Darryl Gobbett, Prescott Securities Limited: Economic outlook

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Darryl Gobbett, Managing Director, Chief Economist & Financial Adviser, Prescott Securities Limited
delivered this presentation at the 2013 Mining South Australia conference. The conference has been produced specifically for the South Australian mining and regional development community and represents a unique opportunity to hear the latest developments from the major projects, mines and explorers in South Australia. For more information on the annual event, please visit the conference website: http://www.informa.com.au/miningsa2013

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Darryl Gobbett, Prescott Securities Limited: Economic outlook

  1. 1. Economic Outlook Mining South Australia 7th Annual Conference 26-27 November 2013 Darryl Gobbett Managing Director, Chief Economist, Representative , Adviser
  2. 2. • Any advice contained in this presentation is general advice based on the investment merits of the security or issuer alone without taking into account any person’s investment objectives, financial situation and particular needs. • The information contained within this presentation was compiled by Prescott Securities Limited (PSL) and PSL provide no warranty regarding the accuracy or completeness of the information. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice by PSL. PSL assume no obligation to update this presentation after it has been presented. Except for any liability which by law cannot be excluded PSL, its Directors, employees and agents disclaim all liability (whether in negligence or otherwise) for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by the recipient or any other person directly or indirectly through relying upon the information. • Before making an investment decision based on such advice, the recipient must decide whether it is appropriate to his/her needs or seek specific professional advice. Should you consider the acquisition of a particular financial product as a result of the material contained, you should obtain a copy of and consider the Product Disclosure Statement for that product before making any decision. PSL may receive a fee for advice and/or the implementation of an investment decision. PSL and their representatives may have financial interests in some/any of the product(s) included within this presentation. • Prescott Securities Limited (PSL) is the holder of an Australian Financial Services Licence No: 228894.
  3. 3. Economic and Financial Background and Outlook • • • • Global economy looking OK despite US Congress’s best efforts Australian economy slowing down in 2013 but lifting in 2014/15 Inflation staying low Sizeable Federal and State Budget deficits – Coalition already cutting future spending and regulation • • • • • • Another cash rate cut but longer term Interest rates lifting since mid 2013 Confidence lifting post election Likely currently in low point of Australian Profit cycle Tax System needs overhaul Asian growth staying strong Chinese growth strong and changing
  4. 4. Continued Global Growth Divergence Output Growth, Inflation Adjusted, % pa 2007 2008 2009 2011 2012 2013f 2014f United States +2.1 +0.4 -2.6 +1.8 +2.2 +1.6 +2.6 Japan +2.4 -1.2 -6.3 -0.6 +1.9 +2.0 +1.2 Euro Area +2.8 +0.6 -4.1 +1.4 -0.6 -0.4 +1.0 China +13.0 +9.6 +9.2 +9.2 +7.8 +7.6 +7.3 India +9.4 +7.3 +6.8 +7.9 +3.2 +3.8 +5.3 Indonesia +6.3 +6.4 +5.7 +6.5 +6.0 +5.3 +5.4 ASEAN 5 +4.3 +1.9 +1.7 +4.5 +6.1 +5.3 +5.4 Brazil +6.1 +5.1 -0.6 +2.7 +0.9 +2.5 +2.5 World Output +5.2 +3.0 -0.5 +3.9 +3.1 +2.9 +3.6 Consumer Inflation: Euro, USA, Japan Emerging & Developing +2.2 +6.5 +3.4 +9.2 +0.1 +5.2 +2.7 +7.2 +2.0 +6.1 +1.4 +6.2 +1.8 +5.7 $US Deposit Rates* 5.3% 3.0% 1.1% 0.5% 0.7% 0.4% +0.6% Source: IMF World Economic Outlook October 2013. * 6month LIBOR
