Stephen Koukoulas

Stephen Koukoulas

Thursday, 04 January 2018 10:53

Housing vs stocks – where to invest in 2018?

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/housing-vs-stocks-invest-2018-032901719.html 

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Housing vs stocks – where to invest in 2018?

2018 is kicking off with the share market trading at its highest level in almost a decade and the housing market starting to weaken, with prices falling in Sydney, Perth, Darwin and Melbourne, and flat-lining or slowing in Adelaide, Brisbane and Canberra. House prices in Hobart are the only shining light amid the increasing nation-wide gloom on housing.

These unfolding trends present an interesting choice for investors, who in recent years have generally been well rewarded with a high allocation of investment funds towards housing and a lesser allocation to stocks.

This is changing and could well be set to continue through the course of 2018 and beyond. The prospect of half a decade of flat or falling house prices is not conducive for investors, almost regardless of the alternatives.

The dynamics of housing are well understood. Extraordinary prices gains over the past decade or so have delivered stellar returns, albeit with a relatively low rental yield, rising costs of ownership (council rates, insurance and the like). The very low interest rates that provided financial comfort to investors as many maximised their debt on the expectation house price rises would offset those costs is less and less relevant as prices start to fall. In other words, with house prices now flat and falling, these dynamics mean that investing in housing is at best marginal, even with the absurdly generous tax policies in the form of negative gearing. Add to that a rise in the interest rate the banks charge investors as a result of the regulatory changes imposed by the Australian Prudential Regulatory Authority, and it is fair to say housing, as an investment, has almost no appeal.

So what alternatives for investors are available?

It’s that time of the year – to stick necks on the forecasting chopping block in an attempt to anticipate important trends in the economy and financial markets.

It is important to have some idea where things are going, whether you are an individual with savings, a mortgage or superannuation, a small business person, someone involved in business or indeed government.

So here are my calls for 2018.

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1. Global stocks
Having registered terrific growth in recent years, a cyclical pull-back in stocks seems to the on the cards during 2018. “Don’t fight the Fed” might prove to be apt again with a near certain continuation of monetary policy tightening from the US Federal Reserve and a wind back in QE. Overlay other policy/political risks from the Trump administration, I would be looking for the S&P500 to fall by 10 per cent or so to around 2,150 (or lower), the Dow down to 21,800 and would kick off the year with a trade to capture that sort of decline. Risk: Further downside

2. The ASX

Australian stocks are inexorably linked to commodity prices and the housing cycle, both of which are erring on the down side. With a probable change in global sentiment towards stocks, the ASX200 is forecast to pull back to 5,750 through the year. So not a bad result, but more likely down than up. Risk: Upside

Tuesday, 02 January 2018 09:20

Economists rules to live by, be judged by

During a holiday clean up, I came across an email that my former colleague at TD Securities, Jacqui Douglas (who is now Chief European Macro Strategist in London), circulated a little before I left.

It was apparently a list of rules that David Rosenberg, Chief Economist at Merrill Lynch at the time, circulated about being a good and relevant market economist.

The list, reproduced below, should be seen as an Economists Constitution. For those in the business of economic forecasting and market strategy, read it and see how many of the rules you stick to and how many you break. It is a lot of fun and certainly something that should also be read by those covering economics and markets, especially those who seem to have a strong bias to give oxygen to those who break most of these rules.

Here they are:

Monday, 01 January 2018 08:43

2017 - 'Twas a very good year

 A year ago, I outlined 10 top calls and forecasts for 2017 for the economy, markets and policy.

The full text of those calls are included below, and my self-rating of the success out of 10 for each of them is in the square brackets in bold. I have tried to reflect the underlying success of the forecast and whether there was money made by taking a position in markets on the basis of those forecasts.

Let me know if you disagree.

In 2016, I got a borderline 50% for my forecasts – it was a mediocre year.

