Low rates, high expectations

What’s behind the increasing hope about the recovery in non-mining sector growth?

The mining boom has largely run its course and there’s been a lot of uncertainty about what that means for the Australian economy, with some predicting a recession.

Fortunately, the Reserve Bank has cut interest rates quite aggressively, leading to a pick-up in the housing market. Rising house prices along with rising share prices mean that people are starting to feel wealthier and this is positive for spending. Approvals to build more homes are also up strongly. Business and consumer confidence are looking up and Australians seem to be becoming a bit less focused on paying down their debt.

This all suggests that non-mining activity will pick up, Australia will avoid a recession and the economy will probably improve over the next 12 months.

What are the biggest opportunities and threats for the Australian economy in 2014?

In terms of opportunities, we should see higher retail sales as the housing recovery filters through, boosting company profits and share prices.

We should see more opportunities for exporters as the Aussie dollar loses value.

And we’ll probably also see growth in unlisted assets such as commercial property and more opportunities to invest in infrastructure as state governments offload assets.

In terms of threats, one might arise from spending cuts if the Government decides to aggressively deal with the budget deficit. And this could risk pushing us back into a lower growth environment.

Conversely, if things go too well, then we could be looking at higher interest rates as inflationary pressures return. But that’s probably a fair way away.

Longer term, there are structural issues that need to be addressed to make the economy more competitive and return more flexibility to the workforce. Now the mining boom’s over, we need to work harder or more effectively to maintain growth in living standards.

What are the three most important factors to think about when investing in property?

A decent income flow is critically important. A low rental yield means you’re very dependent on capital growth, for a decent return.

Don’t underestimate the costs. When you’re investing in shares or managed funds or term deposits, the costs are usually fairly transparent. With rental property they are often hidden but they can really add up. Particularly property maintenance and various taxes.

And don’t forget that property prices can go down as well as up. Australians pay quite a lot for the average house compared with their income and there’s always a risk if something goes wrong with the economy.

Overall, the key is to find property offering stable rental income in good areas where demographic demand over time will be relatively strong.

Eurozone and the US—what can we expect from them in the New Year?

In the US, there might be a bit of uncertainty at the start of next year as politicians need to agree on funding the Government and raising the debt ceiling again.

But next year sees mid-term elections in the US. So the Republicans probably won’t want to push as hard as they in October because Americans would blame them for any economic uncertainty and this may damage their Congressional election prospects.

And as the politicians argue, the US economy continues to improve. Believe it or not, the US Budget deficit has fallen from 10% of GDP in 2010 to 4% now and in 2014 will probably move to 3%.

Meanwhile, at some point in the months ahead the US Federal Reserve will start to slow the rate at which it is buying US government bonds and mortgage backed securities. This could trigger financial market nervousness but note that it will only be occurring because Fed the US economy is stronger. In other words it will be a case of “mission on the way to being accomplished” – which is actually good for confidence and good for growth.

In the Eurozone, the debt crisis continues to recede. Towards the end of next year, the European Central Bank will publish stress tests of the banking sector. They will need to find a way to prop up banks that don’t have enough capital. They probably will, but as usual there might be a bit of uncertainty along the way.

But the broad picture on both fronts is still one of economic recovery. The markets should be able to withstand the stress tests in Europe and the fiscal and monetary issues in the US.

For more information on how current financial markets are affecting your investments and to find out how we can help, call your AMP financial planner or call us, today.

What you need to know

This document was prepared by AMP Capital Investors Limited (ABN 59 001 777 591, AFSL No 232497). This document, unless otherwise specified, is current at Monday, 9 December 2013 and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after that date. While every care has been taken in the preparation of this document, AMP Capital Investors Limited makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance.

This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.