At the heart of the issue are the divided views on the economy. Some believe that the US economy will slip back into recession – the so-called ‘double-dip’ recession.

Others just believe that the economy is taking time to find its feet again after the biggest downturn since the Second World War.

Of course many would ask what that has to do with Australia. Our economy is in good shape, we’re more dependent on China, rather than the US, and Aussie company balance sheets are in good shape.

But at the end of the day Australian shares represent around 2-3% of world sharemarket capitalisation and over 40% of our shares are held offshore, so global trends will always be important for our market.

If you want to know the winner of the bulls versus bears battle watch the US job market – that will prove fundamental to the ‘double dip’ debate.

Stephen Karpin

Managing Director

CommSec Research Insight – 2 September 2010

It’s bemusing to see an idea take root and flourish in economic commentary when it doesn’t necessarily agree with the facts – the web has a lot to answer thanks to the ability to search, copy and paste.

Most often, it’s not economic “commentary” that’s to blame, but economic “barrow pushing” or simply mad and doctrinaire raving that latches onto an idea and then pursues it by ignoring evidence to the contrary and searching out and bending any factoids that support it.

The hardcore gold bug brigade are an easy example – they’re so keen to push the idea that the global financial system is doomed and that gold is only thing in the world worth having that they twist and ignore facts with wild abandon.

Doom and gloom

There are other less obvious cases though that seep into the collective memory unless challenged. For example, the idea that there is a lethal housing bubble in Australia and China that spells doom for our economy. These are important ideas to understand, so please bear with me as I deal with both of them by stealing the hard work of others.

There have been some credible and high-profile proponents of the Australian bubble argument – and some less credible. In my opinion, Dr Steve Keen falls into the latter category – he’s the fella who predicted Australian housing prices would collapse by 40 per cent and that we’d have 20 per cent unemployment.

That probably made him Australia’s most famous economist for a little while during the GFC when he was given uncritical free runs on the likes of 60 Minutes and the 7.30 Report. He was also demonstrably wrong.

Easy headlines

In the former category can be found the Economist magazine and, perhaps, British fund manager Jeremy Grantham who visited Australia last month and picked up some easy headlines by declaring a local housing bubble. The Economist made its case a few years ago, based on the idea of housing affordability, that Australian houses cost a higher multiple of disposable income than most other countries.

I suspect Grantham had picked up the Economist idea and run with it, but the situation isn’t nearly as simple as that – particularly if you get the facts wrong in the first case.

There are two essential parts to the question of whether Australia is suffering an unsustainable housing bubble. One is a simple matter of supply and demand – have we over-built housing thanks to a speculative investment boom the way housing was overbuilt in the US, Ireland, Spain et al?

Over-gearing

The answer to that is easy: no. We have a shortage of housing, we’ve underbuilt. Our investment in housing, as a percentage of GDP, has been pretty much flat for the past six years despite record population growth. That’s the main reason housing prices have risen.

The second part is the more complex issue of affordability, the bit the Economist and Grantham latched onto. The question there is whether Australian households are over-geared and thus riding for a fall.

And the good news there is that the over-gearing argument was comprehensively debunked by the Reserve Bank deputy Governor, Ric Battellino, in a speech last month. You can read the whole thing on the RBA web site here and then you won’t be easily fooled by headline-seeking alarmists.

Can we handle what we owe?

The RBA wouldn’t like us to gear up much more, but the Martin Place mandarins are pretty confident we can handle what we owe the banks now.

Grantham’s claim copped particular attention from Christopher Joye, managing director of Rismark International – a pro-housing investment research house – in a piece he had published in Business Spectator recently. Joye took some joy (sorry, I couldn’t resist it) is showing Grantham’s base figures were simply wrong, as well has quoting Battellino’s paper.

But Joye’s slap at Grantham was just a sidebar – his real target was the persistent allegation of a housing bubble busting in China. You’ve no doubt seen the stories or at least heard mention of dramatic collapses in Chinese residential real estate prices with the Doomsday Brigade using that as an excuse to forecast a crash in the Chinese economy that would flow through to Australia via commodity prices being smashed.

