Upturn reflects rapid adjustment

FIRMS across the industrialised world retrenched sharply in the aftermath of September 11, ensuring a synchronised recession involving plunges in trade, capital outlays, inventories, and employment. However, a US-led recovery already is well under way.

Today, the debate is how vigorous the upturn will be, especially with regard to capital spending. Expectations of a solid, durable US upturn reflects several factors:

p rapid corporate adjustment;

p the resilient consumer;

p phenomenal productivity gains; and

p effective policy stimulus.

The Australian economy

Retail activity, employment and business confidence have all surprised on the upside in recent months, supporting a real GDP growth target for 2002 of around 4.3 per cent. And while the ‘new construction’ part of housing activity has peaked, demand for existing homes remains underpinned by favourable affordability.

According to business surveys, pricing power appears on the rise and inflation is likely to threaten the upper end of the Reserve Bank of Australia’s (RBA) 2 per cent to 3 per cent target band.

Official interest rates were unchanged in April. However, with the balance of risks on the global and domestic economies shifting, we can expect the RBA to begin tightening soon. A cash rate of 5 per cent should be forthcoming around midyear, and a more ‘neutral’ 5.5 per cent by year’s end.

The $A and gold

The $A recently climbed to an eight-month high, and we should expect further gains to around $US0.55-$US0.56 in the second half of the year.

While the gold price has spiked recently, and may well continue to increase in the short term, the long-term price should settle at around $300/oz. The recent upward momentum has been the result of several factors:

p reduced producer hedging (from Anglo, Newmont and Barrick);

p continued Middle East instability;

p continuing Japanese demand;

p USD weakness; and

p speculators continuing to hold long positions on COMEX.

The share market

Mayne Group recently stunned the market with a third downgrade in as many months, just three weeks after assuring the market it was on track for consensus forecasts of $207 million. The company appears to have aggravated relationships with some physicians, which has in no way served to support the share price.

Neither has the current medical insurance crisis. Mayne’s recovery now seems very much a more long-term proposition.

Telstra’s recent third quarter result was disappointing, with core domestic sales declining 1.1 per cent on the pcp. And with company statements along the lines of: “difficult conditions for some time to come”, the outlook is hardly positive.

On a more positive note, recent declines in the larger diversified resources companies, such as Rio Tinto and BHP, may offer buying opportunities.

And for smaller cyclical plays, Smorgon Steel looks to have regained strength and could reward those with a more medium to longer-term view.

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