(Pictured: Matthew Sherwood)
There seems to be a growing consensus, certainly among value managers, that the best thing to like about 2014 is that it is that much closer to 2015.
Perpetual Investment’s outlook briefing for Australian equities last week was very similar to Tyndall Asset Management’s the week before. The outlook for the domestic economy is clouded and there are “valuation issues” with the market, Perpetual’s Matthew Sherwood, head of investment markets research, said.
Both value managers thought earnings expectations were optimistic, although they had retreated from late last year, from about 12 per cent to 7-8 per cent.
Sherwood said: “There should be earnings growth of about 6 per cent in global markets but valuation trends have been causing the latest move. Markets are behaving like it’s a first-year recovery but we’re five years into it.”
He said: “We’re at the stage of the cycle when we should have seen major recoveries. My expectation is that markets will not shoot up but will grind higher.”
More disturbingly, Perpetual was very bearish on the long term for the Australian economy without some significant infrastructure development and market reforms.
Sherwood said that, without action in this regard, the growth in national income over the next 10 years would be as low as 0.9 per cent a year, which would be our worst performance in about 100 years. This is less than half the long-term average. Projects such as the second Sydney airport were “no-brainers”, he said. “GrainCorp was a no-brainer too,” referring to the foreign takeover of the grain logistics company which was prevented by the Government. The takeover would have meant a more efficient operation which would have brought world’s best practices to grain distribution and export.
Sherwood contrasted Australian food processing and distribution with that of New Zealand, which was, at least in its big dairy industry, much better organized and taking advantage of the rise in protein consumption in Asia.
“We need business to be telling the Government what we need to do to get the economy moving… GrainCorp was not the best way for the new Government to get off the mark.”
On a more positive note, the weaker Australian dollar was already helping the economy, Vince Pezzullo, portfolio manager, said. “We’re already seeing the money flowing in, for example, in tourism. The headwinds of the past are becoming tailwinds.”
Perpetual estimates that every 7c decline in the Aussie dollar versus the greenback is equivalent to a 0.25 per cent cut in interest rates. Pezzullo expected the Aussie, currently back up around 89c to the $US, to settle in the “low-mid 80s”.