actuaries institute financial services forum · presented by actuaries institute financial services...
TRANSCRIPT
Presented by
Actuaries Institute Financial Services Forum
Bill Evans May 2018
Westpac Institutional Bank
2
The Budget
Housing
The Economy
The Markets
2
3
Federal Budget: $14.5bn deficit in 2018/19
-4.2
-70
-50
-30
-10
10
30
-7
-5
-3
-1
1
3
2007/08 2011/12 2015/16 2019/20
$bn % of GDP $bn (rhs) % of GDP (lhs)
Sources: Budget papers, ABS, Westpac Economics Gov’t f/cs to ’21/22
underlying cash balance
-18.2 -14.5
+2.2 +11.0
+16.6
2019/20
4
Key forecasts
Budget Westpac Iron ore price Dec ’18 $55 fob vs $55 fob Real GDP 2017/18 2.75% 2.7%
2018/19 3.00% 2.5% 2019/20 3.00% 2.6%
Nominal GDP 2017/18 4.25% 4.0% 2018/19 3.75% 3.7% 2019/20 4.75% 3.2%
Source: Budget papers, Westpac Economics
5
Company Tax: $35 billion
Franking Credits: $56 billion
Negative Gearing/Capital gains: $49 billion
Trusts/Income splitting: $17 billion
Budget deficit levy: $22 billion
Total $180 billion
ALP Policy Shifts (savings over 10 years)
Source: Westpac Economics
6
Newspoll: recent leads hold for multiple years
35
40
45
50
55
60
65
35
40
45
50
55
60
65
Jan-03 Jan-07 Jan-11 Jan-15
% %
Coalition LaborSources: Newspoll, Westpac
LNP 87 seats
ALP 83 seats
ALP 72 seats
LNP 90 seats
LNP 76 seats
7
0123456789
0123456789
NSW VIC QLD SA WA
Coalition Labor
Source: ABC. *Marginal Seats being defined as margin of <= 3%, Data may change pending finalisation of new electoral boundaries in Victoria, SA and ACT in June.
$1.5bn
$7.4bn
$5.2bn
$1.7bn $2.8bn
Marginal seats* by state
8
Housing
9
Australian dwelling prices: major capital cities
-15-10-5051015202530
-15-10-505
1015202530
Apr-10 Apr-12 Apr-14 Apr-16 Apr-18
% % SydneyMelbourneBrisbanePerth
Sources: CoreLogic, Westpac Economics * all dwellings
6mth annualised
10
Australia: debt servicing ratio
57911131517192123
579
11131517192123
Mar-88 Mar-93 Mar-98 Mar-03 Mar-08 Mar-13 Mar-18
% %
Sources: ABS, CoreLogic, Westpac Economics
real prices fall 0-10%
real prices fall >10%
* %income required to meet repayments, households with a mortgage only, Westpac estimates
11
Housing finance approvals
0
3
6
9
12
15
18
0
3
6
9
12
15
18
Apr-98 Apr-02 Apr-06 Apr-10 Apr-14 Apr-18
$bn $bn owner occupierinvestor
Sources: ABS, RBA, Westpac Economics
+3%yr
year to Mar
*excluding refinancing
–26%yr
12
Housing finance by state: investors
0.51.01.52.02.53.03.54.04.55.05.56.06.5
Mar-13 Mar-15 Mar-17
NSWVicQld
$bn NSW: –17%
Sources: ABS, Westpac Economics
–12%
–23%yr
0.00.20.40.60.81.01.21.4
Mar-13 Mar-15 Mar-17
WASATas
$bn
–20%yr
–13%yr
+18%yr
13
Global manufacturing PMI
35
40
45
50
55
60
Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 1835
40
45
50
55
60Index Index
Sources: Markit, JP Morgan, Westpac Economics
14
-40
-20
0
20
40
60
-40
-20
0
20
40
60
Jan 11 Jan 13 Jan 15 Jan 17
bps bps BBSW-OISLIBOR-OISTBILLS-OIS
Sources: Bloomberg, Westpac Economics
Short term funding spreads (3 month)
15
Big 4 bank funding pre-GFC and now
0
20
40
60
80
100
0
20
40
60
80
100
2006 2017
% % Short debt sec.Long wholesaleCert. of depositOther short liab.*Other depositsTerm depositsCall depositsEquity
Sources: APRA, Westpac Economics. *Due to CHs and FIs, accruals, provisions, benefits, acceptances.
