20/08/2013 - 13:22

More full than empty? Morgan Stanley tips on the upside

20/08/2013 - 13:22


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More full than empty? Morgan Stanley tips on the upside
Morgan Stanley has a 'glass three quarters full' view of the Australian economy.

It’s not easy being an optimist these days, which is why an outbreak of confidence about Australia at investment bank Morgan Stanley is worth analysing – it just could change your plans for the future.

Shining brightly amid the gloom of negative political advertising, and fear about what happens after the resources boom, the wealth management team at Morgan Stanley told clients a few days ago to get ready for a different type of boom.

Rather than sliding backwards, Australia is about enjoy the benefits of a surge in resources production that always follows a period of capital investment, increased local consumer spending as interest rates fall, a wave of expansion in education and tourism and, shock-horror, a current account surplus to help repay our international debts.

Not everyone will agree with Morgan Stanley’s glass three-quarters full view of Australia, though as a friend who came across a copy of the August 16 report noted, “it’s good to see something positive”.

If feeling positive were the only enjoyable aspect of the analysis of Australia’s future in a report headed ‘The Next Phase’, then the satisfaction in reading it would be short-lived.

However the points made by Morgan Stanley in a document designed to influence investment decisions are far more significant than a simple stock-buying tip sheet; they are a reason to reassess the wider Australian economy.

Before listing its five positive factors, the analysis starts by considering the four negative arguments from the ‘prophets of doom’. They include:

• the end of the commodity-price super cycle and the collapse of mineral prices and investment in mining;

• the damaging effect on the economy of the high Australian dollar;

• poor government policy making; and

• Australia’s high and uncompetitive cost structure.

On mineral prices and mining investment, Morgan Stanley argues that the low point is occurring now. In other words, the worst is over. The correction in the dollar has also largely occurred and is now back in line with economic fundamentals, while labour and construction costs are being reined in.

The five positives are:

• a resources production boom that will ‘conservatively’ add $US88 billion to exports over the next five years (liquefied natural gas exports alone will rise from 20.9 million tonnes a year to 86mt);

• housing investment is well placed to enjoy a strong recovery thanks to record low interest rates;

• increased locally focused consumer spending thanks to the lower Australian dollar, which will also boost inbound international tourism;

• a fresh wave of Asian students seeking an education in Australia; and

• an unprecedented current account surplus as exports surge and a phase of importing capital goods for the mining boom fades.

The potential current account surplus is perhaps the most significant change ahead for Australia, reversing decades of deficits that have helped drag down the value of the Australian dollar.

“The surge in resources exports and lower capital goods imports should add 8 per cent to 9 per cent to Australia’s next exports over the next five years,” Morgan Stanley said.

“This creates the potential for a sharp swing into an unprecedented current account surplus.”

For investors, an optimistic outlook means a switch into resource production stocks such as Oil Search, Santos, and Fortescue Metals Group, greater exposure to housing companies such as Stockland, while the Asian student influx makes Navitas worth buying.

While investors would be wise to not get too excited by Morgan Stanley’s outbreak of optimism, it is useful to know that some well-placed people see continued strong economic growth after the investment phase of the resources boom and the switch to the production phase.

At risk of over-stretching the argument, Morgan Stanley is essentially saying that ‘the boom is over, long live the boom’.


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