Mining investment may be soaring but that's not much use for struggling share prices, writes David Potts.
End-of-financial year parties might be an occupational hazard, but there seem to have been fewer than normal, or maybe I wasn't invited.
Whatever, you can be sure this financial year is going to be anything but normal. Well, except for the economy, which, if Treasury is right, will be as normal as you can get. This it calls trend growth, or 3.25 per cent a year - a kind of default option.
Few economists believe the budget forecast, but they are really only arguing over a decimal point.
Either way, the economy won't exactly shoot the lights out.
Oh, apart from a record level of mining investment. Don't get too excited - that just means at least half the windfall from high commodity prices will leave the country on the next ship, because all those imported rigs and equipment have to be paid for.
Still, household incomes are rising and inflation has had the stuffing, at least the non-carbon kind, knocked out of it. Such is the state it has itself in over Europe, the market doesn't believe the economic forecast or, more likely, isn't listening.
Not even lower interest rates - and the way Europe's going, it's more likely than not they have further to drop - seem to be making much difference, though give them time.
Meanwhile, wherever the government's $2 billion budget bribes have been going, it hasn't been the sharemarket.
Although DIY super funds have, according to Investment Trends and Vanguard, $50 billion in excess cash, the same survey shows most of their owners are over 55, so having already had their fingers burnt, it would take bigger rate cuts than the Reserve Bank has in mind to drive them back to the sharemarket.
With profits flat because consumers fearing for their jobs aren't shopping in local stores, there's a question over how long dividends can be sustained at these high levels, and every week there's some share price-sapping new capital raising or rumour of one. Commodity prices have peaked, the cost of new mining projects is soaring and there's no reason to expect a surge in volumes shipped any time soon.
Then there's the overvalued dollar. It has pulled down inflation, stretching wages further, only to turn around and bite the sharemarket on the backside. Expect it to stay overvalued in 2012-13 thanks to Australia's lure as one of the few AAA-rated countries left.
For all that, next to property, the sharemarket looks in rude health. Property prices rose too far in the debt-fuelled '90s and early noughties. How long it'll take for them to deflate will depend on whether there are more baby boomers selling their investment properties to fund their retirement or first home owners buying.
This will be a good year for doing nothing, I suspect. But I must be off, something's just arrived in the mail.
Frequently Asked Questions about this Article…
What does the article mean by a "record level of mining investment" and how could that affect everyday investors?
The article notes mining investment is at record levels, but much of that spending goes on imported rigs and equipment, so a big slice of the windfall leaves the country. For investors that means big mining capex doesn't automatically translate into higher local share prices or broader consumer benefits.
If household incomes are rising and inflation is easing, why isn’t the sharemarket booming?
According to the article, rising incomes and lower inflation haven’t been enough to lift consumer confidence or corporate profits. Consumers still fear job losses, profits are flat, and regular capital raisings and share-price pressures mean the market hasn’t responded strongly.
What is Treasury’s "trend growth" forecast of 3.25% and should investors take it at face value?
The article describes Treasury’s 3.25% as a baseline or "trend growth" forecast — essentially a default estimate of how the economy might grow. Few economists fully buy it, but most differences are small; in short, it suggests the economy is likely to be steady rather than spectacular.
How does an overvalued Australian dollar impact investors and listed companies?
An overvalued dollar has helped lower inflation but can hurt exporters and resource companies by reducing competitiveness and squeezing profits. The article warns the dollar may stay overvalued for a while, which can weigh on sharemarket returns.
What does the article say about DIY super funds holding $50 billion in excess cash?
Citing Investment Trends and Vanguard, the article says DIY super funds hold about $50 billion in excess cash and many of those account holders are over 55. With that age profile and recent experience, they’re unlikely to rush back into shares unless interest rates fall significantly.
Are high dividend levels at risk, according to the article?
Yes. The article flags that with flat profits and cautious consumers, there’s a real question about how long dividends can be sustained at current high levels, especially given ongoing capital raisings and share-price pressure.
Have commodity prices peaked and what does that mean for new mining projects?
The article suggests commodity prices have peaked and the cost of building new mining projects is soaring. That combination reduces the likelihood of a near-term surge in shipment volumes and makes new projects more expensive for investors to back.
Given the article’s outlook, is it reasonable for everyday investors to "do nothing" this year?
The author suggests this could be a good year for doing nothing — markets may be lacklustre, with mixed signals from consumers, commodity cycles and currency. For everyday investors, the article implies cautious patience rather than aggressive repositioning, but individual circumstances still matter.
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