54%
38%
Liabilities + Equity
16
The Economy
17
-4-20246810
-4-202468
10
Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Dec-17
% ann % ann Labour incomeConsumption
Sources: ABS, Westpac Economics
real Consumption: 2017 Q4: 1.0%qtr, 2.9%yr LR avg: 3.3%yr
LR avg: 3.3%yr
f/cs to end 2019
Australia: consumer spend vs labour income
18
Household savings ratio – rock bottom
-3
0
3
6
9
12
-3
0
3
6
9
12
Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Dec-17
% income % income
Sources: ABS, Westpac Economics
19
Household labour income: decomposed
-5-3-1135791113
-5-3-113579
1113
Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-14 Dec-17
%ann %ann 'X' factor^ hours worked wages total
Sources: ABS; Westpac Economics
*nominal ^residual including structural and compositional shifts not
Westpac
20
Employment by major sector (‘000) Growth in the 2 years to February 2018
-65 50
52
78
145 273
-100 -50 0 50 100 150 200 250 300
White collar
Production employment
Retail & wholesale distribution
Leisure & hospitality
Construction
Education & health
‘000 change in employment
Sources: ABS, Westpac Economics
21
Business conditions: by broad sectors
-30
-20
-10
0
10
20
30
-30
-20
-10
0
10
20
30
Apr-06 Apr-08 Apr-10 Apr-12 Apr-14 Apr-16 Apr-18
net bal. Goods relatedConsumer sectorsBusiness services
Sources: NAB survey, Westpac Economics
net bal. 3 month mov. avg. deviation from avg
Latest obs’n:
22
Public transport project pipeline: by state
0102030405060708090
NSW Vic Qld WA SA
$bn $bn
Under considerationDefinite
Sources: Deloitte Access Economics,
Westpac Economics
54
79
34 30
40
18 21
25
11 11 7
2
2015 Q4, 2016 Q4, 2017 Q4
78
5 4
Australia 2015 2016 2017 Definite 54 98 113 + under con 117 160 166
23
Australia: construction contribution to GDP
-0.8
-0.4
0.0
0.4
0.8
-0.8
-0.4
0.0
0.4
0.8
Dec-17 Dec-18 Dec-19
Housing Mining investmentNon-mining private Public works
ppts yr Sources: ABS, Westpac Economics
ppts yr updated: Mar ’18
24
Population growth – international
1.69 1.37
1.20
1.15
1.08 0.80
0.76 0.33
0.28
0 1 2
AustraliaDeveloping
WorldNZ
CanadaUSUK
DevelopedEU
% ann
2006 - 2016, avg
Source: AFR
25
Population growth: SA - long slow decline
0
1
2
3
4
Sep-08 Dec-11 Mar-15
NSW Vic Australia
% ann Sources: ABS, Westpac Economics.
0
1
2
3
4
Sep-08 Dec-11 Mar-15
WA Qld SA
% ann
26
0.0
0.5
1.0
1.5
2.0
2.5
0.0
0.5
1.0
1.5
2.0
2.5
Sep-87 Sep-93 Sep-99 Sep-05 Sep-11 Sep-17
% ann % ann
Australia - 5 year mov. avg.
Sources: ABS, Westpac Economics
Victoria 5 year m.a.
NSW 5 year m.a.
Population growth
27
Service exports: a bright spot, for now
0
5
10
15
20
25
30
0
5
10
15
20
25
30
Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Dec-17
$bn $bn Sources: ABS, Westpac Economics Education
Leisure travel Business services*
Transportation
Business travel
Rolling annual, nominal
* Business services: $20bn, including: legal & prof’ services $5bn financial services $4.2bn IT & Telecomm $3.4bn Intellectual property rights $1.2bn other, $10bn
Total service exports: +10% yr
28
International students numbers by state
80
120
160
200
240
280
80
120
160
200
240
280
2002 2004 2006 2008 2010 2012 2014 2016 2018
Index* Index* VICNSWAustraliaQLDWA
Sources: AEI.gov.au, Westpac Economics *2002 commencements = 100
VIC NSW
Aus
Qld
WA
Commencements, higher education Education exports (revenue) 3yrs to 2016/17 Australia 51%
29
The Markets
Current forecasts – May 2018
Latest Jun–18 Dec 18 Jun–19 Dec 19
RBA Cash 1.50 1.50 1.50 1.50 1.50
Aus 10yr 2.77 2.80 3.10 3.10 3.10
Fed Funds 1.375 1.875 2.125 2.625 2.625
US 10yr 2.96 3.00 3.35 3.50 3.30
3yr swap 2.20 2.30 2.50 2.50 2.70
AUD/USD 0.75 0.76 0.74 0.72 0.70
Source: Westpac Economics.
