the crowd is really on board and there’s a lot of exuberance then you’ve got to be a bit more sceptical. But if the crowd is more cautious and nervous and bearish then there might be opportunities there. You also want to look where the cycle is in relation to that investment and what monetary policy is doing.
So at the moment monetary policy is less favourable in the US with the Fed moving towards raising rates, but in Europe officials are talking about more stimulus. So we consider all those factors when investing. But then you’ve got to have a judgemental overlay over all that because the indicators won’t always give you the full answer. At the moment there are suggestions of a bias towards assets that will benefit from continued global growth. So shares, property related investments or commercial property investments in particular.
I think there are good opportunities in Europe and China. On our valuations European shares are actually quite cheap when you’ve got the ECB still easing and profits growing. And the recent falls on Chinese markets have taken shares to levels where they are cheaper than the Australian market. Chinese companies listed in Hong Kong are trading on a PE of eight times, but in Australia shares are at a PE of around 15 times. So there are parts of the world that are offering good opportunities for investors.
One thing the Australian share market offers is good dividends. There is always the ongoing debate as to whether companies should be paying dividends the size that they are. But the reality is they do and they have for a long time. It’s generally served Australian investors well, partly based on the view that a bird in the hand is worth two in the bush.
So if a company is paying you dividends they must be confident they’ve got the earnings and if you want to reinvest in a dividend reinvestment plan you can, but at least it gives power back to the shareholder which I think is a healthy approach.