Media Watch: After the flood by Brian Thomas

 Australia looks to be in an enviable position on the global stage, with China and then India (in a decade or so) assisting Australia’s vibrant economy to grow dramatically. 

I ended last month's newsletter looking at:
• the Reserve Bank of Australia’s surprise interest rate hike on 2nd November
• the much anticipated US QE2 announcement of USD 600 billion (effectively USD 900b when reinvestment of maturing securities are taken into account) on 4th November
• the Bank of England announcement that interest rates would stay at 0.5% coupled with a continuation of its USD 320 billion QE
• the Bank of Japan announcement that its rates would remain at 0%, whilst maintaining its USD 425 billion QE program.

The developed world appears to have pushed rates as low as they can go and is now flooding economies with liquidity. Will this work? The old saying is "don't fight the fed" and with firms like Coca Cola (rated AA-) raising USD 25 billion for three years at an interest rate of 0.75% it looks to be working at the big end of town. Whilst people have long term confidence in the QE programmes of economies around the world, the QE concept can work to stimulate growth.

Adding to the mixing pot were two rate increases in China, in an attempt to dampen inflation and an EU bail out of the Irish Government who are, in turn, bailing out Ireland’s banks. The most disappointing news was that, despite some very encouraging retail sales and manufacturing numbers, the US unemployment rate increased from 9.6% to 9.8%.

To wrap up the big issues, third quarter Australian GDP rose a miserly 0.20%, around half of that forecast by most economists. A large drag from net exports was the major cause. Retail sales remained weak, with tourism turning from a valuable export into an import, with Australians now spending AUD 680 million more each month overseas than is spent by international visitors to Australia. The rise and rise of internet sales has also affected domestic traditional retailers.

What to make of all of this?

I remain positive on growth assets, particularly Australian shares, Australian REITs and global shares in specific markets. Let’s firstly look at how 2010 is shaping up in terms of returns across the major markets:

Historically, market recoveries after a major fall tend to start with a big bounce (in anticipation of an economic recovery), followed by a period of consolidation and then typically a second bounce. We certainly saw the first bounce in 2009. 2010 has been essentially flat in key markets, although good stockpicking has provided opportunities to enhance returns in certain areas like small caps and global shares. Looking forward, the slowly improving US economy, coupled with the EU's pledge to shore up the finances of its fiscally weaker governments should see a more positive world in 2011.

The RBA’s Challenge
The weak third quarter GDP number may be of concern to some, but I believe that the real story for Australia’s economy is the threat of overheating from a large lift in capital expenditure at a time when there is little spare capacity in the economy.
 

CHART 1 shows what is in the minerals and energy pipeline and CHART 2 shows the stock of opportunities. The stand out project in the “committed” pipeline is the AUD 40 billion Gorgon Liquefied Natural Gas project, which will itself create 10,000 jobs and add AUD 64 billion to Australia’s GDP.

CHART 2 shows that there are AUD 248 billion of projects that could get off the drawing board and find their way into the pipeline. Remember that the charts below only show the minerals and energy pipeline, there is also a raft of projects from the public sector and other parts of the private sector.

Australia looks to be in an enviable position on the global stage, with China and then India (in a decade or so) assisting Australia’s vibrant economy to grow dramatically.