Summary: Federal Treasurer Scott Morrison and Federal Reserve Chair Janet Yellen are positive about the momentum of the Australian and US economies in 2016, but there are still a number of unknowns to deal with, including the effects of the slowing mining boom in Australia and the effect of rate rises on the US dollar.
Key take out: Consumers now expect to be able to rate and review the providers of goods and services, so investors should be on the lookout for companies integrating technology to provide this service. My guess is we’ll see a federal election in the first half of 2016.
Key beneficiaries: General investors. Category: Shares.
As we close Eureka for the Christmas and New Year break, I want to begin by sharing with you the message that is emanating from both Australian Treasurer Scott Morrison and US Federal Reserve Chair Janet Yellen.
They might be wrong, but if they are right, then 2016 will be a better year for shares than many are now anticipating.
Morrison’s optimism on jobs
Let’s start with Scott Morrison. After he had delivered his MYEFO statement, I had the chance to interview the Treasurer (alongside Alan Kohler). Now, politicians will always talk their book but Morrison believes that the labour momentum we have been seeing in the last two months will continue into 2016 and give the economy the momentum it needs to continue to grow despite the problems coming in mining investment and the closure of motor manufacturing.
He adds that if he were tougher on expenditure that growth would not take place. We therefore have a government that is pumping large sums into the economy and while that might not be sustainable, it is certainly helping current economic activity. Later in this commentary I will talk about what Scott Morrison had to say about superannuation.
Rate rises: what we don’t know yet
Over in the US, Fed chair Janet Yellen is preaching a very similar line. She expects the American economy to maintain its momentum and that will cause US interest rates to rise gradually. There are lots of things that can go wrong in that scenario including the deep problems facing US shale oil and gas producers. There are major losses that have been incurred by lenders to the industry but those losses are not in the mainstream banking system but rather in the non-banking arena. No one quite knows who is vulnerable.
Yellen thinks that the problem is manageable but nobody really has a good handle on it. If the US raises rates too far or too fast it will cause the American dollar to rise sharply. China has now decoupled its currency from the American dollar, so American companies would be vulnerable to a big rise in imports from China. After the initial reaction to the Yellen speech we saw money being shipped into the US to safe haven assets. The US dollar rose, but shares fell.
Threats to our market in 2016
In Australia the biggest threat comes from the fact that the full impacts of the mining investment decline that have not yet shown up in the economy. On the morning after the Janet Yellen speech as the Australian share market rose, BHP Billiton shares fell. To me this was a signal that in the commodity space there are a lot of nasties still to come out of global corporations. Right now too many are producing for all they are worth, trying to keep their revenue high, but down the track they will have to cut back and that will be costly. BHP is not one of the companies under financial pressure but they are part of the overall scene.
We may have pushed the value of yield assets, including industrial property, too high. In my view the great threat to Australia is that the weakness in the housing market will spread across the property spectrum – an event that is much more likely if we continue with low migration rates.
But if Morrison and Yellen are right and both the Australian and US economies achieve growth, in the case of the US any strong activity there will help China and therefore Australia. In that situation both US and Australian companies have the opportunity to generate much larger profits.
Rise of the ‘reviewing’ economy
In Australia let’s start with the banks. We are going to see the cost levels of Australian banks fall considerably. The sector is clearly in danger from so called disruptors who use new technologies to raid specialised banking markets. While that is a clear risk, as the costs fall so profits will rise. The banks are moving from a stable operating environment to one where they are virtually high technology companies and not all the banks will get the technology right. This is going to mean much closer monitoring of individual bank stocks is required.
The era of extensive technology change will apply not just to banks, but to all companies.
Strangely one of the biggest technology changes sneaking under the radar is the ability of consumers to pass judgment on suppliers of goods and services. The whole basis of the Uber taxi revolution is that passengers can rate their experience with drivers, and this greatly improves the service. The Airbnb group has established an accommodation network around the world and pivots on the fact that people rate their experiences. This enables a real monitor of quality and gives people confidence to book.
In the next few years a lot more companies will be forced to give their customers a chance to rate them. In the telecommunications space all the major players are trying to lift their service levels in preparation for this event. One of the smaller players, Macquarie Telecom, is already publishing customer ratings. Shareholders will need to watch the customer ratings of the companies they invest in and be wary of those that are not joining this revolution.
The future of super
The impression I got from Scott Morrison is that he plans to tailor superannuation so that it reduces the government pension liability. He does not plan to attack the savings that have been built up in superannuation.
But Morrison clearly sees superannuation taxation as a differentiator between the Coalition and the ALP. Finally my guess is – and I must emphasise that it is only a guess – that if all the pointers continue favourably in early 2016 we will see an election in the first half of the year, possibly in the first quarter.
All the best for 2016.