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What’s in store for 2014?

Dr. Shane Oliver shares his thoughts on interest rates, the death of car manufacturing in Australia and the opportunities for investment markets this year. Read on for some insightful answers.


Why are interest rates so low and do you expect to see rates increase this year?
The interest rates we now have are necessary to support the economy as the mining boom slows and the Reserve Bank seeks to boost growth in areas such as housing, retail, construction and tourism.

Low interest rates are not so much a sign of weakness, more a sign of changed attitudes. Australians have a lot more debt than 20 years ago. And since the GFC they have become more cautious about spending. So given higher consumer debt and greater caution, you need lower interest rates than might previously have applied to get the economy going again.

The official cash rate will probably stay at 2.5% for another six months or so as we’re seeing tentative signs of improvement in the economy. By September or October we’re probably going to see stronger growth leading to rate increases to 2.75% and then 3% by the end of the year.

Why are Australian house prices so high in global terms? Are we in danger of creating a property bubble?
We’re building about 7,000 fewer dwellings every year than we need. Combined with the absence of an economic crisis, this lack of supply means house prices have stayed relatively high—unlike many other developed countries, where the housing market collapsed during the GFC.

Our house price to income ratio is well above the global average. One day that may fall back to the global norm but in the absence of a big supply surge or a major economic crisis, it’s hard to see that happening via a collapse in house prices.

There is always a risk of a property bubble developing and in fact we have had local bubbles in parts of Australia over the last decade.

But even though house prices are quite expensive, I don’t see a bubble at present.

I’m not sure this is the best time to buy an investment property as the rental yields are so low. If you allow for costs, the net rental yield for a house is about 1% and for a unit 2.5%, which is quite low. Term deposits deliver 3.5% and shares are yielding around 5.5% with franking credits.

You’ve got to get spectacular capital growth to make it stack up, which seems unlikely. So I don’t think we’re going to see a crash but I don’t see fantastic returns from residential property investment either.

What implications does the death of the car manufacturing sector have for the wider Australian economy?
It’s obviously bad news, particularly for those directly affected, but also because it comes at a time when the economy is struggling to pick up and the mining boom is slowing down.

But we need to keep it in perspective. Manufacturing has been in long-term decline since the 1960s. The manufacturing share of employment 50 years ago was about 25% and today it’s down at around 8%.

So it’s just a just a continuation of what we’ve seen over many years. I think it does make sense to let these industries go although like many Australians I would like to know we still make cars. But unlike me not enough Australians buy them so we only have ourselves to blame.

Other countries can make cars more efficiently than we can so we should move on to making other things. Over the next few years the bulk of new jobs will come from other areas like construction, services, health, education, finance and tourism.

Where are the best opportunities in investment markets this year?
International shares are likely to continue to provide good returns as the global economy continues to recover, especially if the Australian dollar maintains its downward trend, as I suspect it probably will.

Australian shares should also enjoy a good year, underpinned by stronger profit growth—which we’re already starting to see with some good company results.

At the other end of the scale, the returns on fixed interest and cash are quite low and these asset classes are going to remain constrained.

And then in between you’ve got commercial property and infrastructure probably doing OK but more in the 8-10% range.

What you need to know
This document was prepared by AMP Capital Investors Limited (ABN 59 001 777 591, AFSL No 232497). This document, unless otherwise specified, is current at Tuesday, 25 February 2014 and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after that date. While every care has been taken in the preparation of this document, AMP Capital Investors Limited makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance.
This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.


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