Australia Focus : The Aboriginal Walkabout
The Walkabout defined by Merriam Webster.
“a short period of wandering bush life engaged in by an Australian Aborigine as an occasional interruption of regular work” http://en.wikipedia.org/wiki/Walkabout
My dad uses the word derogatorily to refer to the more free spirited hippie folks that he is highly intolerant of.
That would be how I see Australia this past week, walking about searching for answers even as the ASX 200 is just 1 of 2 Asian stock markets to close the week higher ! and has been the best performing exchange in Asia for the past 7 days.
I paid scarce attention to Australia this past week but have noticed that the sentiments are changing after the currency hit a 4 year low on 3 Oct (see more on fx below).
On the economic front, business confidence fell to its lowest level in more than a year and the current account deficit has been projected to worsen slightly and into 2015 as Moody’s sees iron ore prices staying low for the next several years and China continues to slow.
Thus it would be reasonable to expect more mine closures of the small to medium sized firms, unable to fend off the mining giants who are exporting more than ever on mine expansions with iron ore down 39% this year at a 5 year low. http://www.bloomberg.com/news/2014-10-14/rio-iron-ore-output-rises-13-as-expansions-defy-price-slump.html
Yet it is nice to see prices cheapen that would make investment palatable again. Looking at the list of commodity and resource companies whose share prices have fallen, such as Fortescue Metals down almost 50% of its high of $6.02 in Feb to its current price of $3.44, gives me some cheer although more detailed analysis is required.
Risks are on the mount though. Australia is on a warpath with its leaders trying their best to antagonise Russia (next month 15-16 Nov at the G-20) and bombing away in Syria while they face some troubles of their own at home with another bomb scare mid week.
Meanwhile, Japanese household investors are losing appetite for AUD Uridashi bonds after 11 straight months of purchases. Issuance has dwindled notably as the curve flattened almost 1% between the 1 year and 10 years since Jan. http://www.businessweek.com/news/2014-10-15/aussie-love-souring-as-japanese-favor-turkey-australia-credit
But the global appetite remains strong with a record 2037 bond sale going through mid week for A$ 7 bio with 45.5% going to offshore buyers which were mostly fund managers, hedge funds and banks. The yield of 3.945% is hardly appealing but is still a good 1% over US treasuries and yielding higher than Italian and Spanish 2044 bonds which means unless fund managers are prepared to buy Brazil 2041 bonds at 5.03%, Australia is still the only choice.
The other risk is pointed out by Fitch, that Australian bank risks have risen with house prices which are overvalued to historical averages, just when Singaporean companies are going in …
” GIC whose launch of a Melbourne CBD mall, Aspial launching a $1 bio Melbourne project and Fraser Centrepoint buying Australand. ” https://tradehaven.net/market/fx/international-focus-australia-the-unloved/
Link to the report on Fitch : http://www.reuters.com/article/2014/10/15/fitch-australian-bank-risks-have-risen-w-idUSFit79244020141015
I am looking closely at commodities these days like I said mid last week although I had not expected the Fed to be the one to lift oil prices. https://tradehaven.net/market/commodities-make-the-world-go-round-time-to-be-greedy/
I remain bullish on the AUD dollar for carry reasons now that the worst is over and I believe the AUD proxy hedge for EM idea is coming to an end because the trade would need to be unwound ie. Buy AUD and Sell EM gradually as the liquidity returns. https://tradehaven.net/market/fx/australia-focus-chinese-kangaroo-stew/
I think we can see 0.89 in the coming week now that we have based out in the weekly charts. The AUDCAD registered a nice rebound this after its senseless collapse for the past month, 0.99 to 1.00 is a neutral level. And finally, the EURAUD which has had an abnormal run that could only be due to market positioning. I see the carry coming back for that pair towards 1.40 once the ECB starts their buying programme and yes, I did read what the RBA said, again, about the AUD being too high but we only listen to the Fed, followed by the ECB.
For the returns on the bonds, I think we can potentially diversify into stocks at this rate but only, specifically, stocks of substance. Because even 7 years has broken under 3%.
Maybe a walkabout would help me make up my mind.
Bonds prices (indicative). Note that most of the prices are higher on the week compared to SGD corporates. That is because these are mostly rated AA and AAA papers.