The View from the Outer: Life outside the cubicle
“We first raised our concern about the long term deterioration in Australia's competitiveness in late 2009. Since then, the problem has clearly intensified. To be clear, this is not a protest against the structural reallocation of capital away from the non-mining economy into WA and Queensland. This is an inevitable and healthy response to shifting relative returns and comparative advantage. We struggle, however, to see how Australia will progress – both socially and economically - if the rise of the mining/energy economy is accompanied by a steady degradation of the non-mining economy. The former is not directly contributing to the latter – that is emanating from trends that first emerged in the early 2000's – but it is helping to shield the truth (as did the stimulatory implications of escalating house prices through the mid-2000's) and foster complacency.
For local investors, the long term structural decline in Australia's competiveness is a far more significant issue for future investment returns and portfolio design than anything we are likely to see out of Europe or US in the year ahead. Its negative implications for risk adjusted returns – particularly from equities and property – are already emerging. We struggle to see a happy ending. In the absence of inspired political leadership and a relatively rapid policy response, the prevailing trends can only end with a “cleansing recession” – the ultimate provider of a competitive cost base (and currency). To the extent that this point still lies well in the future, it raises the question as to whether Australia will still then have a diversified industry base that can leverage the benefits of the “cleansing”.
We will leave an esoteric debate on productivity to others, suffice to say that all indicators point to material slippage in Australia over the past decade – particularly relative to the period from the early 1990's to early 2000's (refer chart). At a more basic level, an economy's productivity performance is easily observable. A productive economy delivers solid growth, low inflation, strong profits, strong job creation and takes market share from the rest of the world. As we shall see, Australia has struggled with respect to all these benchmarks.
Eoin Treacy's view On my speaking tour to Australia last year I remarked on how expensive Australia had become from the perspective of a foreign visitor. A number of delegates at The Chart Seminar shared similar anecdotes. One said that it was going to cost his family more to visit the newly aqueous Lake Eyre for one week than it would have been to tour South East Asia for three weeks. Another related how his son who was backpacking around Europe decided to come home for a couple of months to work instead of finding a job in Europe because he could make more money in Australia and it would go further when he decided to go travelling again.
The Australian Dollar is proving a serious headwind for the domestically oriented portion of the economy. The commodities sector continues to invest billions in developing new supply. This export engine plays an important role in keeping the economy's terms of trade in positive territory. However this growth is unbalanced both from a regional and sector perspective. The tourist, manufacturing and services sectors are suffering. The loss of competitiveness in these sectors is legitimate cause for concern from a macro perspective. The RBA will need to plot a delicate path through these two widely differing interest groups.
Short-term interest rates of 4.25% offer an attractive proposition in a global environment where many major economies offer a negligible return on short-term paper. In fact, negative returns are all too commonplace. Therefore it is not too difficult to imagine where demand for AAA rated Australian Dollar denominated securities is emanating.
The 10-year yield found support below the 2009 lows in January and rallied to at least partially unwind the oversold condition relative to the 200-day MA. It began to pull back again two weeks ago and will need to find support above 3.65% to question the consistency of the medium-term downtrend. The 2-year yield has been somewhat steadier but needs to sustain a move above the 200-day MA to indicate a return to supply dominance.
The Australian Dollar Trade Weighted Index has been ranging around the 140 area since 2011 and hit a new high last week. A sustained move below the 133 level would be required to begin to suggest a change to the medium-term demand dominated environment.
In local currency terms, the S&P/ASX200 broke downwards from an 18-month range in August. It had been ranging for longer than many other markets and has subsequently had less of a bounce. It held a progression of higher reaction lows from August until last week and needs to sustain a move back above 4400 to confirm a return to medium-term demand dominance. With a dividend yield of 4.82%, the total return index for the ASX200 has been firmer, and remains within its two-year range.
The S&P/ASX300 Resources Index fell harder than the wider market in August. It has been ranging below 5000 since September and has unwound the oversold condition relative to the MA. A sustained move above 5000 will be required to confirm a return to medium-term demand dominance.
The S&P/ASX All Ordinaries Gold Index has been trending lower since April 2011 and encountered resistance in the region of the 200-day MA on two successive occasions. It needs to sustain a move above 7000 to indicate a return to medium-term demand dominance. Gold denominated in Australian Dollars has held a progression of higher reaction lows since 2005.It hit a medium-term peak near A$1800 in August and continues to consolidate above A$1500. A sustained move below that area would be needed to question the consistency of the 7-year uptrend.
I performed a Chart Library High/Low filter of all the Australian shares in the Chart Library this morning, looking for those making at least new 3-month highs. Here is the list of 48 shares. The mining and energy sectors are well represented and the remainder are fairly well spread through other sectors.
In common with pipeline companies elsewhere, Australian Pipeline pays an attractive dividend (7.14%) and while a little overbought in the short-term, it remains in a consistent medium-term uptrend.
Fortescue Metals is outperforming and continues to hold its move above the 200-day MA.
In the consumer sector Campbell Brothers (3.42%) is a clear relative and absolute performer. However, it is becoming increasingly susceptible to a reversion towards the 200-day MA.
Due to the impressive record of many Australian companies in both paying competitive yields and increasing their dividends, they are well represented in the S&P Pan Asia Dividend Aristocrats Index.
Coca Cola Amatil has been largely rangebound since late 2010 and is currently pulling back from the latest retest of A$12. Its yield of 6.39% should help cushion a further decline.
Computershare (4.4%) retested the 2008 low in August but has since closed the oversold condition relative to the MA and is currently firming within the three-month range. A sustained move above A$8.35 would help reassert medium-term demand dominance.
Ramsay Health Care (4.33%) has returned to test the 200-day MA and needs to find support in the region of A$18 if the medium-term uptrend is to remain consistent.
Ansell has been consolidating above the previous highs since late 2011 and has returned to test the 200-day MA. A clear upward dynamic will be required to confirm support in the region of A$14.
While the above shares represent some of the best absolute and relative performers in the Australian market, the strength of the currency is a hindrance. If for any reason the Australian Dollar begins to become less attractive to foreign investors, the domestic stock market would likely be one of the main beneficiaries.