Australia’s economy has performed relatively strongly across 2014, however a number of headwinds remain going into 2015. The biggest challenge for the Reserve Bank of Australia is stimulating non-mining sectors of the economy. Although a lower Australian dollar should help earnings growth for exporters, domestic consumption and business expenditure remain subdued.
The domestic equity market is expected to remain flat in 2015, with the major variables being the value of the dollar, the extent of the fall in the iron ore price and the outcome of the Murray Inquiry into the banking sector. Internationally, impacts are likely to be felt from improved economic conditions in the US and, to a lesser degree, Europe, along with the growth story in China and increasing geopolitical risk.
The RBA expects inflationary pressures to remain relatively subdued, with the forecast in the 2 to 3% range for the next two years.
The mining sector slowdown is going to occur over the next two to three years, and it needs to be offset by domestic consumption. If we do see a slowing in domestic consumption, then we are going to see an economic slowdown. But given where we are at the moment, a weaker Australian dollar should help the economy going forward.
The RBA has held the Australian cash rate at 2.5% since August 2013. This is the lowest cash rate since 1959. The general belief is that if RBA raises rates it’s going to be negative for the economy.
By the second quarter of 2015, we should have a much stronger US economy. Hopefully that leads to a stronger US dollar, and the Australian dollar weakens further to help domestic consumption improve. However, that would give the RBA scope to start increasing rates.
A weaker Australian dollar can push up domestic inflation. If it moves above the top of the 2–3% target band, RBA may be forced to increase rates.
The Australian dollar has continued to fall as the US dollar rose on the back of a strengthening US economy. The market has allowed for an increase in US interest rates, with the Australian dollar falling almost 7% against the US dollar in September 2014.
The Australian sharemarket is likely to remain relatively flat throughout 2015, given that most of the headwinds of 2014 will remain. We still have weakening iron ore prices impacting the resource sector, and we have the Murray inquiry coming out, which in turn could impact the banking sector.
One upside is the weaker Australian dollar which has a positive impact on companies which are leveraged to either the mining sector or offshore markets, eg in the healthcare sector. The building sector can benefit from the weaker Australian dollar.
We could see some instability coming through from expectations in interest rate markets, but at the moment volatility is constrained.
US recovery will be the key for global markets and the global economy going forward. The US looks like it will keep growing strongly.
European recovery is also going to be important however there is not a lot of confidence in the economy overall.
China is still growing above 7%, although this rate may slow due to the property market. The supply of property in China has outstripped demand, so prices and construction should fall.
Geopolitical risk may continue and spread which can contribute to market volatility.
The US sharemarket outperformed those of the euro area, UK, Japan and Australia in 2014 and emerging markets of India and China performed well.
The Indian economy has outperformed with the positive impact of change to government office. The Chinese equity market has rallied primarily due to policy changes making the A shares in China and the H shares in Hong Kong more accessible and seeing a normalisation between the prices.
The US economy grew strongly in 2014 with the labour market continuing to strengthen and inflation increasing slightly, despite the rate of recovery in the housing market slowing.
A factor to consider is the potential for rate rises from the Federal Reserve which can dampen earnings.
In terms of US sectors to watch, technology, healthcare, financials and energy to perform strongly.
Economic activity in Europe remained weak, with real GDP in the euro area unchanged in the June quarter and the unemployment rate falling only gradually. Inflation had declined further and remained well below the target of the European Central Bank of below but close to 2%.
The outlook in the eurozone would depend upon the ECB’s success in managing inflation. The eurozone will benefit from the weakening of the euro. A lot of the European countries are exporters, so they will benefit from a weaker euro.
Opportunities in European equity markets include financials.
Quantitative easing has been successful in the UK, although the strength of the British pound has affected corporate earnings. The UK economy is probably the strongest developed economy other than the US.