The Loewy Blog Edition 13 - February 2016

As the new calendar year begins we have reviewed the consensus of prominent economic forecasters and enclose their predications for the forthcoming 2016 year, along with the forecast. As we go into the new calendar year, the Westpac index of consumer sentiment is at its lowest level in five months.

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Interest rates – Predominantly based on Westpac forecast

                       Latest                            Predictions

                                       Mar-16    Jun-16      Dec-16      Mar-17

Cash Rates     2.0%       2.0          2.0             2.0              2.0
3 Year Swap   2.1           2.2          2.2             2.2              2.2

In our view we see stable interest rates in the year ahead, USA unlikely to continue to increase interest rates given current market turmoil and world economic fragility.

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Australian Economic Growth Forecasts 

                      Calendar         2016          2017

Westpac                                 2.8%          2.8%

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Stock Forecasts

There exists huge volatility in the market around the world, a plunging oil price with markets waiting for a floor thereon and China economic warnings. Deflation asset risk and deleveraging risk. There is extreme uncertainty in the market place and risk. Market analysts can’t agree on depth of retraction and whether bounces are dead cat bonuses or is a floor being found. In our view given the uncertainty in the market place it is not a time to play in short term positions where irrational behavior and new stock levels can be tested.
Perhaps look to alter positions to be more predominant in cash in your portfolio mix. Trying to read a floor on the stock market above, in our view will entail the reigniting of a steady increase in oil prices, this may signal this floor.
For yield stocks without large exposure to profit downgrades, this is not a time to panic and sell in our view – keep these stocks. Dividend policies may be revised by companies and this will obviously impact stock prices. 

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US$ / AUS$

Westpac Predictions 

                                                              Predictions 

Current                             Mar-16      Jun-16     Sep-16      Mar-17

   .70                                     .66             .66            .66              .69

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Real Estate 

Residential and other
Investors have slowed down their buying due to bank restrictions, slowing market, economic and share market jitters.
Macquarie predicts a slowdown of 7.5% from June/July peak 2015 to trough in 16/17
We differ in this view and see a market going sideways with potential small drops but some small risk as we head towards 2017.
Annual rental growth to decline or slightly retard as new multiple developments come online will also impact and put pressure on rentals, vacancy rates. Commercials and industrials have increased significantly on yield compression over the last 18 months. In our view this will stop and slightly reverse as risk emerges. 

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Summary

A year to be conservative and risk adverse with continued uncertainty everywhere. Capital preservation should be paramount especially as deposit rates will drop and risk based products will emerge with more yield. Tread cautiously.
Markets are currently irrational looking for a floor, be overweight in cash short term but don’t panic on good fundamental dividend based stocks, with protected earnings.
In our view all property classes will have slow to negative growth during the year. 

Disclaimer - The material contained in this newsletter does not constitute advice. DPL 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.