This year has been a whole lot better at 62 per cent which, when it comes to forecasting, economics, policy and markets, is a great result.

I am happy, most of my clients are happy and my 2018 calls will be out in the next day or two.

Cheers, Stephen

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 1. Global stocks

When the dust settles from the irrational market reaction to the US Presidential election win of Donald Trump, US (and most global) stocks seem set to fall. Trump policies in trade, foreign affairs, accountability on government spending and tax could all conspire to undermine confidence when the reality of the misguided policy strategy of Trump moves to reality. How much weakness is hard to say, but the Dow, for example, back to 17,500 would seem likely. It could fall further than this. [0/10 By far the worse call, and hopelessly wrong. The geopolitical issues did not amount to zac, the markets appear to be unaware of the issues associated the crunching of the US budget position, and the tax cuts were a positive for markets. US stocks boomed and I was wrong.]

2. The ASX
With the bearish lead from the US, a likely dip in commodity prices and a firm Australian dollar, expect some pull back during 2017. The ASX may hit 6,000 in the early part of the year, as local interest rate cuts are delivered but the negative influences from offshore will likely counter that. A dull forecast, in many ways, but 5,250 for the ASX200. [4/10 It was a solid year for the ASX with a gain of about 7 per cent, 31 December on 31 December. It hit 6,000 points late in the year, not early, which was a favourable position to take at the start of the year. My within year forecast was askew.]

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/2195187-050039322.html?soc_src=social-sh&soc_trk=tw 

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Ignore the spin, government debt is going up and up

Despite all the spin and torture of the data, government debt is still rising, the return to budget surplus is based on fickle economic forecasts and the Turnbull government is on track to be one of the top 10 taxing governments in Australia’s history.

Gross government debt is already at a record at $520 billion and it will keep rising through till at least 2027-28 when it will reach a new record high just under $700 billion. Net government debt (which allows for some of the assets the government owns to offset gross debt), will reach a peace-time record in 2018-19 when it hits 19.2 per cent of GDP, having roughly doubled from the time of the 2013 election.

This is a long way from promises of the Liberal Party prior to it taking office to run budget surpluses and pay off debt.

With Treasurer Scott Morrison delivering the Mid Year Economic and Fiscal Outlook, the new record levels for government debt were confirmed, notwithstanding a small narrowing in the budget deficit which was driven by an unexpected rise in the iron ore price which fed into company profits and taxes paid to the government, as well as higher superannuation taxes based on the solid performance of the stock market last year.

The budget is forecast to return to surplus in 2020-21, but this will require everything to ‘go right’ with the economy between now and then. GDP growth is forecast to pick up to 3 per cent in 2018-19 which, according to Treasury, will underpin a solid rise in employment and a further acceleration in wages. A stronger economy will deliver higher taxes which is the driver of the return to surplus, so the theory goes.

The illion Business Expectations Survey presented a positive outlook for the economy.

Business profits expectations for 2018 are the highest they’ve been since 2011, with companies set to boost employee numbers in the first quarter on the back of the positive outlook, according to illion’s latest Business Expectations Survey.

Data from the survey indicated businesses operating in the Finance, Insurance and Real estate sector had the highest profit expectations approaching the new year, followed by the Transport, Communications and Utilities sector.  The survey shows that overall, the Business Expectations Index is up 25.7 percent on the same period last year and the actual performance of businesses across all sectors is at a 13 year high.

Stephen Koukoulas, illion Economic Adviser, said there were a number of factors driving the positive outlook for 2018. “Corporate profits are getting a boost from lower costs, which are being driven by record low interest rates and on-going low wages growth – which is all occurring at a time of solid gains in the ASX”.

Friday, 08 December 2017 09:15

Oz economy: The good, the bad and the ugly

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/2138618-050543271.html 

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Oz economy: The good, the bad and the ugly

The Australian economy continues to grow, but the pace of expansion remains moderate, being constrained by ongoing weakness in household spending and a slide in housing construction. The good news is further evidence of an upturn in private business investment and stronger growth in public sector infrastructure spending which is providing support for the economy.

