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Finance - A fine start, but what now? |
You may have been (rightly) distracted by a Middle East war, a couple of reasonably important elections, soaring oil prices and a tsunami, but last year wasn’t too bad economically speaking.
In case you haven’t heard the news, the world economy actually put in a stellar performance in 2004 – the best for more than 30 years.
The US gave it quite a nudge of course, boosted by record low interest rates and huge tax cuts. At the same time, Japan started growing, Europe did its bit and once again China maintained its lead with a growth rate approaching 10 per cent. The Australian share market hit record levels and the housing market, while it cooled a little, was still kicking.
As a result investors did quite well. Helped by soaring house prices, those of us who are property owners have probably never been wealthier. But it was more than just property. If you managed to pick the right investments you could have earned more than 60 per cent a year on your money.
The best performing managed funds were those that geared their investors’ money and took full advantage of the rising share market. Returns approached 70 per cent. But even ungeared funds did well with funds specialising in smaller companies for example putting in growth rates of more than 30 per cent.
Returns from housing were varied with NSW doing relatively poorly in part due to the new NSW Government tax on investment property.
Superannuation funds put in a strong performance overall with returns up in the mid to high teens.
But how is it shaping up for this year? Well, on balance it seems it won’t be as good as last year but it’s not looking too bad.
Many economists are saying that we’ve seen the peak and growth rates will slow in many countries. The easy gains in the US from low interest rates and tax cuts were one-off events and unlikely to be repeated. This year US interest rates should continue to rise and the huge US budget deficit combined with ever-increasing war spending will make further tax cuts unlikely.
Rising US interest rates will cut into consumer spending.
The US twin deficit problems – the budget and current account deficits – are putting downward pressure on the US dollar. Unfortunately the US current account deficit will take a long time to repair and the US Administration is not making too many comforting noises on the budget deficit. This means continuing downward pressure on the US dollar and a few problems for the rest of the world.
European nations in particular are complaining that the fall in the US dollar is hurting them economically by decreasing their exports and making US imports cheaper. They want the US to address its problems in other ways.
Japan recovered last year and with luck (and a strong Chinese economy) will keep growing this year.
Back home Australia’s strong performance rested on three legs: high demand from a booming Chinese economy, high government spending ahead of the election and a strong housing market.
This year these factors will remain important but less so than before.
China
The Chinese market is expected to slow a little but the real issue for Australia is increased competition for our key exports from countries keen to cash in on the apparently insatiable Chinese demand.
A falling US dollar makes this worse. As most of our exports are written in US dollars, we get less in $A terms for the same volume of exports. In other words exporters will not have an easy ride.
Housing
The housing sector is also one to watch.
It has been a major source of growth for several years but this could be coming to an end – hopefully not an abrupt one. A lot will depend on what happens with interest rates and how the economy performs.
Fortunately a rising dollar means that import prices will be kept low so any rises in interest rates if they occur at all, should be moderate. In any case Australians are now so heavily mortgaged that any rise in interest rates only has to be moderate to have a big impact.
There is a possibility that the housing sector will bounce, especially if unemployment continues to fall and incomes continue to rise.
By most measures Australian housing is already expensive and normally we would expect a correction. But if Australians remain in work and are prepared to devote more of their income to housing then house prices may have permanently ratcheted higher.
Time will tell.
Government spending
This is the third leg. Spending should remain high if election promises are kept but this effect will also peter out towards the end of the year.
So summing up, the climate for investors should be benign providing we don’t get too many unpleasant surprises.
Residential property and interest rates we have already discussed. Share markets will probably do reasonably well if growth continues as expected - but probably not as well as last year.
Then of course there is always the unexpected……
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