Huntleys' 2013 forecast

Christine St Anne  |  07/12/2012Text size  Decrease  Increase  |  
Christine St Anne: Volatility remained in 2012 as investors continued to navigate some very challenging markets. So, what's in store for 2013? Today, I'm joined by Morningstar's Peter Warnes to give us his outlook for next year. Peter, welcome.

Peter Warnes: Thanks Christine. It's lovely to be here.

St Anne: Peter, Ian Huntley had forecasted that the market would range between 4,000 to 5,000 this year. Was his forecast accurate?

Warnes: Christine, Ian's last two forecasts for 2011 and 2012, had the trading range on the All-Ordinaries Index between 4,000 and 5,000 and strange enough, it has proved very accurate. If you look at the performance of the ASX All-Ordinaries over that two-year period, it has traded slightly out at the top end. But for the last 11 months or 12 months it has traded in the lower end of that range between 4,000 and 4,500, but has been contained in the last two years in that band 4,000 to 5,000. So, it has been a very, very good forecast going back in hindsight.

St Anne: Peter, what sort of factors do we need to see in the market if we are to have a teens bull market for next year?

Warnes: Christine, I think we've got to be a little careful to just say that there is going to be a teens bull market in 2013. What Ian and I are saying is that bull markets develop and we are looking for a teens bull market to develop and the bull markets evolve. Yes, you get initial surge in the market, the first surge is usually very profitable. But then you get the consolidation and you move into a higher zone. So, we are looking for a teens bull market that may have some longevity pushing out to 2015, 2016.

We're looking for a more gradual trend into 2013. The market seems to be reasonably well underpinned at the current level around the 4,500 mark, underpinned by a dividend yield of the market at 4.4 per cent versus the 10-year bond yield at 3.1 per cent, 3.2 per cent. We haven't seen dividends yields on the market over the bond yield for a period of time. Since early 1970s it happened very rarely and in that circumstance, it becomes favourable for equities.

Now, that doesn't mean that the equity market is going to roar away. All it means is it's got some good underpinning as people continue to look for, if you like, sustainable income-producing stocks. The market is giving you that opportunity, as I said, with a yield of 4.4 per cent versus the bond yields of 3.1 per cent, 3.2 per cent.

St Anne: Peter, do you think you'll be able to give us an idea about how you see the market range for next year?

Warnes: Well, Christine, it's always difficult and probably a dangerous occupation to forecast where indices may or may not end up over the course of a year. I would rather get the trend right and we are continuing to say that we could see a moderately rising trend in the market. As I've said, we think the market is already underpinned at 4,500 by those yields; but if forced to have a stab at where the range would be, I would say, look, 4,500 to 5,500 on the All-Ordinaries Index for 2013 calendar year.

Could you see some downside from 4,500? Well, there's obviously always chances of that. And could you see some upside from 5,500? Yes, there's possibility that lies. But as a general theme and probably I think more realistically is that this market will just move up, if you like, one gradient, if you like, one bar from the 4,000 to 5,000 range to 4,500 to 5,500 and I'd be comfortable with that.

St Anne: Peter, how do you see the eurozone playing out? Do you think Draghi's whatever it takes policy will be solely tested?

Warnes: Christine, look, we are not looking for and I'm not looking for any help from the eurozone at all. I just hope there's no more black swans or exogenous factors out there coming from the eurozone that could disturb global financial markets. I would think that the majority of the problems that are still persistent in the eurozone are going to be there for 5, maybe 10 years and hopefully, they are not going to get any worse.

Do whatever it takes and it's conditional because the buying of those bonds that Draghi is undertaking through OMT (outright monetary transaction)  is conditional upon the Italy and Spain in particular, doing something about their problems. Look, these problems, as I said, are deep-seated. Having low interest rates doesn't solve the problem because the problem is that you've got to get the deficits down and the deficits are going to stay down. And that requires some, if you like, backbone rather than what we've had from the politicians over there and probably elsewhere is wishbones. And so what I'm looking forward is a change from wishbones to the backbones and they've got to do that and that will ultimately bring competitiveness and economic activity back into the zone.

But look, we are not looking for any improvement, if you like, of a dramatic nature in the eurozone economy for quite some time. It will probably just – a lot of it is going to depend on what Germany does, but there's too many hangers on there and the hangers on have got to get serious.

St Anne: Do you see some positive signs coming out of the US despite a fiscal cliff looming?

Warnes: Christine, I wish this fiscal would just go away. I think it's a distraction. It reminds me of Y2K. Y2K, every IT platform in the world was going to implode on the 1st of January 2000 as we switched from the 31st of December. It didn't happen. There was no dislocation and I think this fiscal cliff is of the same kind of proportion.