The Australian perspective

Turns out that isn’t quite the case. It’s symptomatic of the poor understanding of China that some people think China is Shanghai and Beijing. No, there’s a great deal more to it than that, as Joye makes plain.

More specifically from an Australian perspective, South Africa’s StandardBank commodities researchers have had a good look at China’s housing from the point of view of demand for commodities. StandardBank’s Walter de Wet finds some concern about the eventual sustainability of China’s rising house prices as prices are rising faster than the growth in median incomes (but not average incomes).

But that unsustainability fear is at the higher end of the housing market – not the base load that reflects China’s continuing urbanisation and industrialisation. De Wet puts it thus:

Onwards and upwards

“From a metal demand perspective, we look at Chinese housing market from a different angle than the US housing market. Prices fall for two reasons: either demand must decline, or supply must rise. Short-term demand may slow due to government measures to cool property speculation in China. But unlike many developed markets, urbanisation continues rapidly in China.

“Therefore, total demand for housing in China’s cities will remain healthy; especially lower income housing. If demand grows, then supply must rise (especially lower income houses). This is bullish for metal demand.

“We acknowledge for existing home owners (likely to be high income earners), there could be a negative wealth effect if house prices fall. In our view, this would affect final consumption expenditure more than primary metal demand.”

The bottom line

So don’t believe all the simplistic scary headlines you might read – the real story, as backed by the RBA and Treasury, is that China’s fundamental demand for bulk commodities remains in place for some years yet.

China’s housing keeps housing us by Michael Pascoe posted on Jul 09 08:27am

http://au.pfinance.yahoo.com/b/michael-pascoe/1112/chinas-housing-keeps-housing-us

Economic growth surpassed expectations in most countries across South East Asia late last year and early this year and, amid a broad based improvement in both external and internal demand, we are already seeing upward revisions to first quarter data.

The improving picture has already led China to take steps to reign back price appreciation in its property market by increasing the reserve requirement for banks on several occasions and Malaysia has also raised interest rates sooner than expected – as did Australia.

Of course, while all of this has been going on, the troubles facing the eurozone have also unnerved investors, as have proposals to tighten regulation of the financial sector.  Now we have rising tensions in the Korean peninsula encouraging investors to exit risk assets.

But while there will be volatility in markets as these events work their way towards a conclusion, the fact remains that the secular growth trends seen across South East Asia should keep the region on a healthy growth path.

Today’s volatility can create a good opportunity to become involved in the long-term growth stories to be found across South East Asia, growth opportunities that have led the region to command a greater proportion of global GDP.

Share of global GDP

Source: International Monetary Fund, World Economic Outlook Database, October 2009

Infrastructure investment is one of those major long term themes worth exploring.  The development of new infrastructure is necessary as the region grows if it is to sustain its rate of expansion.  For example, China needs to invest more in its railways and highways as 350 million people migrate to its cities over the next two decades. A massive rail and highway network is being built to connect the cities to rural areas.  Installed power capacity in terms of megawatts per person is also very low in China, as it is in other emerging Asian countries. There are many large scale projects underway to build new power plants across the South East Asian region.

This investment in infrastructure not only adds to current demand for capital goods but, in turn, fuels job creation, increases household incomes and, ultimately, boosts consumption.  In addition, healthy population growth, together with low household debt levels and high savings rates, also highlight the potential that remains to tap into a new consumer boom.

There is still much wealth creation taking place across the growing middle class in the region but, further down the income scale, most of Beijing’s consumer stimulus plans have also carried into this year, with focus likely to remain on raising household incomes and boosting consumption. The benefits of this will spill over into other countries in the region, like Taiwan, Korea, Hong Kong and Indonesia, which all export to China.

Among all the volatility at present, investors should not ignore the fact that there is much disparity in the region. Before the recent correction, some sectors and stocks had rallied strongly while others had lagged.  As a result, stock selection is likely to be more important this year than last.  Choosing the right stocks can offer a rich investment opportunity as Asia’s economic fundamentals remain stronger than those found elsewhere in the world.

