Good Times Keep Rolling
PORTFOLIO POINT: The sharemarket can be expected to continue rising for the next few months, but watch the performance of the global economy. |
THE ECONOMY
- The current account deficit rose by $773 million in the December quarter to $14.5 billion or 6.1% of GDP. Net foreign debt rose by $22.4 billion to a record high of $472.8 billion. And the terms of trade rose to a 32-year high, just below the record high set in March quarter 1974.
- Private sector credit (lending) rose by 1.3% in January to stand 13.8% higher than a year ago. Business lending rose by 16.3% over the year '” the fastest annual growth in 16 years.
- New home sales fell by 0.3% in January. Government consumption and investment spending rose by 2.4 per cent in the December quarter.
- The current account figures have few implications for investors. But a deficit up around 6% of GDP remains a risk for the Australian dollar. If the global economy were to deteriorate, high-debt countries such as Australia would be most vulnerable.
AT FACE VALUE, the widening of the current account deficit is disappointing. However, it’s important to note that the deficit was substantially boosted because Qantas purchased several aircraft during the quarter and the rising oil price increased the import bill for fuel.
Overall, the bigger aircraft and fuel bill boosted the current account deficit by $1.46 billion, more than accounting for the overall deterioration in the deficit. Still, increased aircraft imports will be a fact of life over the next two years as Qantas completes the upgrade of its fleet.
The resources boom has long promised to chip away at Australia's current account deficit. However, despite the highest terms of trade in 32 years, Australia is saddled with a current account deficit of about 6% of GDP. While miners have been able to export a higher value of resources, a lacklustre export performance from the rural sector has kept exports relatively flat.
The good news is that the Australian Bureau of Agricultural and Resource Economics reported on February 27 that Australian farmers have achieved their second-biggest winter harvest on record. In addition, the summer crop is expected to increase by 21%. Until now, Australia has not had both the resources and rural sectors firing at the same time.
If rural exports lift as expected in coming quarters and support expanded export capacity in the mining sector, the much fabled improvement in Australia's trade accounts will be a step closer. Still, waiting for the current account to improve has been a lot like waiting for Godot. For more than four years, the export sector has failed to provide a positive contribution to Australia's economic growth. There is no guarantee that once all the new investment is in place, expanding our export capacity, that the global economy won't turn down, reducing demand and prices for our key commodities.
Corporate Australia remains firmly planted in the driver’s seat of the Australian economy. Buoyant operating conditions have forced more and more businesses to buy new equipment to expand capacity, resulting in business investment reaching a 16-year high. Housing credit also looks to have bottomed, but that should not overly concern the Reserve Bank. Housing credit growth remains below its long-term average and most finance is directed at owner-occupier housing rather than investment properties.
MANAGED FUNDS, HOUSING AFFORDABILITY
- Australians became decidedly richer in the last three months of 2005, according to figures released on February 24. Not only did house prices rise by 2.1% in the December quarter '” the largest gain in two years '” but superannuation and other managed fund assets soared by 5%.
- In the December quarter, managed fund assets rose by $45.9 billion, boosting per capita wealth of Australians by $2150. Managed fund assets now stand at $955.3 billion, or an average of $46,750 for every Australian. Over the past six years, managed fund assets per capita has more than doubled.
- The price-earnings ratio fell to a nine-month low of 14.72 in the week to February 24, well below the three-year average of 15.75.
- Affordability issues won't prevent house prices rising further over 2006. Tight rental markets, higher wages and firm employment will all serve to boost demand and prices of residential property during the next 6–12 months.
THE AVERAGE Australian became more than $2000 richer in the December quarter, and all courtesy of stronger investment markets, both at home and overseas. During the quarter, the value of managed fund assets soared by almost $46 billion, or about $2150 for every Australian.
And the boost to wealth levels doesn't even include the lift in house prices. Not only was a 5% rise in managed fund assets working to lift wealth levels in the final three months of 2005, so was a 2.1% rise in house prices.
It certainly wasn't just the resources boom serving to increase wealth levels over 2005. The domestic sharemarket posted solid gains over the year but so did a raft of key global sharemarkets. And fund managers shared in the offshore gains, funnelling a record proportion of assets into foreign markets. Fund managers now have a record proportion of total assets invested offshore. In the December quarter, 20.9% of all managed funds were invested overseas, exceeding the previous high of 20.7% set almost six years ago (March quarter 2000).
Plenty of column inches are devoted to rising debt levels, especially by Australian households. But the rising amount of assets held by managed funds, or Australian wealth levels, is an equally impressive story. The value of managed funds now exceeds Australia's GDP, whereas 15 years ago it was less than half the size of the economy. And in just six years, managed fund assets per capita have more than doubled.
Rising profits and favourable valuations will drive the Australian sharemarket higher over coming months, further lifting household wealth levels and, in turn, spending. The price/earnings multiple fell to a nine-month low of 14.72 in the week to February 24, well below the three-year average of 15.75. Affordability issues won't prevent house prices rising further over 2006. Tight rental markets, higher wages and firm employment will all serve to boost demand and prices of residential property during the next 6–12 months.
In part, Australians can afford to devote more of their income to housing because their savings are working harder in other areas, such as superannuation. And improved affordability of a range of goods and services, such as cars, consumer electrical goods and clothing, also are key reasons why reduced affordability of housing is not a major constraint on household budgets.
BUSINESS INDICATORS, PETROL PRICES
- Company profitability hit record highs in the December quarter, courtesy of the resources and infrastructure boom. Gross operating profits rose for the third straight quarter, lifting by 0.8%, to $39.5 billion.
- In 2005, profits rose by 15.7%, above the decade-average pace of 14.4%.
- The national average petrol price fell to a seven-week low in the week to February 26. The average petrol price stood at 118.4¢ a litre, down by 0.7¢ a litre to the lowest level since January 8.
THE RESOURCES boom and the related infrastructure boom are the stand outs in the latest business indicators survey. Not only are profits soaring in mining and construction but so are wages and sales. Western Australia, the state most exposed to the resources boom, recorded the strongest growth in sales of goods and services in the December quarter.
Australian businesses continued to prosper in late 2005, despite an upswing in energy prices at that time. Undoubtedly, higher fuel costs hurt profitability in the December quarter. However, as testament to the strength of corporate Australia, business profitability rose to a record high. Australian businesses facing competitive pressures and higher fuel costs were able to squeeze cost savings out of other areas of their operations in the quarter to boost profitability.
One of the biggest challenges to future business profitability is lack of available capacity. Demand for raw materials from China and Asia continues to grow at a rapid pace and shows no signs of letting up. The good news is that Australian businesses are making the necessary investments to keep up with the rising demand with capital spending in 2005 growing at the fastest rate on record.
Craig James is the chief economist at CommSec, the broking arm of the Commonwealth Bank.