The batch of US economic readings released last week point to a softer turn in economic activity in March. In contrast, a clutch of key Australian February economic indicators released last week were much stronger than expected and in line with Laminar Group’s longstanding view, the Reserve Bank (RBA) left the cash rate unchanged at 3.00% at its April board meeting. The government also announced plans to tax superannuation in distribution phase at 15% on investment returns per individual above $A100,000 per annum, a tricky benchmark that may influence household savings asset allocation decisions. Elsewhere, The Bank of Japan surprised with the announcement of a much bigger than expected security purchase programme, tantamount relative to Japan’s GDP of quantitative easing three times the size of the US Fed’s current programme. Adding to the mixed market influences last was a sharp lift in geopolitical uncertainty from the worsening situation on the Korean peninsula.
Risk assets mostly weakened last week on the mixed influences, with the notable exception of Japan’s Nikkei which rose by 3.5%. In some cases, risk assets may have weakened too far, notably the Australian equity market where the ASX 200 not only fell by 1.5% last week, but has been down each of the past four weeks and by Friday close was trading 5% below its mid-March high.
Much of the pull-back in Australian risk assets has been driven by concerns that China’s growth prospects may stay relatively subdued risking oversupply of key Australian export commodities such as iron ore. Some concerns about China’s growth outlook may be alleviated with Chinese March and Q1 economic readings due this week, making it plain that China’s GDP is and is likely to continue growing comfortably above 7% annual clip.
Several other factors also seem to favour a rebound in risk assets. First, Japan is still Australia’s second biggest export market after China and substantial stimulus from greater government spending, aggressive monetary expansion and probably a weaker yen could jump-start much stronger Japanese demand including demand for Australian mineral exports.
Second, Australian retail spending appears to have taken a much stronger turn in the early months of 2013 with an upwardly revised 1.2% gain in retail sales in January, followed by a much stronger than expected 1.3% gain (consensus forecast was only 0.3%) in February. The improvement in retail spending is running hand-in-hand with a sharp lift in home buying activity in Q1 and the latest government announcement on superannuation tax in distribution phase may add to already strong investor preference for housing. Housing held outside superannuation enjoys tax breaks rivaling superannuation tax breaks and the latest superannuation tax proposal tips the balance a tad more in favour of housing.
Third and importantly, the RBA seems to be signaling that rising retail spending and improving housing activity present no cause to expect an early lift in the record low 3.00% cash rate given well-contained inflation and the capping out of resource investment spending. In short, some parts of the economy are starting to improve sharply and the RBA will continue to provide a tailwind pushing further improvement for many months to come. Company profit growth will in our view be very well supported in this type of improving economic environment, good reason why dips in Australian risk assets, such as have occurred over the past month, represent buying opportunities in our view.