2017 Annual Conference. Thursday, 8 June 2017

Transcription

1 217 Annual Conference Thursday, 8 June 217

2 The global markets impact on Australia Thursday, 8 June 217

3 QIC SLIDES FOR FRONTIER Katrina King 8 th June, 217

4 GLOBAL INTERACTIONS ARE IMPORTANT The pace of Central Banks balance sheet growth is set to change, removing a key dampener on term premium US Fed: likely to announce the roll off of balance sheet investment in Q4 217 Bank of England: finished QE in February 217 ECB: stepped down from 8bn to 6bn per month in March looking at next step down in early 218 Bank of Japan: buying below their target of Y8t per annum 3

5 CENTRAL BANK INTERVENTION 1Y Term Premium 12 m change Jan 1 Jan 13 Jan 16 Jan YoY % Change in BS 1Y Term Premia (12m change, bps) YoY Change in Fed, ECB, BOJ, BoE Bal Sheets (%, RHS, Inv) CENTRAL BANK TAPERING : QUANTITATIVE TIGHTENING Now that bond risk premiums have normalised to some extent, we expect the sell-off in US bonds is likely to prove more gradual from here : A more hawkish Fed is now in prospect Reinvestment of balance sheet likely to taper from 218. Shift from Quantitative Easing to Quantitative Tightening Source: Datastream, QIC, Forecast results are predictions only and may be affected by inaccurate assumptions and/or by known or unknown risks and uncertainties. Forecast results may differ materially from results ultimately achieved. 4

6 LOOKING FOR INVERSION? Australian bond yields to invert against US? percentage points difference Apr 97 Apr 2 Apr 7 Apr 12 Apr 17 AUS-US cash rate spread GLS forecast AUS-US 1yr bond spread (RHS) percentage points difference Source: QIC, Bloomberg. Forecast results are predictions only and may be affected by inaccurate assumptions and/or by known or unknown risks and uncertainties. Forecast results may differ materially from results ultimately achieved. 5

7 WHAT IF THERE IS A BIGGER HOUSING CORRECTION? What would a severe correction in the housing market look like? How big a correction? Rental yields on houses in Melbourne and Sydney are currently less than 3%, while real mortgage rates are around 4% These yields imply that the Melbourne and Sydney housing markets are around 3% overvalued Multi-res dwellings in Melbourne and Brisbane are significantly oversupplied: a 3% price correction is also touted as a possibility in these markets We model a 3% correction in the prices of dwellings over two years: (5% quarterly increments) This would be an historically unprecedented correction in Australian history (although I am assured that in Colonial times, house prices fell by around 3%) Australia would lose its AAA rating Banks would not emerge unscathed Bank lending rates would rise by 1.25ppts across the board Australian share market would take a hit A-Reits and Bank stocks would fall by 2% Foreigners would view Australian assets as a more risky investment: term premia would rise by 1ppt 6% 5% 4% 3% 2% 1% % Rental yields and real mortgage rate (%) Rental yields Real standard variable investor mortgage rate Sydney Melbourne Brisbane Adelaide Australian house prices (% yoy growth) Note: Grey shaded area is a QIC house price scenario Source: ABS, Rp Data-Rismark, RBA, QIC Perth Hobart

8 WHAT IF THERE IS A SEVERE HOUSING CORRECTION? Impact on rates and FX Australia experiences a mild recession in quarterly growth terms in 218/19 cf 1991/92 Significant easing in financial conditions as RBA cuts rates Official cash rate cut to floor of.75% in 218q1 and is held at this level until 221q2 (could be considered as a QE equivalent) 1-year govt. bond yield falls by 95 bps in 218q1 AUD falls to US$.64 in 218q Australian official cash rate (% ) Housing sim Baseline 16 Australian 1-year sovereign bond yield (% ) 1.1 AUD Housing sim Baseline 1.9 Housing sim Baseline Note: Grey shaded area is a QIC house price scenario Source: Thomson Reuters, QIC

9 THE MACRO INVESTMENT OUTLOOK JUNE 217 DIANA MOUSINA ECONOMIST

10 THE AUSTRALIAN ECONOMY STILL CONSTRAINED Housing investment is set to slow Building approvals have peaked 25 Dwelling approvals, monthly 's 2 Total 15% 1% and retail sales growth is sluggish Retail Sales % yoy 15 5% 1 5 But mining investment is close to the bottom % GDP Source: ABS, AMP Capital Mining versus non-mining investment Non-mining investment Mining investment Units Forecast based on capex plans 69/7 79/8 89/9 99/ 9/1 % -5% and services exports are strong Rolling 12 mth exports, $m Surging services exports Education Tourism

11 LABOUR MARKET HOLDING UP Jobs growth versus unemployment rate Unemployment rate, % Employment growth, annual % change Australian employment vs jobs leading indicator Annual % change * based on job vacancies, job ads & hiring plans Jobs leading indicator * (adv 3 months, RHS) Employment growth (LHS) Source: ABS, DEWR, NAB, ANZ, AMP Capital 1

12 SPARE CAPACITY IN LABOUR MARKET IS DEPRESSING WAGES GROWTH Lowest wages growth on record driving inflation down Annual % change Underlying inflation (average of mean and median) Wages growth Source: ABS, AMP Capital 11

13 HEADING FOR A SHORT TERM OVERSUPPLY OF APARTMENTS 3 25 Number of cranes in use for residential construction Residential crane count Sydney Perth Melbourne Brisbane Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Source: Rider Levett Bucknall Crane Index, AMP Capital 12

14 THE DIVERGENT AUSTRALIAN HOUSING MARKET SYDNEY AND MELBOURNE STILL TOO HOT 9 8 Monthly avg, % First rate cut Auction clearance rates First rate cut Sydney Sydney & Melbourne property slow a bit - further slowing ahead Dwelling prices, Melbourne Sydney Outlook 7 6 Melbourne Perth Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Core Logic-RP Data, Domain APM, AMP Capital 13

15 TRAFFIC LIGHT SIGNALS FROM DAA PROCESS Signal Equities Listed property Fixed income Commodities Valuation Cycle Liquidity Sentiment Technical Result Favourable Neutral Negative Neutral Source: AMP Capital. As at May

16 IMPORTANT NOTE This presentation has been prepared by AMP Capital Investors Ltd (ABN , AFSL ) ( AMP Capital ). BetaShares Capital Ltd (ACN , AFSL ( BetaShares ) is the responsible entity and the issuer of units in the AMP Capital Dynamic Markets Fund (Hedge Fund) ( Fund ). AMP Capital is the investment manager of the Fund and has been appointed by the responsible entity to provide investment management and associated services in respect of the Fund. Investors should consider the Product Disclosure Statement ( PDS ) for the Fund before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it is important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. Neither BetaShares, AMP Capital, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this information. While every care has been taken in the preparation of this information, BetaShares and AMP Capital make no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This content has been prepared for the purpose of providing general information, without taking account of any particular investor s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of this information, and seek professional advice, having regard to their objectives, financial situation and needs. 15

17 Frontier Advisors Level 16, 222 Exhibition Street Melbourne, Victoria 3 Tel: Annual Conference