At face value, 2.8 per cent annual GDP growth rate is quite good, but the devil in the detail on how that growth has been registered is why there are some concerns about the sustainability of the expansion as 2018 looms.

Household spending remains mired with growth of just 0.1 per cent in the September quarter. It seems the very low wage growth evident in recent years, plus data showing a small rise in the household saving rate, is keeping consumer spending in check.

Making up well over half of GDP, household spending will be the vital element of the economy into 2018. If wages growth remains weak, there seems little prospect of a pick up in household spending. And if household spending remains weak, bottom line GDP growth will be relying on a strong expansion in business investment and public sector demand.

The changing nature of work is causing significant disruption within the economy and for workers confronting an erosion of their take home pay and basic workplace conditions.

The precise nature of these changes is still unfolding in line with the spread of technology, the move to a more casualised workforce, globalisation and the steady decline of union influence.

The recent Per Capita round table discussion of these issues was particularly enlightening, not least because the participants helped to articulate how widespread these trends in the labour market are becoming, but they also covered what these changes might mean for the economy and the policy settings needed to ensure strong growth and a decent society.

One of the most potent manifestations of the workplace changes in the past decade or so has been the hit to wages. After several decades of annual wages growth around 3.5 per cent (which equates to an increase of around 1 per cent per annum in real terms), wages growth has slumped in recent years.

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/2073035-004930587.html 

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Watch out below! The Aussie dollar is about to sink

Watch out below! The Australian dollar is on the cusp of a significant fall. Already in recent weeks it has slumped from about 81 US cents to around 76 US cents at present and the factors that generally hold sway over the direction of the Aussie dollar suggest more falls are in store.

Commodity prices are going nowhere. The days of US$150 a tonne iron ore and massive prices for coal are well past. While the week-to- week changes in commodity prices can appear extreme, they are in a range a good 40 to 60 per cent lower than the peak levels around 5 years ago when the dollar traded as high as 1.10 against the US dollar.

Also keeping commodity prices lower is the fact that miners have slashed the cost of digging these commodities out of the ground. They can sell their output at a lower price and still have a healthy profit, because of this cost cutting. At the same time, the tens of billions of dollars invested by the mining sector over the past decade have build what are now fully functioning mines, adding to the supply of bulk commodities in the world market. While demand is still strong, the fact that output (supply) has run faster and cost of production has fallen, it means the overall level of commodity prices is broadly flat.

The big issue rapidly unfolding for the Aussie dollar is the erosion of the gap between global interest rates and those prevailing in Australia.

Friday, 24 November 2017 06:36

Late payment times down 10%

Late payment times down nearly 10 percent

According to the latest analysis by illion, the average late payment time for an Australian business was 12.6 days during the September quarter, down 9.1 percent from 13.9 days during the prior corresponding period. In addition to reducing the length of time for overdue bills, the data shows more businesses are also settling their invoices on time, demonstrating a broad shift in payment behaviour.

“If a company’s annual report is like the yearly medical check-up, then payment data is like Fitbit data. Timely payments are a crucial sign of business health. They are critical to small businesses running on slim margins, reducing the risk of job cuts and business failures.”

Simon Bligh, illion CEO

"In line with the pickup in business expectations and a more positive tone in other parts of the business sector, the sharp fall in late payments reflects better economic conditions and a clear improvement in cash flows. Business cash flows have also been boosted by higher profits, as seen in illion’s latest Business Expectations survey, which means firms are able to make their payments to suppliers in a timelier manner."

Stephen Koukoulas illion Economic Adviser

The full report is at this link: https://dnb.com.au/_media/documents/AU%20Late%20Payments%20Q32017%20Full.pdf 

THE LATEST FROM THE KOUK

Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.