January 23, 2018

Questions for the Australian Economy in 2018

This year, Australia braces for the impact of several market themes.

The year 2017 represented gradual evolution rather than major change. 

The Australian economy grew, as it consistently does despite the economic hurdles set before it by world markets. We saw traditional pillars of the economy such as the Aussie dollar, mining, property and stocks compete with a list of new themes now dominating investors’ attention — cryptocurrencies, the Internet of Things (IoT), and the Trans-Pacific Partnership (now the CPTPP) to name a few.

These are all revolutionising how Australia does business and how its consumers spend. We are seeing the ‘sharing economy’, Fintech and e-commerce become staple industries in themselves, having been akin to specialist niches up until now. Meanwhile, several Australian-based and ASX-listed companies are taking notice and developing products to keep up. 

But while technology continues to accelerate change, Australia will still face serious questions in more traditional business areas — housing prices, the Australian dollar and the future of mining as just a few examples.

Below are five key questions facing Australia and its citizens in 2018.

Q1: How will cryptocurrencies evolve and how will Australia adapt to them?

By 2020, over 80% of the world’s population will have access to a smartphone, while only 50% will have a bank account. 

Cryptocurrencies and digital wealth are offering to bridge this socio-economic divergence. If looked at more broadly, there is a growing likelihood that the way to financial independence and self-empowerment will come about via digital means rather than political ones.

To counteract and counterbalance the systemically-destructive effect of centralised market systems that rely on relative value, cryptocurrencies (powered by blockchain technology) propose to introduce a decentralised method of valuing goods, services, currencies, (and even ownership rights) through an objectively secure and transparent method of making economics play fair.

How Australia adapts to this now-quickly changing landscape of currencies, wealth and digital value remain unclear. The current Australian government doesn’t regulate Fintech products such as Bitcoin – yet.

And the reason why government regulation is sadly inevitable is the following frothy chart which governments the world over are salivating over:
Prevalent in the financial news during 2017 was, of course, the growth of cryptocurrencies such as Bitcoin and Ethereum. Last year saw the value of Bitcoin soar by over 1,500%, rising from less than US$1,000 per Bitcoin to as high as US$15,000 during the year (amid persistently elevated volatility).

How cryptocurrencies develop in terms of applicable legislation, government-involvement and general appeal value for consumers are likely to be core themes this year – precisely because it is starting to influence people’s wallets a bit too much.

Q2: If we are in fact in a housing bubble, when will it burst?

Homes in Sydney and Melbourne have never been more expensive on any measure, including relative to income and rent figures.

Stable demand is supporting nominal house prices, although increasing supply and an already expensive price-base sound like a recipe for house-price-inflation to slow, and possibly even reverse if the Reserve Bank of Australia (RBA) decides to accelerate interest rate increases in-line with US Federal Reserve policy.

If you’re of the opinion that Australian property prices can’t fall — ask someone in Perth or Darwin (or other regional towns in a mining area) about the ‘flexibility’ they have witnessed in house prices. 

That said, Sydney and Melbourne are a runaway train from an inflation perspective, which means that out-of-control prices in both cities are likely to remain on trend in 2018.

Q3: Will Banks continue pace-setting the ASX?

With banks likely to be under even more pressure to uphold higher lending standards and with global interest rates on the rise, 2018 could see a definitive decline in investor demand for banking stocks and exposure to banking. Throw in new taxes on foreign buyers and China’s crackdown on money leaving its borders, and we can foresee some significant market risks for the coming year.

If the Australian property market does falter in 2018, the effect on the wider economy could be unprecedented. Why? Because a property bust combined with the possibility of lower credit ratings for the major banks raises the risk of a local financial slowdown in a similar vein to Ireland and Greece around 2011.

Australia had the good fortune of largely avoiding the most debilitating effects of the GFC in 2008 due to a lower exposure to US financial products. But the regulatory backlash has been felt globally regardless of financial exposure.

Australia now has tighter lending regulations and bank capital rules, with 2018 promising to deliver yet more regulatory tightening.
In terms of the ASX, the Aussie benchmark is trading at all-time highs indicating that risk-appetite remains strong among both consumers and institutional investors in Australia. 

Australia's major banks are ~60% reliant on domestic home lending, making them uniquely vulnerable to a property market downturn. The big four banks are also quite reliant on overseas funding, making them vulnerable to foreign financial crises and, consequently, lower liquidity in global credit markets.

Q4: Will the cyclical mining recovery continue?

After a period of declining revenue, several major Australian mining industries bounced back in 2017.

Both base and precious metals experience heightened miner attention as spot prices continued trending higher. Commodities such as lithium, cobalt, zinc and graphite were the standout performers of 2017, thanks to their importance in lithium-ion batteries and energy storage technologies.

Mining industry capital expenditure continues to decline but has now reached a historic low of around A$30 billion for the last fiscal year. There is a possibility that this expenditure begins to creep up again due to the strong price inflation throughout 2016/17, which can lead to a lagging knock-on effect of more capital expenditure.

Australia, along with the rest of the world, will see further progress towards a lithium-ion powered future in 2018 including more lithium/cobalt/zinc explorers entering the mining arena to help global industry embark on the largest lithium-ion-powered gadget frenzy in history. Battery market trends indicate that demand for metals will remain elevated thereby helping Australia to not only retain its commodity-market dominance, but also to keep it for years to come as the battery industry taxies down the runway in anticipation of takeoff.

Q5: What next for the Australian dollar?

The Australian dollar has remained in a $0.70-$0.80 range against the US dollar for three years. However, given the telegraphed monetary policies from the US Fed and RBA,  changing yield-differentials could have a signifiacnt impact on the Australian dollar this year.

For now, the US Fed is expected to raise rates only tentatively while the RBA is admittedly worried about runaway property inflation and a frothy stock market — both of which could see the RBA commit to premptive rate hikes towards the end of the year. 

The Aussie dollar is on course to record four consecutive weeks of gains against the US dollar and is already trading close to the top of its most recent trading range.

The Australian dollar has been tipped to trade as high as 83 cents in 2018, and CommSec analysts forecast total returns on Australian shares to lift by 10-12% in 2018. 

As all investors and traders should know by now — making predictions is pretty easy, but seeing them manifest into reality tends to depend on how these  large tectonic market themes interact with each other. 

If the engagement is smooth and conducive, then we could see Australia not only raise its level of GDP, but also, lead the charge being the epicentre of developing new technologies for world markets. 

However, on the flip side, if Australian legilsators and businesses do not find a smooth method of integrating new technologies, the aftershocks for the Australian economy could leave Aussie consumers and businesses quaking in their boots for decades.

Written by George Tchetvertakov 
Published by Finfeed.com