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Australia measures up in a different way

BNP Paribas Equities has developed a new leading economic index for Australia.

This index is a composite of nine variables: consumer confidence, business confidence, yield curve ratio, real M1 growth, All Ordinaries momentum, housing finance approvals, residential building approvals, new orders received and the US NAPM index.

This index is claimed by the boffins at BNPP Equities to have a better track record of predicting the Australian business cycle than other comparable leading indicators.

In testing the indicator, it signalled a mild slowdown during the Asian crisis without a hard landing or bear market. In fact that was what did eventuate.

Now the BNPP Equities leading indicator is suggesting a period of slower growth but still a robust GDP growth ahead.

Even a mild slowdown in growth will be accompanied by some earnings downgrades.

The upshot of these predictions are that BNPP Equities are recommending a fairly defensive sector tilt for equity portfolios, with overweight exposure to banks, property trusts, infrastructure and utilities, food, alcohol and tobacco, healthcare and high quality growth stocks with offshore earnings.

The BNPP Equities team are still cautious on the technology, media and telecommunications sectors.

BNPP Equities are cognisant of the fact that bank valuations are not cheap anymore.

However, with credit growth growing at around 13 per cent per annum in Australia there are still good prospects for the institutions that provide that credit.

They are expecting that credit quality will deteriorate somewhat but they certainly aren’t expecting that the landing that the economy will experience will not be sufficiently hard to cause a severe bad debt cycle.

Overall BNPP Equities are not going to re-weight into domestic cyclical industrial stocks until their leading economic indicator rises again.

Likewise, they will wait to see a rise in the OECD leading economic index before overweighting the resources sector despite the valuations being quite attractive in that sector.

So all in all the indicators from BNPP Equities are for a positive GDP growth figure for the immediate future.

This coincides with the forecasts from the OECD and Treasury as to growth in Australia.

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