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  • While the RBA left rates unchanged in February, the strong message from the RBA is that its policy focus remains firmly on the medium-term outlook for the economy.  And the major considerations there are strong global output, high commodity prices and rising business investment -- not the impact of the floods.
     
  • The RBA does note that there will be a "temporary adverse effect" from the floods.  And that rebuilding will "add modestly to aggregate demand" over the next year or two. But it is clear that the RBA doesn't think the floods will change the course of the economy in the medium term.

  • The RBA also made some concession to the low recent inflation readings.  Whereas previously the RBA thought that inflation was "likely to increase somewhat over the medium term", now it expects that "inflation over the year ahead will continue to be consistent with the 2-3% inflation target."  Clearly, the RBA is not ringing a bell and declaring that the war against inflation has been won. But there is just a hint that the RBA has become a little more relaxed about these price pressures.
     
  • The RBA's conclusion: "the current stance of monetary policy remained appropriate in view of the general macroceconomic outlook" also suggests that rates will remain stable for the next few months.  This is because it contained no qualifications, such as "for the time being", which might hint that the RBA was thinking about shifting rates higher in the next month or two.  But the same concerns that drove tightening in 2010 -- high commodity prices, booming mining investment and prospective wage increases -- remain at the top of the RBA's list of concerns.  And this not only suggests that the RBA retains a tightening bias, but also that the RBA won't be distracted from tightening further by -- what it thinks will be -- the temporary drag on growth from the floods.  This means that the RBA could tighten more quickly than the market thinks, with a rate hike in May a distinct possibility.

Welcome to the new Oliver's Insights!

This note looks at the impact of the floods for the Australian economy and share market. The key points are as follows:

  • Like the bushfires of two years ago the floods have wrought terrible tragedy in terms of loss of life and disruption to people's lives. Beyond the human suffering there will also be significant implications for the Australian economy and investment markets.
  • Expect the floods to knock around 1% (or $13 billion on an annualised basis) off the Australian economy in the December and March quarters. Rebuilding should see 0.5% of this recouped by year end and a further modest boost to growth through 2012.
  • Higher food prices, notably for fruit and vegetables, will add around 0.5% to 0.75% to inflation in the March quarter.
  • In terms of damage to physical assets, property, equipment and infrastructure, the flood could cost $15 billion with rebuilding likely to be spread over several years.
  • The RBA is likely to look through the short-term boost to inflation and focus more on the short-term hit to growth, leaving rates on hold till around mid year. However, once production rebounds and rebuilding kicks in it is likely to return to raising rates from around mid year to head off an overheating in the economy.
  • While the floods have led to earnings downgrades, the impact on markets overall should be minor, in part offset by higher coal prices. Australian shares are cheap, having lagged global markets over the last year, and we remain of the view that notwithstanding short-term uncertainties they will head to around 5,500 for the ASX 200 by year end.


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Positive for global shares, particularly cyclical stocks such as Diversified Resources Companies BHP & Rio.

Six months ago some pundits were predicting a double dip recession as government stimulus was progressively withdrawn. January’s US Manufacturing Survey Data posted the strongest reading for seven years and highlighted that US economic growth is accelerating.

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The US economy grew at a rate of 3.2% and is likely to hit 4% growth early in 2011. With the worlds largest economy now growing at an above average rate, China and India for the first time in modern history both growing at close to 10% and the main engine of Europe, Germany firing, we are looking at synchronized global growth in 2011. Coupled with still very low interest rates (primarily in the US and Europe) we have a very solid foundation for above average share price performance this year.

As the most commonly used industrial metal, the spot copper price provides a good reading on the level of global economic activity.

Spot Copper Price – 5 year Chart

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As demonstrated by the above chart, the copper price has recovered from the 2008 recessionary slump and recently reached a record high.
We are also seeing near record prices for Iron Ore and Coal and I expect that we will see the oil price through US$100 in the first half of this year.
The obvious beneficiary of this are the resource and energy sectors and we continue to retain an overweight exposure via BHP Billiton, Rio Tinto and Woodside Petroleum.

 

 

Charlie Aitkin, an Equity Strategist for Southern Cross Equities, discusses the key issues that impacted markets last year and his expectations for the year ahead:

  • Australia’s increased Sovereign Risk rating thanks to ill-conceived policy disasters by the Rudd and Gillard governments.
  • European Sovereign Debt concerns
  • Earnings Expectations...read more...attachment

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