  5. 5. US Growth Slow but Steady US Spending: Contributions to Growth % pa annualised, Real GDP, Source: USA BEA June qtr 2009 - Sept 2013 +2.1% % pa 6 4 1998 - 2007 average +3% pa 2.8% Dec Qtr 2007 to June Qtr 2009 Output fell 5% 2 0 -2 2004 2005 2006 2007 Sept Dec Mar June Sept Dec Mar June Sept Dec Mar June Sept Dec Mar June Sept Dec Mar June Sept Dec Mar June Sept Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2011 2012 2012 2013 2013 2013 -4 -6 -8 -10 Government Expenditures Net Exports Residential Investment Private Inventories Private Non-Residential Gross Fixed Investment Personal Consumption Expenditures Total
  6. 6. US companies doing very well despite US Govt 2013 Q3 profits to record highs Economy to surprise on upside in 2014 Very Low Interest rates Cheap Energy Negligible wages growth Strong Productivity gains Competitive $US
  7. 7. US Housing market picking up Established House Price Growth Accelerating Very low mortgage interest rates even with recent rises Rising Private sector employment, Low rental vacancies and rising rents Less forced sales, new housing construction still low but rising Falling unsold housing stock, now lowest since 2007 Helping lift household and bank balance sheets and confidence
  8. 8. USA Labour Market Lifting Slowly but on Right track Unemployment at 7.2% in September, cf 10% 2009, 4.4% 2007
  9. 9. Increasing Recognition of US Fraccing Gas Surplus as a Game Changer Risks for Australian Gas and Coal Exporters, Farmers, Manufacturers China is estimated to have a bigger resource than USA
  10. 10. USA Federal Budget Deficits Down, Expected to Stay Low “Sequestration” Spending & Personal Tax Impacts Growing Economy and Profits, Lower Defence spending Less dire outlook on Debt/GDP ratio Deficit Stimulus contraction another reason for continued monetary support Quantitative Easing Tapering not expected until after mid 2014 USA Federal Budget Outcomes and Projections, % of GDP Source: US Congressional Budget Office, May 2013 (Projections for 2013 and later years, based on current legislation) 40 Revenue, Left Axis 35 Spending, Left Axis Deficit, On and Off Budget, Left Axis Debt Held by Public, Right Axis 30 25 20 15 10 5 0 Sep-80 -5 -10 -15 Sep-85 Sep-90 Sep-95 Sep-00 Sep-05 Sep-10 Sep-15 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 -5 Sep-20 -10 -15 -20 -25 -30
  11. 11. Growth Driven by Emerging Economies’ Urbanisation & Middle Class H’Holds Great Changes for Humanity •Coming down out of the trees •Harnessing fire •Agriculture •Urbanisation •Ageing
  12. 12. Spending by the Global Middle Class $US billion, 2005 Purchasing Power Parity Exchange Rates Source: OECD Development Centre Working Paper No 285, The Emerging Middle Class in Developing Countries, Jan 2010
  13. 13. Global Motor Vehicle Market Production of all motor vehicles, million Motor vehicle fleet 2011 2006 2012 Total, million Per 1000 people China 5.708 19.271 115 85 USA 11.980 10.329 253 812 Japan 10.800 9.943 75 589 Germany 5.758 5.649 52 634 South Korea 3.699 4.562 19 379 India 1.627 4.145 22 18 Brazil 2.528 3.343 50 259 Source: www.oica.net, wikipedia.org
  14. 14. 650 Hides and Rubber, to 30 November 2013 300 Source: International Monetary Fund 600 550 500 Hides, Heavy native steers, over 53 pounds, wholesale dealer's price, US, Chicago, fob Shipping Point, US cents per pound, Left Axis Rubber, No.1 Rubber Smoked Sheet, FOB Malaysian/Singapore, UScents/lb, Right Axis 450 275 250 225 200 400 175 350 150 300 125 250 100 200 150 75 100 50 50 25 0 Jan-1990 Jan-1995 Jan-2000 Jan-2005 Jan-2010 0 Jan-2015
  15. 15. Other sectors expected to grow with Rising Urban Middle Classes • • • • • • Food – More, Greater Diversity, Better, More Western • More Meat, Edible Oils, Dairy, Alcohol, Sugar, More take away • McDonalds aims to increase China stores by 50% to 2000 in 2013 • Yum! Brands in China has 3,300 KFC & 651 Pizza Hut: aim is 20,000 Travel – Chinese tourists biggest spenders globally and in Australia in 2011/12: – Total & per capita – Indians likely to be next largest Education, Children’s expenses, Communication and Entertainment Buying up Overseas Businesses, Farms and Resources – Motor vehicles, Pork, Dairy, Wine, Sugar, etc etc Health Care, Aged Care, Financial Services – Diseases of the West and the Aged Focus on Brands, Quality, Authenticity
