2015 outlook: While our Global Macro team’s view is for improving global growth and still-accommodative policy settings, Australia’s macro trajectory remains out of sync, with slowing growth and escalating risks. Scope for fiscal and monetary stimulus is available, but we believe policymakers will slip ‘behind the curve’ through 2015, at least relative to market expectations.
Global view – the cycle is not over: Improving growth, bottoming inflation, and still-accommodative central banks present a supportive backdrop for equities and credit in 2015. Valuations, while above-average, do not look extreme enough to spoil the party.
Watch growth (not rates) for risk: Weaker growth, not higher rates, is the key risk to markets, and we are mindful that the disconnect between equity and rates markets is far from resolved. We venture a ‘triple glut’ of savings, oil and central bank liquidity is at play.
Australia out of sync: In our view, Australia’s transition from Resources-Led Growth to East Coast Recovery has stalled. Lower oil will only partially offset the likely employment and income shock ahead. The risk we see is that growth conditions almost certainly need to deteriorate before a substantial policy easing will occur, leaving us cautious on domestic cyclicals.
…Index target maintained: We maintain our 12-month forward ASX 200 index target of 5,350. This implies minimal capital returns over the year with potential near-term index weakness, ultimately being regained by what is increasingly necessary policy support.
…Since Australia’s last recession in 1991, one of the longest expansions on record has unfolded thanks to the country’s historical trade linkages to DM markets as well as integration with the multiple waves of the Asian growth miracle. Known as the ‘lucky country’, Australia has managed to avoid a sustained downturn despite the numerous shocks that have sent peers into recession.
…We see many of the levers and offsets to growth headwinds as somewhat exhausted. Indeed, as we laid out in Australia Macro+: Lost in Transition, 4 November 2014, we think macro risks are skewed to the downside. In our base case, we assume a material growth slowdown, in conjunction with greater than expected deterioration in labor market conditions. Unless the monetary and/or fiscal backdrop turns more stimulatory, Australia could face its first recession in a quarter-century.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
