Australia economy the worst is still to come
Western economy that has defied the financial crisis and kept growing . Australia economy was built on the emerging market bubble .
Assets which boomed off the back of aggressive emerging market growth will come under increased scrutiny with Australia particularly vulnerable.
That is the view of Alexander Friedman, CIO of UBS Wealth Management, who believes certain EM-linked markets are not properly reflecting the slowdown in the developing world.
He said:
‘While low valuations keep us neutral on EM equities, we reiterate our negative position on Australian equities and the Australian dollar, and are adding a new theme expressing a negative view on Australian financials, all of which are overvalued EM-linked assets.’
Emerging markets, Friedman said, are undergoing a two stage transition as foreign capital flows reverse direction.
‘If capital stops flowing, countries tend to go through two phases. First there’s a “crisis prevention” phase in which a country draws on any available liquidity reserves to prevent widespread bankruptcies.’
‘Then there’s a “reform” phase in which countries try to reduce their reliance on foreign capital,’ he said.
Reform phases
In the reform phase, Freidman said the key question is whether previous foreign inflows were channelled into profitable enterprise or speculative ones. One sign of the latter is foreign ownership of local assets.
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On this count we are cautious on South Africa, where foreign bond holdings represent a massive 86% of the country’s reserves. This makes interest rates and the rand particularly vulnerable to a reversal,’
he said.
A second sign Freidman is wary of is misallocated capital, and among EM economies, he points out China’s investment-to-GDP ratio of 48% as ‘far too high’.
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With producer prices in deflation for the past 18 months the economy is clearly suffering from overcapacity.’‘Imbalances have been able to persist and even grow as vast liquidity in the banking system created by the People’s Bank of China’s de facto dollar peg has fuelled credit growth to unprofitable enterprises, such as the steel industry,
Chinese transition
While Freidman notes the importance of reforms, and a key focus of China’s government, he remains realistic about the implications this transition will have on the world’s second-largest economy.
‘We expect the Chinese economy to continue to disappoint expectations over the course of the year, and believe recently announced measures to lower taxes for small businesses, support trade, and reform railway investment will directly affect the economy in only a limited way. We project growth to slow to 7.2% year over year in the fourth quarter.’
‘We continue to believe in the long-term emerging market consumption growth story but believe near-term performance will be challenging due to the headwinds to EM growth described above,’ Freidman said.
Aussie Falls to Lowest in More Than Two Years
Bloomberg reports Aussie Falls to Lowest in More Than Two Years as Home Loans Slow
Australia an ‘overvalued EM-linked asset’ says UBS WM’s CIO
Australia’s dollar fell to the lowest in more than two years versus the greenback after home-loan approvals grew at the slowest pace in three months, boosting the case for further cuts to borrowing costs.
The Aussie slid against all but one of its 16 most-traded peers amid speculation the U.S. central bank will reduce stimulus this year, narrowing Australia’s interest-rate advantage. Standard & Poor’s lifted the U.S. credit outlook to stable from negative, supporting the view that the Federal Reserve could taper asset purchases under its program of quantitative easing. New Zealand’s kiwi dollar fell.
“Housing is the one area most likely to make up for the mining investment downturn, and it’s disappointed,” said Joseph Capurso, a Sydney-based foreign-exchange strategist at Commonwealth Bank of Australia.
Australian Insolvencies Hit Record
Australian insolvencies hit record for month of April.
A new April record has been set for Australian companies becoming insolvent. Some 941 firms were put under administration, marking the highest tally for that month since records were first made public in 1999.
Some 941 firms were put under administration, according to an FTI Consulting analysis of Australian Securities and Investments Commission records.
Almost 3450 companies have gone into administration so far this year, compared with 3524 during the same period in 2012.
But the number is higher than the opening four months of 2008 to 2011, which included the global financial crisis.
Tony Evans - Tokyo 