Big picture decisions for Australian equities in 2013 by Macquarie Investment Management

KEY MACQUARIE INVESTMENT MANAGEMENT'S VIEWPOINTS:

• We remain overweight mining and select mining services companies as we believe the markets is too pessimistic on commodity prices and is prematurely calling the end of the commodity cycle.
• We believe overall Eurozone can achieve zero to small positive GDP growth, materially better than the dramatic slowdown that occurred in 2012.
• We remain underweight the expensive defensive and high yield/no growth stocks as we see global risk appetite returning with fading GFC2 fears.
• We are very selective in our positioning in Australian domestic exposed cyclicals. We see the cycle turning more favourable in 2014 than 2013 presently, but structural issues remain.
• We see enormous value opportunities in Australian market reminiscent of the GFC-induced low in March 2009.

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Capital expenditure and the RBA - has mining investment peaked?

Report by Richard Gibbs, Head of Economics, Macquarie Securities Group

Key points

• Mining investment has been the major contributor to overall growth in Australia over the last couple of years. RBA has pared back its mining investment forecasts.
• The peak in mining investment will have implication for growth in Australia
• What the RBA has said about mining investment
• What the peak means for the labor market

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Review of 2012, outlook for 2013 by Shane Oliver, Head of Investment Strategy & Chief Economist

Key points

This note provides a review of key developments of relevance for investors in 2012 and the outlook for 2013. The key points are as follows:

• While 2012 has had its share of worries, it has turned out far better than feared and share markets and growth assets have been able to generate strong returns for investors. This has been helped by investors looking for higher yields in the face of zero or falling cash rates.
• The combination of diminishing extreme downside risks globally, a modest pick up in growth as the year progresses and attractive valuations for most growth assets points to another year of reasonable returns in 2013. Expect interest rates to remain low globally and fall a bit further in Australia.
• The main risks relate to US budget and debt problems, a relapse in Europe, slow growth in Australia and a sharp back up in bond yields if investors get more confident.

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RBA cuts cash rate to 3%

At its December Board meeting, the Reserve Bank of Australia (RBA) decided to cut the cash rate by 25bps, to 3.0%, the same level it reached during the global financial crisis.

In Macquarie's view, the two key questions for monetary policy are: first, whether monetary policy is less effective when households are trying to deleverage (particularly when the other arms of macro-policy -- fiscal policy and the exchange rate -- are working against it). And, second, whether the RBA's decision in December has any implications for the outlook for rates over 2013

In Macquarie's view, the RBA will still need to cut the cash rate to 2% over 2013 in order to get the traction on housing construction that is needed to support growth.

It seems clear, however, that the RBA doesn't share this view. It seems that the RBA will only change its tune when there is irrefutable proof that mining investment has declined or that unemployment has risen much more sharply than the Bank is prepared to tolerate. And if that is the case, then the RBA may well remain the reluctant rate cutter for a few more months yet.


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