Chris Caton - Chief Economist BT Aus & Global Economy

Was invited to come along to a BT/Westpac presentation by Chris Caton about the Aus & global economy last night. Thought I would share some of his comments. Hopefully these are in some logical order.

At the current level, the market's PE ratio is about at its long term value. Real value for shares based on the same basis, is outside of resources and financials.

World PE is slightly lower, so Aus is in relative terms, somewhat more expensive. Outside of Australia opportunities, he sees opportunities in the US.

Based on historical 'Big Bear' cycles (5 in the past 100 years), it has taken no longer than 6.5 years for the sharemarket to get back to its peak. This would mean the ASX needs to increase another 30% in the next 14 months. He did say, that was not a prediction. ;)

Productivity, Mining
Budget very sensitive to commodity prices, in the next 2 years will be focused on productivity growth. There are no easy gains from mining anymore. The reality is productivity will pick up (mathematics of inputs/outputs) especially based on the increasing mining revenues (outputs) as projects come on board and the reduction of investment (inputs) in these projects

Our wages are not high despite the popular preconception, it is the exchange rate which has exacerbated the wage comparisons.

Unemployment & Inflation
Don't believe recent Abs stats on unemployment. Most of the gains (two-thirds) were in part time males, who are 10% of the total employment base. Unemployment is low,but has been trending upwards marginally.

Inflation is also low and is not expected to have any particular impact. Doesnt see any great fear of inflationary impact on QE because the financial system is not working as well as it did. So the greater inputs are being required for the same output in financial industry

Household Debt, Interest Rates & Housing Prices
Interest paid for households has reduced across the board and is appraoching post GFC levels, which is providing stimulus. Household debt still around 150% of income, but this has been at the same level since 2005. I asked him how you reconcile this in line with the increase in our savings rates? He replied that the savings were used elsewhere. I am not quite convinced of that argument, but who I am to disagree. He doesn't believe current debt is an impediment to future house price growth.

There are 50% of households with no debt.

On the oft debated question on housing prices, bubble, historical highs predominantly utilising median income to acquire median house price comparison compared to the US since 1981, we are twice as high. But compared to a host of other countries (European, Scandanavian, Canada, NZ), we are right in the middle. The chart he referenced was a RBA one.

Nominal interest rates has come down & income has continued to increase so this has been the real cause of house price growth. In the future, he believes prices will track income growth by and large. Prices and in particular in Melbourne have stabilised and are starting to grown again.

We are at the peak of mining investment, which we will lose half our source of our growth, but interest rates cuts will help. Construction (already due to grow organically) will rebounds, and the anticpiated exchange rate reduction will help non-mining and tourism. Revenues from Mining boom iron ore, LNG to increase as projects come online.

Next 10 years Consensus Economics has Australia as best growth from 2013-2025 against our non-Asian equivalent economies. Compared however to Asia we are 11th, India and China are equal first. They are as follows; India, China, Indonesia, Philipines, Malaysia, Thailand, Singapore, Taiwan, South Korea, Hong Kong and then Australia.

Has indicated that demographics are better in India. India has increased from our 14th highest to 4th highest trading partner.

No catastrophe in the economy and we will experience moderate growth in Australia, cash rate may fall to 2.75% but was hedging his bets on that. Indicated that signalling to the market a possible rate reduction is as much to keep a lid on the exchange rate.

Stockmarket to be around 5300 by the end of 2013, although at current earnings levels is at fair value. The exchange overvalued and predicts it will be 95 cents by end of 2013. The best explanation of the high forex has been our government bond rates which is the highest yielding AAA rated globally and inflows to fund mining construction. Since the start of the GFC when we started borrowing money, overseas holdings of debt increased from 30% to now 75%. We are very attractive location for large overseas holdings of money.

He believes based on historical linkages ie the relationship between the TWI of US dollar against all major currencies compared to Aus/usd dollar is overvalued. Based on this, it should be at 82cents.

He didn't believe in response to a question, for Australia to have higher inflation to get the currency down eg Japan. Of course, sometimes talk by the central authorities is enough

Federal Budget
Budget very sensitive to commodity prices, which is why we are having issues. The biggest mistake of the ALP was ever making promise to keep budget balanced. It would have been economic vandalism if we made it to a surplus this. He reiterated that Australia does not have a government debt problem, around 10%. Although you could make a case that we don't have enough :eek:

Thought the current government economic performnace has not been as bad as the percpetion has been. On the whole, doesnt see a huge difference between the two sides based on their policies on the budget and economy.
The biggest mistake of the ALP was ever making promise to keep budget balanced. It would have been economic vandalism if we made it to a surplus this. He reiterated that Australia does not have a government debt problem, around 10%. Although you could make a case that we don't have enough :eek:

To argue that Government shouldn't stop spending money because it would kill the economy is a silly one. In that case we might as well have our GDP 100% funded by Government. Government spending is necessary for many things but it should never take up the level that it is now (1/3rd).
Thanks for sharing Buzz.

Always interesting to see predications.
Brave call on the AUD, thought if it was back at 95 then our economy would be much softer (effecting his other predications) or US were rising their rates.
Even at 2.75% the carry is still great.

CBA's call is for 1.04 Dec.