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Themes for 2015: Key Strategic Considerations

Economists generally all expect that 2015 will be another year of below-trend growth in the Australian economy. Most economists expect growth in real GDP in 2015. Some say as much as 2.5% but this may well be at the high end of expectations. The good news is there will not be a recession.

Exports from Australia will generally be at lower prices. Unemployment will remain high and risks of further deterioration of the labour market could see business and consumer confidence slide.

We see a number of themes developing:

Unemployment: Unemployment is expected to continue to edge higher through most of 2015 as new job creation continues to fail to keep pace with the number of new entrants to the labour force. The unemployment rate will continue to erratically drift higher, somewhere between 6.75% and 7.0%. In some regional centres, unemployment will be higher.

A$: The Australian dollar will likely continue to decline against the US dollar. This will provide additional impetus to economic activity but it may take longer to have its full effect than expected. Demand for the Australian dollar declines as capital inflows into mining investments fade. Bank of America Merrill Lynch Forex strategists predict the Australian dollar at 77 US cents by the end of 2015.

X Factor: The X factor for confidence could well come in the form of the dramatic slump in oil prices. The slump in world oil prices caused by a major over supply has seen prices drop by more than half. This has led to a drop in the price at the pump of an average 40¢ a litre. Each time a car is filled up once a fortnight; motorists are saving up to $30, money that can now be spent elsewhere. How long will this last, is anyone’s guess!

Global: A stronger US economy and a stronger US dollar will contribute to more declines in the Australian dollar. A slowing China, and falling inflation globally, will add to downward pressure on the prices for Australia’s key commodities. However, cheaper oil is a positive for the Australian economy because Australia is a net importer of crude oil. On the other side, lower prices for natural gas will impact Australian exports and make it unlikely of any major further expansion in the Liquid Natural Gas Industry.

Weak income growth: Australia’s terms of trade will deteriorate further, by about 6% in 2015. Each shipload of iron ore is worth less and less as prices fall. In the early 2000s a ship load of iron ore was worth the same as 2,200 flat screen TVs, in 2011 about 38,000 TVs and now is worth about 17,000.

End of the resources boom: The transition in the resources sector from investment to exports which has been underway since 2012 will intensify as Liquid Natural Gas plants which have been under construction begin to come on-stream. Four out of seven Liquid Natural Gas plans under construction will start operating in 2015. It’s also likely that existing mining operations will be looking to cut costs.

Housing: New dwelling construction activity is expected to reach a record high in some of our capital cities, although its rate of growth will slow, as will the rate of increase in property prices. Talk of 200,000 new dwellings to start in 2015 has been touted. It is likely that this is a very optimistic figure and a more reason figure of 150,000 will be realised at year end. At this level, it would take at least 7 years at this level of activity to get anywhere near filling the current national housing shortage.

Consumers: Growth in consumer spending will remain sluggish, reflecting very weak growth in household disposable incomes, a reluctance to add further to high levels of household debt, and ongoing concerns about rising unemployment. Forecasts consumer spending will grow by 1% or a little more.

Capital Expenditure: There are some indications of a pick-up in capital spending in limited areas of the non-mining economy which could also help with job creation. Actual business conditions, rather than confidence, have improved if only marginally. There are indications of stronger capital expenditure and hiring in labour-intensive sectors such as construction, transport, recreation and finance.

Interest Rates: Fiscal policy will remain a focus for the Abbott Government as it struggles to get the budget back onto a credible path out of deficit and back to surplus. Falling tax revenues and a disagreeable senate will make any reform or innovation near impossible. The RBA is likely to hold interest rates unchanged at 2.25% after cutting the cash rate in February, having left rates unchanged since August of 2013. It is possible that the RBA may start raising rates in 2016. We are resolved that the next movement in the RBA’s cash rate will be upwards, but not until the second quarter of 2016.

Based on what we have discussed above we see the key strategy considerations for 2015 being:

  • On the investment front, being slightly overweight in global equities and property will provide better outcomes. Exposure to the United States is good thing as this market is travelling very well at present. Opportunities in Japan and some other countries also exist for those with high risk tolerances.

  • As always, adequate diversification of your investments is king and the best way to protect your capital in tough and or uncertain times. Exposure to alternative assets is golden right now where there is low correlation to other asset classes. This also goes with bonds and other fixed interest investments while currently under performing for some time now will see resurgence when interest rates are lifted.

  • Regular rebalancing of managed funds within super will make sure your diversification is maintained. One of the greatest criticisms of industry super we have is that industry super don’t offer this vital function and can leave you over exposed in the wrong asset classes.

  • Review your industry super fund. Not all funds are equal and yours may be inferior to others. The best returns for industry funds in 2014 were around 9.0%. Average returns of our clients were at least 20% better than this.

  • Increase cash buffers to protect against unexpected changes in financial circumstances.

  • Look to reduce non-tax deductible debts to save interest. Regardless of how the markets perform, an interest saving is still a certain cost saving.

  • Look to at your debts. Interest rates have fallen and there are some very attractive offer out there for home loans, personal loans and credit cards. 3 and 5 year fixed home loan rates are the lowest they have ever been. Taking a split strategy will save you a significant sum.

  • As always, keep your insurances relevant. Don’t hold too much cover or not enough. A health event or death may dramatically change the fortunes of your family situation.

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