31
AUD TWI and USD index
889092949698100102104106
y 2016 May 2018
Index USD
May 2016 May 201859606162636465666768
A TWI Index
Sources: Bloomberg, RBA, Westpac Economics
32
0.28 0.30 0.35
0.13
-0.13
-0.38 -0.50
-0.25
0.00
0.25
0.50
-0.50
-0.25
0.00
0.25
0.50
Dec 17 Jun 18 Dec 18
% Market Westpac
Sources: Westpac Economics *market prices implied rates as at 21/07/17
expected cash rate level %
Westpac: rate differential negative (July)
33
-0.36
-0.75 -0.75 -0.80
-0.38
-0.63
-1.12 -1.12 -1.25
-1.00
-0.75
-0.50
-0.25
0.00
0.25
-1.25
-1.00
-0.75
-0.50
-0.25
0.00
0.25
Jun 18 Dec 18 Jun 19 Dec 19
% Market Westpac
Sources: Westpac Economics, Bloomberg *market prices implied rates as at 27/04/18
expected policy rate differential %
Westpac: rate differential negative
34
Global manufacturing PMI
35
40
45
50
55
60
Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 1835
40
45
50
55
60Index Index
Sources: Markit, JP Morgan, Westpac Economics
35
Global liquidity added since 2008
0
2
4
6
8
0
2
4
6
8
Fed ECB BOJ China shadow*
USD tn USD tn Sources: Bloomberg, RBA, Westpac Economics *Implied by RBA estimates **change in central bank balance sheets since 2008
36
0.00.51.01.52.02.53.03.54.04.55.05.56.0
0.00.51.01.52.02.53.03.54.04.55.05.56.0
Total finance Bank Non-bank
RMB trn
Mar-17 Mar-18Source: CEIC
year-to-date lending RMB trn
China credit revolution brings risks
37
Funded by wealth products ; Banks and Insurance
Supports
• Offshore investments • Property speculators • Property developers • Local Government
(80% of Infrastructure) • Corporates, outside banking system.
Shadow Banking system
Source: Westpac Economics
38
Outlook for spot iron ore
30
50
70
90
110
30
50
70
90
110
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
USD/t USD/t iron ore (TSI 62%fines benchmark)
Sources: Westpac Economics, Bloomberg.
Westpac forecasts to 2020
$65/t
$50/t $52/t
Sep/19
Low, $39.5/t Jan 2016
39
US: core inflation near target; to remain there
0
1
2
3
4
5
6
0
1
2
3
4
5
6
1990 1995 2000 2005 2010 2015
Core PCE
Dallas Fed PCE TM
Sources: Datastream, Westpac Economics
6mth %chg 6mth %chg annualised
Compensation growth trending up
012345678
012345678
2002 2004 2006 2008 2010 2012 2014 2016 2018
CompensationWagesBenefits
Sources: CEIC
%yr %yr Employment Cost Index
40
41
S&P 500 PE ratio and 10yr bond 0
1
2
3
4
5
6Jan 2005 Jan 2008 Jan 2011 Jan 2014 Jan 2017 Jan 202010
12
14
16
18
20
22 % (inverted) Ratio S&P 500 PE ratio lhsUS 10yr bond inverted rhs
Sources: Bloomberg, Westpac Economics
Westpac forecasts
42
ASX 200 PE ratio and 10yr bond 1
2
3
4
5
6
7Jan 2005 Jan 2008 Jan 2011 Jan 2014 Jan 2017 Jan 2020
8
10
12
14
16
18
20 % (inverted) Ratio ASX 200 PE ratio lhsAus 10yr bond inverted rhs
Sources: Bloomberg, Westpac Economics
Westpac forecasts
43
S&P500 and ASX200 PE ratios
5
10
15
20
25
5
10
15
20
25
Apr 02 Apr 06 Apr 10 Apr 14 Apr 18
Ratio Ratio
Source: Bloomberg, Westpac Economics
44
Conclusion • Budget forecasts high- surplus in 2019/20?
• Tax cuts unlikely to boost spending- near term.
• 8 year above trend growth in out years – unreal.
• Weak income growth to contain consumption.
• Housing and prices set to fall – investors slow.
• Political uncertainty will weigh on business.
• Growth opportunities in Victoria and services.
45
Conclusion • Cash rate on hold in 2018 and 2019.
• US rates to 112 basis points above RBA in 2019.
• AUD to head towards USD 70 by end 2019.
• Driven by USD combined with weaker AUD TWI.
• China to tighten credit further – slow commodity.
• Commodity prices to fall through 2019.
• Share markets vulnerable to US bond rates.
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