What does the macro mean for stocks? – OPINION
If there was one constant in all the 2016 predictions for the economy, it’s that inflation was to remain low. This could keep Australian investors on the dividend teat for just a while longer.
Crystal ball gazing is an activity which is foolish at the best of times, but trying to predict the market in 2016 after a year which was largely characterised by volatility is especially foolish. That hasn’t stopped a raft of economists and arm-chair economists from doing so.
While there are varying views on whether the bottom of the commodity cycle has actually been met, low inflation seems to be the one topic most agree on.
Last year, giving a speech in Perth, Reserve Bank governor Glenn Stevens said inflationary pressures (at least domestically), are seen to be weak.
“Year-ended GDP growth is forecast to be in the range of two to three per cent in June 2016 and to pick up a bit during the following year,” he said.
“Domestic inflationary pressures are expected to remain subdued.
“Inflation is forecast to be in the range of 11⁄2 to 21⁄2 per cent over the year to June 2016, and 2 to 3 per cent over the year to June 2017.”
Low inflation also seems to be the theme du jour from economists, with Commbank forecasting inflation to grow from 2.25% – 2.75% to 2.5% – 3% this year.
It’s hardly inspiring stuff which fit into a general theme of gentle growth on the macro front, with Commbank leaving its cash rate little changed at 1.75% to 2% in the second half of the year, down from its current base of 2%.
According to an end of year report from Westpac chief economist Bill Evans, a low inflationary and growth outlook means the RBA won’t be particularly tempted to cut rates.
“Since the last rate cut in May this year  Westpac has assessed that rates will be on hold throughout 2015 and 2016,” he said.
“We have seen no reason to change that view but do recognise that risks to the view are to the downside.
“The key dynamic that would be responsible for a need for lower rates would be the impact of falling terms of trade on incomes and spending. With further falls in the household savings rate; an expected sub USD 0.70 Australian dollar; and ongoing solid employment growth that prospect seems unlikely.”
The low inflation outlook is mainly a by-product of a low economic growth environment. While it’s expected to be positive this year, it’s only going to be marginally so.
So what does the macro mean?
With low inflation and low growth the order of the day internationally as well, it could mean that money from investors looking for a return could find its way into the stock market.
However, with the outlook for commodities mixed, money could end up finding its way into stocks which offer significant dividends instead of cash products, which will offer continuing low returns.
Ironically, the likes of the big banks have been under pressure during the last year to scale back dividends in the wake of the APRA-instigated raising of lending rates independent of the RBA.
In case you missed it, the Australian Prudential Regulatory Authority mandated last year that banks needed to have more cash on hand in case there was a run following a GFC-esque collapse.
It was sound policy, but the banks decided that instead of cutting its dividends to customers, that they would simply rake in more cash from existing customers.
Australian investors have always been rather obsessed by dividend yield compared with other international investors, and the episode demonstrated that the banks well and truly know that their dividends are part of the main attraction of investing in them.
Investors looking for steady growth throughout the year may well start looking at dividends even closer than they already are, as the low growth in inflation means the ability for companies to generate a large profit spikes remains subdued.
Slow and steady is the theme here.
The low inflation environment means that cash products are unlikely to offer too much growth this year, while a steady growth environment underpinning the market this year means share prices could head north.
Not by much, mind you, but north enough to lure investors to make the switch.
Any raise in commodity prices such as iron ore or oil could see stocks rise further than expected this year, further adding cash into the market and perhaps focusing the attention on more speculative stocks.
We should note that commodity forecasts remain mixed at this point, meaning there is a potential upside here but factoring it in is foolish at best.
With marginal growth expected in the Australian economy and generally flat inflation on the horizon, all looks set for stocks to maintain or even strengthen their dividends to increase the attractiveness of the equity as an investment option.
The question is that in a low growth environment, whether this is sustainable or not.
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