The Loewy Blog - Edition 15 - January 2018

THE LOEWY BLOG – EDITION 15 – JANUARY 2018

The new calendar year has begun and we herein enclose a composite of commentary of prominent economic forecasters and enclose their predications for the 2018 year along with their forecast and our predications.

• Global economy – The International Monetary Fund tips economic growth to lift from 3.6% in 2017 to 3.7% in 2018.

• Will the pace of low growth rate continue for prices and wages. This has been influenced by partial technological change keeping prices low.

• USA economy – will the recent tax cuts and Trump focus on infrastructure continue to fuel growth. What will happen in USA. Westpac feels earnings growth and interest outlook are not severely out of line with current valuations. Benign inflation and recent rate increases should not lead to a significant equity collapse in the USA.

• From an Australian perspective uncertainties about China will be pivotal.

• The shift from export to services and financial sector transparency will be difficult. This will be the most pivotal issue for our economy if Chinese growth can continue around 6.5% growth type levels

• Australian growth GDP to hit between a range of 2.5% to 3.0%

Interest Rates

                                                                   June 2018      Dec.2018      June 2019

                                                                             %                   %                   %

Cash Rates –median concensus

- Australia *1                                                    1.5               1.75                  2.0

- Fed Rates –median concensus *1           2.0               2.25                 N/A

Australian Economic Growth Forecasts
                                                                             2018            2019
                                                             *1             2.9%            2.85%                                               

(*1 - January Financial Review 5.1.18)

    Panel of prominent economists

Stock Forecasts
Westpac forecast (Australia)

                                                                         Mid 2018                      End 2018

All Ord’s                                                        6300 – 6500                6500 – 6700

We see value in European and Japanese stock market for growth more than the Australian market.

US$/AU$ Currency Prediction

                                                                       June 2018                  December 2018

Westpac Forecast                                          74.00                                 70.00

Although recent commodity growth has put $A around 80c levels, these levels are in our view short term weakness of the US dollar against other major currencies. The consensus of major commentators is the predicated range 75c-78 range in the latter part of the year.

Real Estate

Residential Forecast

Sydney 2018

We see softness in residential markets in Sydney for the 2018 year. This started in the last quarter of 2017 and will continue for the next year in our view. Whilst we don’t see major corrections to values, we see potential downwards trends of up to 5-7% in some areas.

Avoid unit purchases in large over supplied development areas like Parramatta, Homebush, Alexandria and surrounding areas. Pressure on buyers for finance, who are to settle, may result in large defaults which will impact prices in these areas.

Our residential tip continues to be Hobart for capital upside and yield.

Retail

We see pressure in this sector with the Amazon effect putting pressure on retailers and hence prices on rentals paid. Shopping centres valuations under pressure. Impact of low wages, growth puts pressure on all aspects of retail markets including retail strips.

Office Market

We see upside in this sector as the economy improves and vacancies decline. Fringe city areas i.e. Surry Hills will continue to experience growth with excellent upside. Residential refurbishment of city previously held office space has somewhat depleted stock and the sector represents good upside in our view. Prime yields 4.5% to 5% - Yields however starting to look high in our view if they drop much lower than this.

Industrial

Strong growth in logistics and transport and online retail warehousing is driving the sector, rental growth up between 6 -10% last year, on average, in Sydney. Sydney average price yields Prime – 5-7%, Secondary – 5.25 – 8%.
Predication rental growth 4.0% next 2 years – good upside in sector.

Summary

Again a relatively stable outlook for 2018 economy at or near 3% growth. Low wages growth and benign inflation.
China however looms as the wild card if growth targets miss and the move to a more transparent financial sector/banking system is a failure.

Disclaimer - The material contained in this newsletter does not constitute advice. LCP is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation