Expect a two-speed in Australia next year. No, it won’t be mining vs other industry sectors; it will be strong investment returns vs a weakening broader economy, says Instreet Investment MD George Lucas.
In the past few years, a new word has entered the Australian lexicon – a two-speed economy. It refers, of course, to a booming mining industry, and those two states where it is largely centred, Queensland and Western Australia, and the rest of the economy that has been lagging, notably services, construction and retail.
Well, mining has lost its lustre somewhat in recent months in the wake of a slowing China. But we expect that Australia will still experience a two-speed economy in 2013, albeit in a different form. Let me explain.
The Global Financial Crisis (GFC), which will 'enjoy' its fifth anniversary in September 2013, has perceptibly changed people’s investment outlook in many ways; but two factors, to my mind, are most significant.
First, people are debt averse; the latest figures show households are saving 10 cents in every dollar of net disposable income, which includes credit card debt being slashed and home mortgages being paid off, helped along by falling interest rates.
It’s not just households that are being more frugal; companies, too, are focussing on having strong balance sheets as evidenced by the slow credit growth of the banks. And now governments have joined the party; deficit has become a dirty word as both state and federal governments strive to deliver surpluses.
It seems everyone is saving.
Second, investors are far more focussed on capital preservation than the rate of return an investment can earn. As evidence of this they are still attracted to bank term deposits that come with government guarantees compared with higher yielding, blue chip stocks that have the added attraction of franking credits. It is the complete turnaround from before the GFC when investors were liberally employing gearing to chase higher returns.
So, in a nutshell, investors are deleveraging and an investment’s security is of paramount importance. So what does this mean for the broader economy?