Crown shares after raids

Australia is forecast to enjoy at least another two years of solid economic growth, extending a quarter of a century without recession and dodging the deflation that dogs so many of its rich world peers.

The latest Reuters poll found analysts expect the $1.6 trillion economy to expand by 2.9 per cent this year, unchanged from the July poll.

Growth was seen at 2.8 per cent next year and 2.9 per cent in 2018, a result that would see Australia capture the Netherlands’ crown for the longest run without a recession.

Surging export volumes, record low interest rates and an historic boom in home building have already underpinned growth of 3.3 per cent in the year to June.

A recent revival in the value of commodity exports also promises to boost company profits, national income and tax receipts in coming months. Surging prices for coal alone could eradicate the country’s trade deficit and add 2 percentage points to nominal GDP.

The worst also seems to be over for a long slump in mining investment, which subtracted a huge 1.6 percentage points from GDP growth in the year to June.

“The Australian economy’s output performance, in aggregate, has been resilient in what remains a challenging environment,” said Westpac senior economist Andrew Hanlan. He is tipping economic growth of 3 per cent for both 2016 and 2017.

“That said, downside risks persist. World growth is sluggish, and global financial sector vulnerabilities remain.”

At home, jobs growth has turned sluggish and heavily weighted to part time work, restraining wage growth and adding to downward pressure on inflation.

Indeed, underlying inflation slowed to a record low of 1.5 per cent in the year to June and looks likely to have remained very subdued in the third quarter

Accelerating global growth means we are nearing the end of the Australian “profits recession”, write Credit Suisse strategists.

Aggregate earnings per share for the ASX 200 has dropped 13 per cent since the third quarter of 2014, but an expected pick-up in global economic growth in 2017 should help inspire single-digit EPS expansion in the year ahead. This backdrop of climbing earnings should help the benchmark top 200 index grind higher to 6000 by December 2017, the broker reckons.

“The coming end of the profits recession suggests a new phase of the market cycle,” they write. “The premium associated with growth stocks should diminish as profits growth becomes less scarce.”

Lowly valued companies are set to benefit, the strategists write, including the likes of Bluescope Steel, Caltex, Computershare, Macquarie Group and Myer. They add department store owner to their model portfolio.

The analysts also bring a global perspective to the ASX sectors, and they note:

  • Australian heath care and  infrastructure stocks trade at a biggest premium to their global peers.
  • Aussie gold stocks are closing the valuation discount to their peers.
  • Banks’ price-to-book premium is justified by the superior return on equity.
  • Meanwhile, the Australian fund managers are some of the most expensive in the world. But they are also some of the most profitable.

The broker notes that the commodities “mini-cycle” continues, with more spending by China and an increase in infrastructure projects there should boost steel demand and support iron ore prices. Credit Suisse’s forecasts are:

  •  Iron ore could trend lower in the next calendar year to $US45/t because of a developing oversupply.
  • The coal price rally is likely to peak out in 4Q16 then drift lower in 2017.
  • Despite the recent plunge in the gold price, investment demand could be supported by the uncertainty of the US presidential election and earlier (and harder) than-expected Brexit timeline. We forecast $US1325/ounce by Dec 2016 and $US1450 by end 2017.
  • Oil had a flat Q3 but started the fourth quarter with a price rally. Lower inventories in the US and flat production had set the stage for a rally before the OPEC output freeze agreement. The OPEC agreement would pose as a significant upside risk for prices, but currently it lacks crucial details and our analysts maintain crude forecast at $US44 a barrel in December 2016 and $US55 a barrel at the end of 2017.