Charlie Aitken is always a salesman. But his recent notes have taken on a fervor striking even for him. From today:
So what then remains the bear case on Australia?? Why does just about every global strategist recommend “underweight Australia” and just about every international fund manager is “underweight Australia??
Because they are wrong.
Look at the Australian cash rate to 10yr bond yield curve. It is steepening because Australia is going better. That yield curve is telling you Australian GDP growth has bottomed: it’s that simple.
There has been a change of management for the better in Australia. This has occurred right as Chinese GDP growth rates bottomed and East Coast Australian GDP growth rates bottomed. We had Federal management change right at the bottom of the “earnings cycle” for Australia Inc. and I genuinely don’t believe, despite what I type every day, that the global investment world appreciates yet what is truly going on down here and what they are missing.
Unemployment is 5.8%. .8% above what would be considered “full employment”. Australian household balance sheets are in great shape. Australian corporate balance sheets are in great shape. Relative to the developed world Australia’s federal balance sheet is in great shape despite the best efforts of previous management to waste taxpayer money. Australia’s central bank balance sheet is in great shape, with our cash rates 2.00% above the developed world average cash rate and no QE. We have the 4th largest retirement savings pool in the world.
Our banks are holding excess regulatory capital and competition for deposits is easing. Credit growth is accelerating, yet we have record amounts sitting in cash earning zero real.
House prices are rising, new home sales are up, building approvals are up, development and renovation applications are up.
Confidence readings are at multi year highs and when capacity meets confidence you know what comes next… spending.
At the same time the Federal government is going to embark on an ambitious nation building infrastructure upgrade cycle, potentially partially funded by Canberra lending its AAA credit rating to the private sector for the construction period.
If the government is spending and not moving regulatory goalposts then the business community starts spending. The multiplier effect of business spending is huge, which eventually leads to job creation. Unemployment is a lagging indicator.
So think about this scenario for Australia for the next few years.
1. Mineral and energy commodity prices remain firm and leading Australian miners deliver higher volumes into those prices
2. Mining investment slows but remains at elevated levels
3. Agricultural commodity prices remain firm and Australian farmers deliver higher volumes into those prices
4. Inbound tourism cycle accelerates
5. New home construction cycle accelerates
6. Home renovation cycle accelerates
7. Discretionary retail spending accelerates
8. Job creation accelerates
9. Savings rates revert to 0%
10. Money floods out of term deposits
11. Credit growth accelerates
12. Compulsory super flows into risk assets
13. AUD heads to 80usc as the Fed ends QE
I don’t want to put the #kissofdeath on it, but we could be in for a multi-year period where everything goes right for Australia. Could it be that mining, agriculture, banking, housing, tourism, transport, building/development, building materials, steel, retail, TMT, and finance sectors all see tailwinds at once??
Yes… and that is now my base case for Australia over the next 2 years. I believe in synchronised growth from the Australian economy.
If you subscribe to anything I write above your equity portfolio must have a major tilt towards cyclical stocks: both regional and domestic. If I am proven right you simply won’t get a dip to buy cyclicals in. As data evidence comes through you will see further consensus upgrades from cyclical analysts, chasing share prices.
I think it’s a major mistake to believe that Australian or regional cyclicals listed in Australia have “run ahead of fundamentals”. That is a misnomer. All cyclical share prices turn up and see spot P/E expansion ahead of an earnings and dividend recovery. That’s how it’s worked for decades. I don’t understand why cyclical sector analysts don’t understand that. Do they not understand how cyclical leverage works??
Do they think when the earnings uplift is confirmed that share prices will still be here?? I don’t.
That is why I think recent weakness in key Australian cyclicals (banks are also leveraged cyclicals), driven by US political shenanigans, is most likely your last chance to get set.
We are all underestimating the earnings, dividend, free cash generation from Australian cyclicals as we come out of 5 year “feels like East Coast recession”. Costs have been cut to the bone, nobody has invested in new capacity, and a demand uplift will see prices and volumes rise concurrently.
Similarly, we are all underestimating earnings, dividend and free cash generation from Australian listed regional cyclicals, particularly the big miners and big energy as we enter a new phase of the mining and energy production cycle.
At the strategy level I am maximum bullish Australia. I think my 6000 ASX200 Index call in the next 12 to 18 months isn’t a big ask. AUSTRALIAN EQUITIES ARE IN A CLEAR EARNINGS AND DIVIDENDS UPGRADE CYCLE.
I am always suspicious of anything that tells me it’s my last chance to get it in and there are some issues with this analysis:
- there is no evidence of capacity constraints in the economy, the opposite in fact;
- China’s growth has bottomed but isn’t accelerating. Iron ore has held up well but the oversupply coming is real;
- Australian rebalancing has accelerated in the past few months but is more oriented to asset prices than it is to construction, leaving a big question over employment;
- the steepening yield curve cannot simply be put down to better growth prospects. It is very much a result of the global shift of money out of safe havens associated with taper;
- the shift by consumers to saving over spending is persuasively structural, and
- in general, there is no doubt that Australia has entered a cyclical upswing, but it’s fighting against structural headwinds, which is why the rate cutting cycle has been so slow to get traction.
Whether it’s wise to be “short Australia” at this point is a moot point. But the bull case is far less clear than Aitken’s argues. Having said that, I reckon we’re going to see six months of sunshine which will be enough to send the Aitken’s of this world nuts for cyclicals.