  16. 16. China’s Growth on Target at 7.5 - 8.0% pa, ex inflation, but changing Spread benefits of growth • Increasing wages • Lift Value Add in Industry • Rising consumption • Better and more housing • 10 million new homes pa • Increased tourism • Better care for Aged • Reduced pollution • More Western & better quality food Source: RBA Statement on Monetary Policy, November 2013 Reduced regulation • Finance • Trade
  17. 17. Source: China 2030, World Bank and Development Research Centre of the State Council, the People’s Republic of China, 2012
  18. 18. Some Indicative Numbers for China 2011 Constant value $US 2010 2020 2025 % change on 2010 GDP, $US billion 7,298 15,462 20,594 +182% Investment, $US billion 3,386 5,876 7,414 +119% Consumption, $US billion 3,547 9,278 12,975 +266% Consumption per Head $US 2,630 6650 9,200 250% Sources: China 2030, World Bank and Development Research Centre of the State Council, the People’s Republic of China, 2012 International Monetary Fund Prescott Securities Ltd
  19. 19. Directions of Chinese Reforms • Some points from 3rd Plenary Session of 18th CPC Central Committee • Improve and develop socialism with Chinese characteristics – Build law-based and service oriented government – Modernise governing system and capabilities – Establish modern fiscal system • Set up Central Leading Team for comprehensively deepening reform – Accelerate reforms in education, employment, income distribution, social security, public health • Markets’ decisive role in allocating resources – Public ownership remains dominant; More free trade zones, relax investment restrictions • Allow people living outside cities to equally participate in modernisation – Changes to residency system – Hukou – Property rights for farmers; New agribusiness systems • Drawing red line for ecological protection • Relax one child policy
  20. 20. Iron Ore, Copper and Coal Prices $US, end month to 15 November 2013 Source: International Monetary Fund, Bloomberg 11,000 Copper, $US per tonne, LME Cathodes, Left Axis 10,000 Iron Ore Fines 62% spot China Imports CFR Tianjin port, per dry metric tonne unit, Right Axis 9,000 Coal, Australian thermal coal, 12,000- btu/pound, less than 1% sulfur, 14% ash, FOB Newcastle/Port Kembla, Right Axis 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Jan 1980 Jan 1985 Jan 1990 Jan 1995 Jan 2000 Jan 2005 Jan 2010 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0
  21. 21. $A/$US at 0.92 – 0.95 about fair value On current Commodity Prices, Look for lift as China and USA growth lifts $US Commodity Prices and US Producer Prices 300 End Month to 15 November 2013, Sources: www.crbtrader.com, www.bls.gov 1982-1984 = 100 CRB Commodity Price Index plus Gold and Oil Prices, Left Axis 3.00 US Producer Prices, Left Axis 250 Ratio of Commodity Price Index to US Producer Prices Index, Right Axis 2.50 200 2.00 150 1.50 100 1.00 50 0.50 0 0.00 Jan-63 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
  22. 22. $A/$US at 0.92 – 0.95 about fair value On current Commodity Prices, Look for lift as China and USA growth lifts $US Commodity Prices, US Inflation & $US/$A Exchange Rate To 15 November 2013, Sources: www.crbtrader.com, www.bls.gov, RBA, PSL 2.00 1.90 1.80 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.70 0.60 0.50 0.40 Jan-63 $US CRB Spot Plus Oil & Gold/$US US PPI: Left Axis, 1982-1984=100 $1.60 $1.50 $US/$A: Right Axis $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
  23. 23. Australian economic background Source: Pre- Election Economic and Fiscal Outlook 2013, Department of the Treasury and Department of Finance and Deregulation, 13/8/2013
