Already, forecasters are projecting into 2012. What will it bring? More turmoil, or back to solid growth for companies and nicely rising share prices?
Some Australian analysts are adamant that next year will bring riches. They say that there are myriad reasons why Aussie punters have cause for celebration – from the European crisis that’s now done and dusted with newly minted Prime Ministers focused on making money, to China forecast to grow by 8% a year, which they say translates into high commodity prices. They also point to rising sales out of the US, and Australia’s new uranium market – India.
It all sounds rather exciting, but why do we feel so uneasy? In the past we could point to China, India or rising commodity prices as the reason for optimism, but these arguments are starting to sag; they don’t have the same ring as they used to. The simplicity of betting the house on China or India seems reckless in the midst of these global tremors.
Australia survived the global financial crisis relatively well largely thanks to Government stimulus packages. As consumers and businesses pared back spending, the government more than made up for it. But lately the government has been warning that stimulus is out and austerity is in – to bring the budget back to surplus in 2012/13. Gillard’s Mid-Year Economic and Fiscal Outlook 2011-12 involved $11.5 billion cuts to spending, due in part to a $20 billion fall in tax receipts.
The word of the moment is fiscal restraint, which is a pretty way of saying slashing government spending. Normally, as the theory goes, fiscal restraint is used during boom years and expansionary fiscal policy is employed as the economy begins to slow. However, currently around the globe from Greece, Ireland, France, UK and Germany – governments have been pressured to pare back spending in the face of sluggish growth. Hardly surprising, unemployment is skyrocketing and asset prices are falling in a heap.
Gillard’s Mid-Year Economic and Fiscal Outlook detailed plenty to be worried about in 2012. “Risks continue to be tilted strongly to the downside with considerable potential for damaging contagion from a downward spiral of events in Europe,” the report said, continuing: “The global recovery remains vulnerable to shocks, most notably emanating from Europe. Growth in emerging economies, led by China, while slowing, is holding up and is forecast to continue to drive global growth. However, a further sharp deterioration in the situation in Europe or the US would be expected to have spill-over effects on the growth performance of emerging market economies.”
Already, there are signs pointing to a slowdown in China, with Chinese export growth slowing to the weakest pace since 2009 and import growth down in November. China’s passenger-car sales have slumped to a level not seen for well over a decade, according to the China Association of Automobile Manufacturers. It’s feared that investors are starting to pull out of China; the People’s Bank of China recently intervened in the foreign exchange market to prevent the yuan from dipping – the first intervention in 11 years.
Europe is China’s largest trading partner and Europe is tipped by some strategists to move into recession in 2012.
India, too, is coming under increasing pressure as the European crisis plays out. Its sharemarket index, the Sensex, has lost over 20% this year – making it one of the worst performing sharemarkets in the world. The fear of foreign fund withdrawals from India has investors on edge. European investment banks are scaling back exposure and demand for the currency is drying up. Its currency, the rupee, is Asia’s worst performing currency this year. The economy is slowing after 13 separate rate rises have failed to curb the nation’s inflation crisis.
The problem for India is that a stgalued currency makes interest payments on their large current account deficit more costly. As the currency retreats further, fears of a financial crisis grow.
Conditions on home turf here in Australia are not too swell either. Unemployment has just ticked up to 5.3% in November as 39,900 full-time employees lost their jobs. Household spending is slowing, and according to Gillard’s economic review will remain sluggish as we move into 2012. Aussie homeowners have plenty of debt to pay off – courtesy of our recent housing boom – and as unemployment creeps higher, repayments on mortgages will only get tougher to make, cutting into funds usually allocated to discretionary spending. This spells bad news for retailers specifically, and the fallout is already apparent with retail brands such as Fletcher Jones, Colorado, Clive Peeters and Satch Clothing, packing up shop and closing their doors as debts mounted and sales disappeared.
So if it’s not China or India, or commodity prices that will save the day – what is it? Interestingly, Gillard’s review did point to some bright lights in the economy, other than the mining sector that is. “Education, training, health care and social assistance have grown solidly”, the report noted, “while administrative and support services and professional, scientific and technical services have growth strongly over the period. It is the large employing service sectors that are helping to bolster employment growth in the patchwork economy: for example, over the past year the health care and social assistance sector has added nearly 45,000 jobs; public administration and safety has added nearly 34,000 jobs; administrative and support services have added over 23,000 jobs; and professional, technical and scientific services have added around 22,000 jobs. Together, the service sectors have added 195,000 jobs over the past year, more than 3 times the number of jobs created by the mining and construction sectors combined. These divergent trends are set to continue through at least the next two years, and probably longer.”
Indeed, there are always bright spots and the challenge for stock pickers in 2012 is to identify these growth areas. And of course, there will be no shortage of news-driven rallies for the short-term punter in 2012 as Europe resumes some sort of stability and the US economy slips into recovery mode. Being well informed of the risks while picking up bargains for the long haul should form part of any investor’s gameplan in 2012.
More articles from this week’s newsletter