Australian stocks are poised for the worst quarter relative to global equities in two years as manufacturers from Ford Motor Co. to General Motors Co. exit the nation and consumer confidence drops.
The country’s benchmark S&P/ASX 200 Index fell 2.2 percent from the end of September through yesterday and the MSCI All-Country World Index of global developed and emerging market shares gained 2.9 percent. That’s the biggest gap since December 2011. Valuations on the S&P/ASX 200 peaked this year at 16 times estimated earnings on April 30, compared with the average multiple of 13.7 in the past five years, according to data compiled by Bloomberg.
Rising unemployment and lower mining investment threatens 22 years of consecutive economic growth in Australia as traders bet there is only a 15 percent chance the central bank will cut the benchmark overnight cash rate target at its next meeting in February. About $67 billion was wiped from the value of the stock market this quarter as a report this month showed the economy expanded slower than economists forecast.
“People are very nervous about the local outlook,” George Boubouras, who helps oversee $30 billion as chief investment officer at Equity Trustees Ltd. in Melbourne, said in a telephone interview on Dec. 12. “Corporate Australia is still relying on cost cuts. You need the cash rate to be cut in the first half of next year to turn the corner. There is now more upside versus downside to Aussie equities,” he said, forecasting the S&P/ASX 200 will rise to 5,950 by the end of 2014. It closed at 5,096.10 today.
Forge Group Ltd. has slumped 88 percent this quarter, the biggest drop among companies on the S&P/ASX 200 Index, after forecasting a loss and leading declines among mining-services companies already struggling as the world’s biggest miners BHP Billiton Ltd. and Rio Tinto Group cut spending.
The value of mineral and energy projects being developed in Australia dropped 10 percent to about A$240 billion ($213 billion) as of October from six months earlier, the Bureau of Resources and Energy Economics said in a Nov. 27 report. After the peak of a decade-long commodities boom in Australia, the world’s biggest iron-ore and coal exporter, resources companies are scaling back investment.
“Mining investment is expected to continue to decline for several more years,” Shane Lee, a Sydney-based strategist at CIMB Securities, said in an e-mail on Dec. 12. “The drag on the market in 2013 was materials, but we expect this sector to be one of the main engines of market returns next year.”
Lee forecasts earnings will grow 17 percent in 2014 for the materials industry. That group in the S&P/ASX 200 has fallen 9.1 percent this year.
Australian Treasurer Joe Hockey said Dec. 17 that the budget deficit will balloon to A$47 billion in the fiscal year through June 30, 2014, up from an August estimate of A$30.1 billion, as the mining boom wanes and the nation’s currency remains “uncomfortably high.”
The government estimates economic growth will be 2.5 percent this fiscal year, less than the 3 percent estimated in May. Hockey pledged spending cuts, including in assistance to the motor industry, to try to rein in debt.
General Motors’ local Holden’s unit said last week it will cease making cars in Australia in 2017, citing high costs due to an almost 50 percent increase in the Australian dollar in the past four years. About 2,900 employees will lose their jobs at the automaker’s plants in South Australia and Victoria states. In May, Ford said it will exit Australia in 2016, also citing the currency among reasons to cease production.
Qantas Airways Ltd., the country’s largest airline, tumbled 30 percent this quarter after saying it expects to lose as much as A$300 million in its first half, forcing the carrier to either take on debt, issue shares or sell assets to pay for new planes.
Australia’s dollar has dropped 14 percent this year, the steepest decline after the yen among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. That comes after an almost 50 percent increase in the so called Aussie in the four years through Dec. 31 as the China-led commodities boom spurred demand for the currency.
A lower level of the currency “would likely be needed to achieve balanced growth,” according to minutes of the Reserve Bank of Australia’s Dec. 3 meeting released this week.
“We continue to expect the RBA to leave interest rates on hold, but the risks in the short term are still skewed toward more rate cuts, particularly if recent bad news regarding Holden’s and Qantas adversely affects confidence,” Shane Oliver, who helps oversee $131 billion as head of investment strategy at AMP Capital Investors Ltd. in Sydney, said by telephone Dec. 17.
Traders see a 15 percent chance of a cut to the benchmark interest rate from a record-low 2.5 percent when the central bank meets in February, according to swaps data compiled by Bloomberg. Thirty economists surveyed by Bloomberg forecast no change to the rate in 2014.
Consumer confidence fell this month to the lowest level since July, according to a Westpac-Melbourne Institute gauge. Third-quarter gross domestic product advanced 0.6 percent from the previous three months, missing economists’ forecast for a 0.7 percent expansion.
The drop in the S&P/ASX 200 this quarter has pared its gain this year to 9.8 percent, compared with the S&P 500 Index, which is up 25 percent. Earnings-per-share on the Australian benchmark will climb by between 6 percent and 7 percent in 2014, according to UBS AG estimates.
The Australian gauge traded yesterday at 14.7 times estimated earnings, 7.3 percent higher than the five-year average, according to data compiled by Bloomberg. That compares with a current multiple of 16 on the S&P 500.
“Unlike the U.S., Australian growth is likely to decline in 2014 as the growth handover from mining to non-mining continues to struggle for traction,” Matthew Sherwood, Sydney-based head of investment markets research at Perpetual Ltd., which manages about $25 billion, said by telephone Dec. 12. “Investors enter 2014 with valuations stretched, earnings growth forecasts optimistic and with clear growth risks.”