  24. 24. Reserve Bank Forecasts November 2013 Source: RBA Statement on Monetary Policy, 8 November 2013
  25. 25. The Australian Economy: The Federal Government’s Forecasts -Business Investment likely overstated for 13/14 and 14/15 % change, inflation adjusted (Italicised are PSL forecasts) 10/11 11/12 12/13e 13/14f 14/15f 3.1 3.2 2.5 3 3 1.001 1.03 1.10 1.2 1.2 3.0 -3.6 0.5 5 5.5 155 130 130 136 143 8.8 37.6 18.5 5 -2.5 3 10.1 1.5 2.5 5 Private Final Demand 3 6.2 4 3.5 2.75 Public Final Demand 3.4 2.3 -0.5 0 0.5 Household Consumption New Motor Vehicle Sales, m* Private Investment - Dwellings No. of Private Dwellings Started (‘000)* - Non Dwell. Construction - Equipment Source: Australian Government 2013/14 Budget Paper No. 1 * PSL Forecasts
  26. 26. Private Sector Investment Expected To Taper Off Gross Investment by Major Industry Sector, $b, Current $ 2010/11 2011/12 2012/13 2013/14 Expected Mining 46.85 82.00 94.72 102.84 Manufacturing 12.3 13.23 9.46 8.56 Electricity, Gas & Water 6.19 5.41 5.48 5.10 Construction 5.44 4.74 4.99 2.52 Wholesale & Retail Trade 7.42 7.45 7.38 6.37 Transport, Post & Warehousing 11.55 13.65 11.11 10.35 Rental, Hiring & Real Estate 11.94 10.52 9.77 9.36 Other 17.61 17.85 17.54 14.14 Total 119.34 154.84 160.45 159.24 Source: ABS 5625.0 Private New Capital Expenditure and Expected Expenditure, Australia, Aug 2013
  27. 27. Consumer & Business Confidence Gets an Election Lift Australian Consumer and Business Confidence 130 Source: Reserve Bank of Australia, NAB, Westpac Melb Institute 30 25 120 20 15 110 10 100 5 0 90 -5 -10 80 Consumer Confidence: Westpac Melbourne Institute, Left Axis, to November Business Confidence: NAB Net Balance, Right Axis, to October 70 60 50 Sep-1989 Sep-1992 -15 -25 Sep-1995 Sep-1998 Sep-2001 Sep-2004 Sep-2007 -20 -30 Sep-2010 -35 Sep-2013
  28. 28. Share Prices Lifting but continue below Profit gains Corporate GOS, $m Australian Share Prices & Profits All Ords Source: ABS, ASX, PSL 100,000 10,000 90,000 9,000 Research forecasts of Australian corporate gross operating surplus in light blue 80,000 8,000 70,000 7,000 60,000 6,000 50,000 5,000 40,000 4,000 All Ords Right axis 30,000 3,000 Corporate Gross Operating Surplus, Australian Bureau of Statistics Estimates Left Axis 20,000 10,000 0 July-49 2,000 1,000 July-59 July-69 July-79 July-89 July-99 July-09
  29. 29. Share Market has earnings support in 13/14 to move higher Source: Reserve Bank Chart Pack November 2013
  30. 30. Households Continue to Save at 25 Year Highs Source: Reserve Bank Chart Pack November 2013
  31. 31. Debt Still High but higher House and Share Prices will lift Net Worth Source: Reserve Bank Chart Pack November 2013
  32. 32. Markets Expecting Cash Rate Cut to 2.4% but rises from mid 2014 Cash rate expectations edging higher since election
  33. 33. Term Deposit Rates High relative to Money Market Yields since GFC To “Normalise” through 2014 : Should assist Share Prices
  34. 34. Forecast General Government Sector Budget Outcomes Source: Pre- Election Economic and Fiscal Outlook 2013, Department of the Treasury and Department of Finance and Deregulation, 13/8/2013
  35. 35. The Longer Term Hoped for Improvement Source: Pre- Election Economic and Fiscal Outlook 2013, Department of the Treasury and Department of Finance and Deregulation, 13/8/2013
  36. 36. Some of the Tax increases, 2013/14 to 2015/16 • • • • • • $32.8b 20.0% FBT $0.68b 16.3% Company Tax $6.65b 9.6% Superannuation Fund Taxes $3.98b 52.2% Capital Gains Taxes $5.30b 67.1% Tobacco $1.73b 20.8% – GST • Individuals ex FBT, net $6.11b 12.1% Total Tax $50.55b 14.5% Source: Pre- Election Economic and Fiscal Outlook 2013, Department of the Treasury and Department of Finance and Deregulation, 13/8/2013