Source

Written by Investment Management Friday, 18 June 2010 12:25

David Urquart is portfolio manager of the Fidelity Asia Fund

http://www.professionalplanner.com.au/investment-management/growth-and-opportunity-remain-in-asia.html

The larger-than-expected 110 billion euros (A$160 billion) austerity package for Greece, the eurozone bailout package of more than a $1 trillion and a commitment by the European Central Bank (ECB) to buy European sovereign bonds certainly reduce the danger for now. But investors are still concerned about other eurozone economies under similar fiscal pressures to Greece.

On balance, they probably shouldn’t fret so much. Greece, a country of only 11 million, is a basket case worthy of junk status that may succumb to its problems because of structural weaknesses; namely working practices, retirement laws, political stability and the size of the state. And while there were clarifications on how large the government debt of Greece is, there has been little new information on government finances in peripheral European economies that explained the market action leading up to the bailout package for the eurozone, which encompasses 16 EU countries that are home to about 330 million people.

The upward pressure on Irish government bond yields and CDS spreads before the package was announced (to above 250 basis points in early May from about 150 basis points in January) is particularly interesting. This is because Ireland was widely applauded by bond investors for tackling its deficit and outlining a credible restructuring plan. This suggests the market behaviour before the latest rescue package was more sentiment driven.

The fact that increases in Greek, Portugese and Irish credit-default swap spreads, which represent the cost of insuring against default in the underlying bonds, exceeded jumps in corresponding bond yields suggests speculative money was behind much of the recent market action before the eurozone packaged was announced.

However, investors are right to be cautious. Many commentators suggest the whole eurozone experiment is still shaky longer term and another country could become unstuck.

Might we see a domino effect?
But while the most likely sources of trouble, namely Portugal, Ireland or Spain, have problems, none are as sick as Greece.

Spain certainly doesn’t appear to be. While the economy suffers from high unemployment and the government needs to undertake fiscal tightening, a recovery is emerging. The bleak debt environment seems to have been priced into stock markets; however Spain’s potential to gain from the rapid growth of Latin America appears to have been underestimated on the basis of current valuations.

Portugal, at first glance, has similarities with Greece. The European Commission believes government assumptions of positive growth this year and next are over-optimistic. But like Spain, Portugal is not Greece. Its 9.4% 2009 budget deficit is more than 3 percentage points lower than Greece’s 13.6% shortfall and, crucially, the country has successfully cut its debt before.

Ireland’s 2009 budget deficit is actually higher than Greece’s. In terms of the total stock of public debt, however, Ireland’s is estimated to be a manageable 65% of output while Greece’s is a ruinous 110%.

No banking crisis appears imminent. European banks, overall, have a limited exposure to this potential crisis in comparison with sub-prime mortgages. The Bank of International Settlements estimates that European banks’ exposure to Greek, Spanish and Portuguese debt represents only 5% of total bank assets. So, the idea of persistent contagion seems unlikely given the relatively better economic and corporate situation in the other peripheral economies, the better credibility of their governments and the lack of exposure among the European banking sector in general.

Changed days call for changed tactics
Still, financial markets wanted swift, decisive, and aggressive action from the eurozone authorities to ease their concerns about Greece and other countries. And, they got it. Markets rallied strongly as details of the eurozone rescue package emerged, and it became clear to investors that the eurozone and global financial authorities were prepared to pull out all the stops to avoid any escalation of the Greek debt crisis.

The immediate reaction saw equity markets surge and risk spreads tighten, while the gold price fell and the euro strengthened. But the success of the rescue measures will be judged over longer time horizons. Investors must assess the short-, medium- and long-term impact of the overall package, its durability and the potential for unintended consequences.

The package makes an individual country issue into a European issue, and it gives the pressurised economies space to get their finances in shape. What is most clear is that European policymakers have risen to the challenge set by the markets, broken with tradition and boldly expanded the limits of their policy response. The market and the authorities are now in agreement: uncharted waters call for uncharted policies. As a result, investors suddenly have more confidence the turmoil can be navigated.

The ECB has historically taken a hard line on inflation, with little or no consideration given to economic growth. The commitment to buy sovereign bonds is therefore something of a watershed moment for a central bank that has been reluctant to consider anything but inflation targeting policies. While the markets have welcomed the new flexibility, inflation remains the enemy above all others and it should be noted that the monetary impacts of bond purchases will be sterilised or, in other words, offset via liquidity operations to avoid inflation risks.

