Housing looms as a risk for Australia, says AB
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Global asset manager AllianceBernstein believes that while Donald Trump's policies may be less of a threat to Asian bond and equity markets in 2017 than many people think, the outlook for Australia remains clouded.
Incoming US president Donald Trump's policies may be less of a threat to the Asian bond and equity markets in 2017 than many people think, according to global asset manager AllianceBernstein (AB).
But the outlook for Australia remains clouded, with the possibility of a crisis in the housing sector in the second half of the year that could cause the Reserve Bank of Australia to lower the cash rate, which is already at an all-time low of just 1.5 per cent.
The forecasts feature in a research note, "Volatility and the Trump Effect: Navigating the Investment Markets in 2017," which outline the firm's views on the global macro outlook and Asian and Australian capital markets in the year ahead.
Guy Bruten, senior economist, Asia Pacific, and Anthony Chan, Asian sovereign strategist, two of the report's five authors, said four themes shape the firm's macro overview for 2017. They are:
• The global debt overhang which continues to provide a headwind to world GDP growth, forecasted by AB to be 2.8 per cent next year compared to an estimated 2.6 per cent for 2016,
• Political populism--a factor in the UK's vote last year to leave the European Union, and Donald Trump's success in the US presidential election--could cause further upheavals,
• An increase in fiscal stimulus, as more countries follow Japan's lead and conclude that quantitative easing and other unconventional monetary policies have run their course,
• The likelihood that global inflation has bottomed and is about to rise.
"The prospect of higher inflation and the expectation of further, though prudent and measured, interest-rate rises by the US Federal Reserve virtually ensure further volatility in global bond markets next year," said the economists.
Brad Gibson, AB's portfolio manager, Asia-Pacific fixed income, said the firm's Asian bond portfolios were underweight duration in areas sensitive to US interest-rate movements, such as Hong Kong and Singapore, and long duration in India and South Korea, where rate cuts were likely.
While expectations the new US administration would take a more protectionist stance on trade had made AB more cautious towards emerging markets in Latin America and Eastern Europe, Gibson said the firm did not share the widespread pessimism about the implications for Asia.
"Far from creating a vacuum in Asian trade and investment, a scaling back of US engagement with the region would leave more room for companies from China, India, and Japan to pursue their ambitions there," he said.
Stuart Rae, chief investment officer, Asia Pacific ex Japan equities, said with regard to Asia, a more protectionist stance by the US was likely to be more unevenly successful than expected.
"Our base case is the US will make some well publicised moves against steel and auto imports. These industries account for a relatively small proportion of Asia's exports, however, and such measures are more likely to hurt Mexico (in the case of autos) than any Asian country," he said.
A broad-based tariff on Chinese goods was unlikely, because it would increase the cost of technology and other goods for US consumers (which would be politically unpopular) while the complex structure of global supply chains would probably make it difficult to implement effectively.
"Many iPhone component manufacturers, for example, are based in Asian countries outside China, and the cost of relocating such manufacturing processes to the US would be prohibitive in the short term," said Rae.
For Australian equities, the 2017 outlook is dominated by uncertainty about the strength of China's demand for commodities and the likelihood of fresh anxieties over the stability of Europe's financial system, said Roy Maslen, chief investment officer, Australian equities.
These were key risks for the Australian market's top two sectors of resources and banks, respectively.
"Expectations of volatility notwithstanding, we continue to see some attractiveness in equities based on the level of dividend yields relative to returns on bonds and cash, and the scope for active investors to discover value opportunities and invest defensively," said Maslen.
Bruten added that, while commodity prices had improved recently, the improvement was unlikely to be enough to reboot the Australian economy overall.
The pace of growth in housing construction, meanwhile, was unsustainable and its support for the economy was beginning to fade.
"We see the prospect of some disorder in the housing sector in the second half of 2017 that could well force the Reserve Bank to lower the cash rate," he said.
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