  37. 37. Not A Sustainable Personal Tax Situation Bracket Creep: Wages and Tax Rates Sources: ABS 6302.0 Average Weekly Earnings May 2013, ATO $100,000 39% 39% $90,000 39% 38.5% 38.5% 41.5% 39.5% 38.5% $80,000 39% 41.5% $70,000 $60,000 $50,000 Marginal Tax Rate Thresholds 43.5% 43.5% 44.5% $40,000 $30,000 Average Annual Fulltime Earnings, Adult Males, $20,000 $10,000 $May-1995 May-1997 May-1999 May-2001 May-2003 May-2005 May-2007 May-2009 May-2011 May-2013 May 2015(f)
  38. 38. Coalition’s Policies: “Real Solutions for All Australians” with “5 Pillars” • • • • • Scrap the Carbon Tax: Direct action on Carbon abatement Scrap the Mining Tax Reduce the Budget deficit: Set up Commission of Audit to examine spending Create 1m jobs in next 5 years, 2 m in the next decade Productivity Priorities Working Group – Reduce Red and Green tape: Targets for deregulation – Increase workforce participation: employer subsidies for old and young on welfare, Work for the Dole Scheme and more – Bring back Australian Building and Construction Commission – Require unions to act under same rules as companies – 6 months Paid Parental (ie maternity) Leave on salaries to $150,000 – Reduce company tax rate to 28.5%: 1.5% Levy on larger companies for PPL – Cut car industry support by $500m, – Defence procurement?
  39. 39. Coalition’s Policies: “Real Solutions for All Australians” with “5 Pillars” • More engagement with Asia – Accelerate Free Trade Agreements with China, India, Indonesia, Japan & others – Two Way Colombo Plan; Targets for Foreign, preferably Asian, languages in Year 12 • Asylum Seeker policy: Stop the Boats, Temporary Protection Visas • Defence White paper in 18 months, Increase defence spending to 3% of GDP – Decisions on submarines, AWD, “Valley of Death” • • • • Enquiry into the Tax system Review of Competition Policy New Prime Minister’s Business Advisory Council Rolling 15 year plans for Infrastructure spending – Infrastructure Australia to be revitalised – Roads and More Roads, Dams, River Murray plan – NBN to be refocussed
  40. 40. Coalition’s Policies: “Real Solutions for All Australians” with “5 Pillars” • Enquiry into the Tax system – Personal Income tax cuts promised • • Productivity Commission Enquiry into Child Care costs and flexibility No adverse policy changes in superannuation – “Level playing field” re industry, retail, smsf – 2 year wait on SGC increases, Low Income Super support axed – Likely tougher standards for industry fund trustees • Establish Aged Care Provider Agreements – Productivity Commission Caring for Older Australians’ Report • Health – Improving Healthcare through increased productivity – Restore the Private Health Care rebate – Diabetes and Dementia research funding • Changes to Indigenous funding, policies and bureaucracies
  41. 41. • Innovation Race See further acceleration in pace of innovation & implementation – Including world changing ones • Social networking: Linked in, Facebook, Twitter etc • Gas fraccing • 3D printers – Lattices for bones & organs – Guns, horseshoes, spare car parts, buildings – Food • Growing Human Organs • On demand low/no cost information and entertainment: – Demise of the daily newspaper, local free to air TV? – Winner take all experts • Pilotless aircraft, weapons; driverless trains, trucks and cars • Remote medical diagnosis, prognosis and operations – With faster destruction & creation of industries & companies
  42. 42. Change is accelerating: The Innovation Race • Innovations globally are being implemented more quickly – Penetration of 25% of US population took: – 55 years for automobiles and 26 years for Television – 16 years personal computers, 13 years mobile phone – 8 years internet? 5 years Ipad? • World is seeing combination of: – Record number of researchers – More & bigger national efforts on many fronts – Eg Climate change, biotech, energy, transport – Rising Urbanisation needs and Defence Budgets – Many more middle class consumers and faster acceptance
  43. 43. Thank You

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