The US economy will not hit a brick wall and will not stop operating on the 1st of January 2013. Yes, it would be nice for these politicians to show some nationalism rather than their party-driven ideas and idealism. But that's what politics is all about.

The fiscal cliff is a distraction. I'm more concerned about what's happening in the real economy except the fiscal cliff and the signs are positive. The signs in the US, the banking system has stabilised. The housing industry has certainly bottomed. You have got housing starts now running at close to 900,000, I think, 895,000 starts for October and that's way up from 470,000 back in April 2009. Permits are at four-year highs. House prices are starting rise. The inventory of existing homes and new homes is falling.

So, what's happening over there is that low, low interest rates that where Bernanke aiming, aiming to keep long-term bond rates down so they will impact on mortgage rates and you've got 15-year mortgage rates in the US now at just over 3 per cent and 30-year rates at 2.6 per cent something like that. Now, that is going to start dragging some people back into that market and that market will once it gets to like a million housing starts on an annual basis that will start to be positive for GDP. It hasn't been a supporter of GDP for the last four or five years.

So, housing is better. Order sales are very robust. The consumer confidence and consumer sentiment numbers are okay and quite reasonable at this point in time. So, the green shoots in the US economy are there. We have to make sure that we keep watering them and get them to grow a little stronger.

But I would suspect that, look, that economy is – there's what we're looking for leadership. It is the most resilient. They are the most entrepreneurial race in the globe. They have technology. Just look what's happened with your iPhones and iPads and what have you, it came from Apple it is Apple that in the last four or five years, look at the development and what that's done to the technology and communications, et cetera, et cetera. So, that's where we are looking for leadership and I think you'll find that economy looking better and better as 2013 unfolds.

St Anne: Peter, China's growth concerns is one of the key topics for 2012. Do you think that this will continue and how do you see China's move to a more a consumption-oriented economy playing out?

Warnes: Christine, it was no surprise that China slowed down. You can't run 12 per cent, 13 per cent GDP growth year-in year-out, particularly as the base starts to get higher and higher. So, a slowdown was obviously on the cards and yes, everyone said okay, well, how far is it going to come back?

Look, I would suspect that the third quarter number of 7.4 per cent is probably the low. The exit of that quarter was better. In other words, September was better than August and August was better than July. And the subsequent numbers coming out October and November were also better than September. So, I would be looking for a marginally better fourth quarter.

The new power base there, it will get to work in 2013. There is still a lot of work to be done in terms of this move from the rural to the urbanization. Another 350 million to 400 million people have got to move and they want them to move before they get that balance in the economy. It's probably at the moment around 50-50. I think what they want see it at about 70-30, 70 in the cities and 30 in the rural regions and that still requires a lot of infrastructure.

But more importantly, it will change the complexion of China's economy. It will change it from an economy that is supported by and driven by infrastructure and exports to one that is more driven by domestic demand because of the move to – the urbanization move. So, domestic demand will become more important to the overall economy and a more balanced economy.

That will be, yes, you'll see a growth in terms of the bulks as Australia provides, in other words, coal and iron ore, those rates of growth will come off, but the volumes are certainly not coming off. The volumes are still expanding, but the rate of growth is slowing. But I suspect that in the base metals you could see some interesting moves there in terms of copper and nickel and aluminium. I think interestingly the prices there could start moving. But I don't expect the bulk prices to roar away anytime soon and probably there I don't think you will see bulk prices like you saw in the first quarter of 2011.

So, China, again, if you're like supportive of a 2013 market, that will drift, I believe, drift higher and that a better Chinese performance will help our resources stock which have been the ones that have really pulled this market down over the last year.

St Anne: Peter, finally, we're now moving into more of a low rate environment. What are the key implications for retirees?

Warnes: Christine, I mean, I'm not in the camp of further cuts in official interest rates in Australia. Having said that, I don't think they're going to go up. So, what I'm saying is that 3 per cent official interest rates for all of 2013 are highly likely. That puts pressure on term deposits and then term deposits are round about 4 per cent to 4.5 per cent with 2.5 per cent inflation means the real rate of return is 2 per cent.

Retirees have really got a very, very difficult problem in terms of where do I – what do I do? Do I go up the risk curve and go on get some equities or do I stay in capital secure investments with very, very little growth potential? I would think that what they have to do is probably go up the risk curve a little bit. Each individual has got different philosophies. But if you can buy sustainable (companies) and sustainability is the key word for 2013.

St Anne: Peter, thank you so much for your insights today.

Warnes: It's more than a pleasure, Christine.  

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