In Australia there is persistent uncertainty about the pace of the recovery in non-mining business investment. It is well known that manufacturing is deteriorating, but what's needed is stronger growth in the services sector, as well as construction and infrastructure, to offset the significant reduction in mining capital expenditure (capex).
Total capex fell 4.4% in the first quarter of 2015 to $35.9 billion and the Australian Bureau of Statistics has forecast a 25% drop in annual total capex next financial year to $104 billion. The worse-than-expected forecast also caused a sharp fall in the Australian dollar in late May.
Even though the Reserve Bank of Australia cut interest rates to a historic low of 2% in May, many economists have suggested further interest rate reductions may be required to help boost GDP growth forecasts that are already below trend at 2.5%.
While there is genuine concern in the market place about lowering interest rates further because of the upward pressure on housing prices, at Ausbil we've concluded that interest rates will stay low for an extended period of time and may actually go lower.
On a positive note, the Budget and the message behind it has boosted confidence. Fiscal policy has become less of a headwind for business activity and consumer spending is improving. The Federal Government has decided to let the deficit expand, allowing the economy to grow. Unemployment looks to have stabilised and we believe business and consumer confidence is beginning to display "green shoots" of optimism.
Given global growth forecasts are improving relative to expectations for Australia, we have positioned the Investment Portfolio to capture international earnings streams among the domestically listed companies. In tandem with the fall off in mining capex, we have reduced our Resources exposure, but upped our holdings in the stronger housing related sectors and sought out select high yielding stocks to counter low interest rates.