Still, the fact is that a two-tier eurozone economy appears to be developing, as high debt levels and austerity measures make growth prospects gloomy for peripheral Europe. This is a big concern because of the implications for monetary union.

Recovery still intact
So what else can we say of the future? Global economic growth remains robust. Corporate earnings are healthy. The recovery in stock and credit markets is unlikely to be materially derailed by the recent events in Greece, which was always going to need a bail-out. That is not to say that other countries such as Spain, Portugal and the UK do not have tough choices to make. It’s just that they have more scope to make them.

We know there are pockets of slower growth in the eurozone, but the area will benefit from healthy global and emerging-market growth. Developing economies are contributing significantly to global growth and the eurozone is one of their key sources of machine goods, commodities, services and finished products.

In this light, European stock markets could offer excellent opportunities for investors looking for relative value. Another net positive for many European companies is that the weakness in the euro makes their products more competitive.

The midst of a crisis often presents attractive, valuation-based opportunities for astute investors prepared to take a medium-term view. Fidelity’s equity managers are united in their thoughts that there is significant medium- to long-term value to be found among this volatility in European equities. Many European shares are overlooked and under-valued and our portfolio managers are finding interesting ideas across the continent’s equity markets that have more capacity than most to surprise positively.

Actual and expected government budget deficits (as a % of GDP)

Datastream for 2008-09 figures. The Economist for 2010 figures based on forecasts by The Economist Intelligence Unit

Important information
Commentary on market activity and sector trends are subject to change and should not be taken as financial advice.

Fidelity International May 2010

China is not alone. All across the developing world, cities are acting as people magnets. The UN forecasts the urban population of Asia will grow by 1.8 billion by 2050, while Africa will see nearly one billion people join city life and 200 million from Latin America and the Caribbean will leave their rural homes behind.² All up, more than 60% of the world’s population are likely to live in cities by 2030 compared with fewer than one-in-three in 1950.³

Much of the growth today stems from cities drawing economically motivated populations across the developing world. While it is often educated young adults who move from the country, the development of export-led manufacturing industries across poorer parts of Asia have created demand for low and medium-skilled labour.

Regardless of educational background, the attraction of city life lies in the financial incentives found there. Take China again. Already urban incomes are estimated to be three times those of the rural population and studies forecast that urban China will come to have disposable incomes and consumption demand twice that of Germany by 2025. Through the process of much-increased urbanisation, it is expected that, in time, more than 90% of China’s GDP will be generated by its urban economy.⁴

But city infrastructure in the developing world is stressed by growing populations. Emerging countries need to extend electricity grids, water mains and transport links to support growing urban centres.

China and India are among the developing nations that have announced major stimulus plans centred on infrastructure investment.

India may be one of the fastest-growing economies in the world but its infrastructure has failed to keep pace. The Indian government is committed to raising infrastructure investment, with various studies suggesting US$500 billion (A$570 billion) needs to be spent to bring the country up to standard. The power and transport sectors are expected to attract around 60% of that money. With a large power supply deficit and low per-capita power consumption, it is the government’s intention to increase generation capacity by 80,000 megawatts by 2012.

China is expected to experience the largest urban migration ever seen over the coming decades as up to 70% of its population moves from the country to urban areas, to take China’s urban population to over one billion. This could create one of the greatest booms in mass-transit construction. Outside of the cities, a massive rail network is also being built to connect the cities to rural areas. By 2012, China could be laying as much as 10,000 kilometres of new rail track each year.⁵

Redeveloping the developed world

While emerging markets must build core infrastructure from scratch, in the developed world, much of the infrastructure is in place but needs replacing. To remain competitive in a world that is increasingly influenced by the economic might of the developing world, the developed world must invest heavily in its infrastructure stock. Failure to make significant progress towards upgrading the basic infrastructure of the west could prove costly in terms of congestion, unreliable supply lines and growing environmental issues, not to mention the implications for standards of living and quality of life.

