If all goes to plan, Australia will weather some tough conditions to come out ahead in 2013, writes John Collett.
If the fearless forecasts of economists and analysts for 2013 prove correct, our sharemarket will hit 5000 points, interest rates will slide, and the Australian dollar will finally lose some heat.
These are just a few of the insights from some of the best and brightest of our financial-markets thinkers.
But first, a wealth warning. Forecasting general trends is tricky enough, let alone providing "point" forecasts, where the experts are asked where markets and interest rates will be at the end of this year. It is the assumptions behind the point forecasts that should be more helpful to investors looking for opportunities in 2013, rather than the point forecasts themselves.
Three of the five economists and analysts polled by Money are expecting a lower cash rate for 2013. At 3 per cent, the cash rate is already at its low during the global financial crisis. Any lower and it would be a record low and drive interest rates on term deposits to less than 4.5 per cent, and the average standard variable mortgage rate to less than 5.9 per cent. Interest rates could even be cut to 2.5 per cent by the end of 2013, says the chief economist at AMP Capital Investors, Shane Oliver.
He says the Reserve Bank has been too slow to cut rates and will have to do more to boost the non-mining parts of the economy. "The mining sector is slowing faster than was expected a year ago, while non-mining parts of the economy such as retailing and housing are only showing tentative signs of improvement," he says.
The chief economist at BT Financial Group, Chris Caton, expects only one cut in 2013 to take the cash rate to 2.75 per cent. "There is already a fair bit in the pipeline and we will see some of the effects of that," he says.
How much more the Reserve Bank will have to do depends on how much economic growth has to be found from elsewhere in the economy when mining investment peaks, which is going to be earlier than thought, Caton says.
However, UBS Australia chief economist Scott Haslem expects the Reserve Bank to leave the cash rate unchanged at 3 per cent in 2013. "We think that [monetary] policy is getting some traction in the domestic economy and the global economy is looking a little bit better," he says. "We are also seeing tentative signs of stability in consumer confidence and house prices."
The chief economist for Australia and New Zealand at HSBC, Paul Bloxham, is on his own in forecasting a rise - of 0.25 percentage points - in the cash rate, probably in the last quarter of 2013.
"We see that growth will pick up, and the interest rate-sensitive sectors will start to pick up and more than offset the fading contribution from mining investment," he says. "By the middle of 2013, the economy will push up against capacity constraints and that will lift underlying inflation into the upper part of the RBA's target band by the second half of next year."
SHARES ON THE UP
Bloxham has the most bullish view on shares, forecasting the ASX/S&P 200 index to finish 2013 at 5200 points from about 4700 now; an increase in share prices of almost 10 per cent. Interest rate cuts are starting to provide support for the housing market, the housing construction cycle and the retail sector, Bloxham says.
Caton tips the sharemarket could end the year at 5000 points. "The market is cheap in a fundamental sense, but it is not dirt cheap as it was a year ago," he says. Share prices climbed more than 14 per cent in 2012.
"The market has made a lot of progress and earnings forecasts [for companies] have come down," Caton says. "We are still on the cheap side and the worries only have to stabilise for the sharemarket to continue to get traction."
The managing director of fund manager NAOS Asset Management, Sebastian Evans, is cautious on shares. He is expecting the market to finish 2013 only slightly higher."Maybe I am being a bit conservative, but I think things are relatively soft in the domestic economy," he says.
WEAKER AUSTRALIAN DOLLAR
The economists and analysts expect the Australian dollar to fall against the US dollar from $US1.05 now.
The usual reasons given for the high Australian dollar - high commodity prices and high domestic interest rates - are not nearly as supportive of our dollar now that the cash rate and commodities prices are lower.
One of the main reasons for the Australian dollar staying higher for longer is that foreign central banks are buying Australian sovereign bonds.
The share of the bond market owned by foreigners is increasing, Caton says, but sooner or later it will stop growing. "I cannot see us getting to the other side of the mining investment [fall] and the currency not falling," he says. Evans says our dollar may end 2013 at US97¢; Paul Bloxham is expecting US95¢, still well above the historical average for the Australian dollar of about US75¢.
Continuing demand by foreign investors for our sovereign bonds, with their AAA credit rating (Australia being one of only about six countries in the world with the top rating), will help keep our dollar stronger for longer, economists say.
MODEST HOUSE PRICE GROWTH
Those polled expect national house prices, including apartments, to show modest growth in 2013. Forecasts, on average, show a price rise of about 5 per cent. "I am reasonably optimistic on house prices in 2013 because I think that we have already seen the trough," Bloxham says, adding that mortgage interest rates are about 1 percentage point below their long-term average. "We are expecting house prices to rise by 6 per cent in 2013," he says.
Haslem forecasts a rise in house prices of 3 per cent, though there will be quite significant differences between markets.
He says wages growth, improved affordability - due to lower mortgage interest rates and soft house prices - and an undersupply of property will support demand.
Oliver also thinks house prices will recover this year, rising by 5 per cent through to December.
Shares for 2013
The head of research at Fat Prophets sharemarket research, Greg Smith, thinks the ASX/S&P 200 index could finish 2013 at 5100 points.
There will be pull-backs along the way, but Smith says the stabilisation of Chinese economic growth, lower interest rates and a weaker Australian dollar should drag the market higher.
He likes the prospects for mining giants BHP Billiton and Rio Tinto. Their share prices have fallen during the past two years, but once Chinese growth stabilises, their share prices should get "fresh legs".
Smith also likes Telstra for its yield. Despite its share price performing strongly in the past two years, the telco's shares could rise further as investors continue to chase yield. It could even reach $5 by the end of 2013 from just under $4.50 now, Smith says.
The research director at Intelligent Investor, Nathan Bell, is more cautious on the outlook for shares. He says the domestic economy is slowing, retailers are not responding to the cuts in interest rates and some of the big mining projects have been shelved.
Bell is cautious about buying shares in companies whose prices have run strongly, such as Telstra, most of the big banks and blood-products maker CSL.
He prefers Woolworths, with shares on a cash yield of about 4 per cent and a "grossed up" yield (after the benefit of franking credits) of about 6 per cent. With Australia's strong population growth and new stores opening, Woolworths is expected to do well in 2013, Bell says.
He also likes ASX Group, which owns and operates the Australian Securities Exchange. It is a "monopolistic-type" business with shares on a grossed-up yield of about 8 per cent, Bell says. When the global economy improves, ASX Group is expected to do better on increased trading volumes, as will share registry manager Computershare, another of Bell's picks.
The head of equities at Morningstar, Andrew Doherty, fancies ANZ, BHP Billiton and Origin Energy as stocks that will do well over the next three years.
"ANZ is performing well domestically and is pushing into Asia and that does open up an element of uncertainty, but we think it is well placed to perform quite well in Asia," Doherty says.
He also thinks the market is being overly pessimistic about BHP Billiton and Rio. BHP is preferred because it is better diversified.
Origin Energy is another of Doherty's preferred stocks. Origin is an energy retailer with more than 4 million customers.
Origin had an earnings downgrade in late 2012 that sent its share price lower. Origin's shares are trading at just above $12 - but Doherty says fair value for Origin shares is $15.