WE MAY be in the middle of a once-in-a-lifetime mining boom, but 2011-12 has been a year many investors would rather forget.
Superannuation and property most people's biggest assets have been buffeted by a nasty combination of global weakness and wrenching change in the domestic economy.
Super funds look like eking out a 0.5 per cent gain over the financial year, says SuperRatings, while the S&P/ASX 200 Index is on track to fall by 10 per cent after more eurozone turmoil. Capital city house prices have slumped an average 4.5 per cent.
With so much bad news, it's easy to get despondent. Consumers have not been this pessimistic about their finances over the coming year since the early 1990s recession, a Westpac index shows. Wary investors have quit sharemarkets and rushed to financial havens, driving government bond returns to record lows.
In spite of all this, key economy-wide figures suggest things might not be quite as bad as we think.
For one, the pervasive sense of gloom has hardly stopped people from hitting the shops.
TD Securities strategist Alvin Pontoh this week pointed out that consumers' bleak mood would normally be consistent with annual spending growth of about 2.5 per cent. In the year to March, however, official data showed a 4.3 per cent jump in consumer spending.
"Consumers are saying one thing and doing another," Pontoh says.
Official readings of the jobs market are also stronger than the highly publicised layoffs of recent months suggest. And it's not just mining jobs that are being created. In the year to May, the biggest job gains actually came in professional services, which created 77,600 positions.
JPMorgan chief economist Stephen Walters says this suggests the economy has more going for it than mining. "Most of the jobs have been created in services like science or healthcare. That's implying that it's still a pretty decent economy."
As well, many households are about to receive tax cuts or higher benefits. Overcompensation for the carbon tax is forecast to leave many lower and middle-income households financially better off.
People earning more than $80,000 will receive no tax cuts, and many will lose benefits on health insurance. But overall, UBS chief economist Scott Haslem estimates the wave of new payments and tax cuts will help lift households' "free cash flow" (income after interest, petrol, tax and utilities bills) by 8 per cent in the year to March 2013. That is double the 4 per cent rise of the previous year.
These reasons for confidence, however, have been swamped by the persistently worrying news from overseas. Households have been pulling their heads in. They are still spending, but are no longer willing to always bid up house prices. Growth in housing credit has slowed to a record low of 5.1 per cent a year, compared with 20 per cent in 2003.
"They're seeing what's going on in Europe and thinking, 'maybe carrying all that debt is not such a good idea, maybe I should start paring back a bit'," JPMorgan's Walters says.
The effects of this greater caution have become clearer in the past year. Entire industries that profited from debt-fuelled consumption are under pressure, with margins being squeezed from retail to banking.
This week's second profit downgrade from Boral in as many months also showed the slow housing market has hurt some manufacturers.
As the year wore on, investors have also become increasingly concerned about a slowdown in Australia's biggest trade partner, China.
China's Purchasing Manufacturers Index, a gauge of its industrial activity, has fallen below 50 points, indicating activity is well below average.
Pengana Capital fund manager Tim Schroeders says investor fears of a slowdown have spread beyond China to all the so-called BRICs Brazil, Russia, India and China.
"What we've seen is a significant slowdown not only in China but, more importantly, economies such as India and Brazil," he says. "Basically they cannot sustain high growth rates with a developed world that's growing at sub-par levels."
This realisation of a weaker growth environment has sparked a rush for high-quality, well-financed companies while speculative mining stocks are out of favour.
"Single-project companies that are at the beginning of spending large amounts of capital are extremely vulnerable," he says.
Finally, it's clear that commodity prices have probably peaked. The price of iron ore may seem far removed from households, but the fall in prices means the economy is no longer receiving a free boost to national income. This translates to weaker growth in wages and profits.
All up, two sure-fire wealth creators of recent years a buoyant property market and rising commodities prices have come off the boil in the past year.
Is it any wonder people are feeling gloomy, even if aggregate figures suggest the economy is still in pretty good shape?
Frequently Asked Questions about this Article…
Why are everyday investors feeling gloomy about the Australian economy in 2011–12?
The article says 2011–12 has been a tough year: super funds look set to eke out only about a 0.5% gain, the S&P/ASX 200 was tracking a roughly 10% fall amid eurozone turmoil, and capital city house prices slumped around 4.5%. Add widespread consumer pessimism and record-low government bond returns as investors flee to safety, and it’s easy to see why sentiment is weak.
Are consumers still spending even though they feel pessimistic?
Yes. TD Securities strategist Alvin Pontoh noted that consumers' mood would normally suggest spending growth near 2.5%, yet official data showed a 4.3% jump in consumer spending in the year to March. The article highlights that people are saying one thing but doing another — still shopping despite bleak sentiment.
What does the jobs market look like for investors worried about unemployment?
Official readings were stronger than some headlines suggested. The biggest job gains in the year to May came in professional services, which created about 77,600 positions. JPMorgan’s chief economist Stephen Walters is quoted saying many jobs have been created in services such as science and healthcare, implying the economy has more going for it than just mining.
How is the housing market slowdown affecting companies and investors?
The article notes housing credit growth slowed to a record low of 5.1% a year (vs about 20% in 2003), and weak house-price growth has hit industries that benefited from debt-fuelled consumption. For example, Boral issued a second profit downgrade in months, illustrating how a slow housing market can hurt manufacturers and related companies.
What impact is China’s slowdown having on Australian investment markets?
China’s Purchasing Managers Index fell below 50, signalling below-average industrial activity. Fund managers quoted in the article say fears of slower growth have spread beyond China to other BRIC countries (Brazil, Russia, India), reducing demand for commodities and adding pressure to commodity-linked stocks and sectors.
Should investors avoid speculative mining stocks and favour high-quality companies?
According to the article, investor appetite has shifted toward high-quality, well-financed companies while speculative mining stocks are out of favour. Fund managers warn single-project companies that need to spend large amounts of capital are particularly vulnerable in a weaker growth environment.
Have commodity prices peaked, and what does that mean for returns and wages?
The article signals commodity prices have probably peaked — it specifically mentions falling iron ore prices. That means the economy is no longer getting a free boost to national income from commodities, which translates into weaker growth in wages and corporate profits and removes a recent source of wealth creation.
Will tax cuts and higher benefits help household cash flow and investor confidence?
The article says many lower- and middle-income households are expected to receive tax cuts or higher benefits (partly as overcompensation for the carbon tax), which UBS’s chief economist Scott Haslem estimates could lift households' 'free cash flow' by about 8% in the year to March 2013. However, people earning over $80,000 would get no tax cuts and some may lose health insurance benefits.
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