It’s little wonder then that the global recession led to plans for massive government stimulus directed at rebuilding crumbling infrastructure. The US committed around a third of its US$825 billion stimulus package to new infrastructure projects, including US$150 billion over 10 years to clean energies. More than a year later, much of the investment has still to be made and so expect there to be ample opportunity for private industry to get involved through public-private finance initiatives.

Indeed, the private sector can play a significant role in many infrastructure projects. Since the 1980s, more than US$1 trillion of assets have been privatised in OECD countries.⁶ It is likely that further assets will transfer into private hands as emerging countries look to finance infrastructure. Already, the private sector supplies 20% to 25% of infrastructure financing in the developing world.⁷

Many private companies will be well-placed to benefit from an infrastructure boom, from building, managing and/or owning the new assets. Developed-market capital-goods providers and contractors are tapping into the opportunity to bring their expertise to the developing world (while enjoying demand to replace infrastructure in developed markets). The surge in new business that they are seeing from emerging markets is likely to be sustained for many more years.

With decades of experience in developing high-speed trains, the French rail sector is thriving, for instance. Faiveley makes high-tech train parts such as couplings, air-conditioning systems and doors, and is seeing increased trade with China.

New home-grown champions are forming in the emerging markets too. Emerging-market private firms are diversifying into infrastructure provision or, in some cases, ownership. These companies, with their local connections and understanding, are meaningful competitors and/or partners to the developed market players.

Rural Electrification is an Indian government-owned company that aims to finance and promote rural electrification projects all over the country. As a financier, its asset growth is expected to track the growth in the power sector.

These examples show how an investment in the urban age is an investment in the majority of the world’s people and in the growth of the world economy. It’s perhaps a 21^st century investment opportunity like no other.

Percentage of population living in urban areas

by Neil Massie, Investment Commentator at Fidelity International June 2010

UN, 2008

² “World Urbanisation Prospects”, United Nations, 2008

³ “Rethinking Urbanisation”, Michaels, Rauch, Redding, January 2009

⁴ McKinsey. Op cit

⁵ Credit Suisse, March 2010

⁶ Fidelity International estimate. April 2010

⁷ Goldman Sachs, April 2008

Financial markets remain firmly in the grip of the early stages of the Recovery Phase on the Investment Clock, with economic data for most of the first quarter of 2010 showing improvement in business, consumer and GDP growth.

But the Recovery Phase on the Investment Clock can be a slow and gradual process, often punctuated by significant reversals in the sharemarket indicating that sentiment remains extremely fragile. It can often take five to seven years to move from the bottom of the Recovery Phase at 6 o’clock to the top of the Boom Phase at 12 o’clock.

We have seen a spectacular recovery in the sharemarket from its low of 3109 points in March 2009 to an April 2010 high of 5000. This was an unprecedented rise of 60 per cent and the gains largely focused on the top 50 companies.

Analysis of historical sharemarket data over 110 years in Australia shows it normally takes about 33 months for a market to recover from its low point to go on to reach, and then surpass, its previous high. That the market rose by 60 per cent in a little over 12 months indicates it may have been getting ahead of itself.

We should not expect this pace of gain for the remainder of 2010. However, it is still quite possible the sharemarket could reach the previous high of 6800, in November 2007, sometime in late 2011 or early 2012.

The sharemarket in a Recovery Phase will always be driven higher based on sustained or increased earnings growth from the major listed companies. Many reported significant turnarounds in the first half of the 2009-10 financial year, largely based on measures taken during the global financial crisis to contain costs, focus on the business at hand and improve the balance sheet.

Not until full-year results are disclosed will we really be able to judge whether a company’s earnings are now reflecting an improvement in trading conditions and profitability based on an economy on the mend.

History can provide a guide to what is ahead:

• The average decline of each bear market since 1969 was 37 per cent; the All Ordinaries index fell 55 per cent from its record high in 2007.
• The worst bear market was between January 1973 and September 1974, when the index declined more than 50 per cent.
• The average sharemarket return for the three years directly following the end of a bear market was 62 per cent, or 17.4 per cent a year.
• The average sharemarket return in the six months directly following the end of a bear market was 28 per cent.

Where we are now on the Investment Clock

Based on a backdrop of worldwide financial and economic uncertainty and the fragility of the recovery process, we are likely to remain between 7 o’clock and 8 o’clock for some time – until world economies show signs of improving and the debt crisis and its contagion effects are no longer a threat to the Recovery Phase.

This is the rollercoaster part of the Recovery Cycle, where companies are forced to become leaner and increase productivity. These measures and the slowly improving economy translate into increased company profits and this gradually stimulates share prices to recover. Investors who enter the market at this level often see excellent gains in the years ahead.

The cash rate is expected to end up somewhere between 4.75 and 5.25 per cent in the second half of 2010. In recent months the labour market has stabilised, with unemployment likely to remain between 5.3 and 5.5 per cent.

Australia has managed to weather the recessionary storm better than most industrialised countries, but it will not be immune from catching a cold from its major trading partners still struggling to claw their way back.

Many companies are likely to report sustained or increased earnings after a year and a half of tightening and consolidation in order to be positioned to take advantage of the Recovery Phase. Increased takeover activity can be expected in the second half of 2010.

These are all classic signs of the re-emergence of the early stages of a cyclical bull market.

The 2011-12 financial year offers some real prospects for positive GDP growth returning, assisted by the major world economies recovering. Investors can expect further sharemarket gains well into 2012.

Source

Rod North is the managing director of Bourse Communication. For more information about the history of the Australian sharemarket, his book, Understanding The Investment Clock – Your Road to Recovery, is available. You can also visit the World’s First Interactive Investment Clock to see what lies ahead in the investment cycle.

Latest National Auction Clearance Rates

The volume of new properties entering the market and the total number of properties available for sale are both sitting at levels well above 12 month averages with new listings 12.5% above average and total listings 4.1% above average.

Across the nation the total number of new rental listings has jumped from 24,708 last week to 26,906 this week. As a result, total listings have also increased from 53,333 last week to 55,517 this week.

For more information contact www.rpdata.com.au

And in April the number of volatile days lifted to just three days. But in May there were 15 days where the All Ords rose or fell more than 1%.

At the heart of the issue have been concerns about budget deficits and debt maintained by European countries. But when you add in issues like the volcanic ash cloud in Europe, the oil spill in the US and worries about the health of the Chinese economy it is understandable that investors have become jittery. With share markets swinging wildly, it is important to stand back and see the big picture.

And while the Aussie market has softened recently, in the financial year to date it is still up by more than 10%.

Stephen Karpin

Managing Director

Research Insight Commsec Issue 163 3 June 2010 (4.30pm)

www.commsec.com.au

Click here to download the presentation.

Retailers would certainly be concerned that Aussie consumers are now paring back confidence levels. Especially given that despite the relatively positive attitude over the last few months, spending has remained subdued. In annual terms retail spending has recorded negligible growth, and that has prompted major retailers to slash prices – a trend that will remain part of the retail landscape for the next few months.

When the latest consumer confidence result is coupled with the weak economic data over the past couple of weeks, it paints a picture of an economy that is going sideways. The implications for interest rates are clear. A pause at the June Reserve Bank board meeting is the most likely outcome.

The latest wage data represents a win-win situation. For private sector companies wages are at just shy of the slowest rate in a decade, serving to keep costs down and boost profitability. But for employees, wages are still growing at a faster rate than prices, boosting the purchasing power of consumers.

We take it for granted in Australia, but the real wage gains recorded over the past decade have been instrumental in underpinning household spending and overall economic growth.

And had real wages not increased over the period it’s clear that housing affordability would have deteriorated significantly, restraining construction.

What are the implications for interest rates and investors?

Fundamentally the economy is in good shape, especially the job market. But consumers are still not prepared to spend unless the goods are on sale. Weaker consumer confidence levels certainly won’t help retailers, struggling at present to get people to part with their cash.

The longer that the era of ‘new conservatism’ continues, the longer that retail margins will be under downward pressure together with profitability. The latest data indicates that now be a good time for the Reserve Bank to take a pause from lifting interest rates. We expect the Reserve Bank to leave cash rates on hold in June especially given that even wage inflation is remaining well contained.

Savanth Sebastian, Economist – CommSec

Market Bulletin 21 May 2010