Australian stockmarket investors have benefited from Chinese demand but pressure on growth and global trade conditions will bring a wake-up call in the year to come, an economist predicts.
“We have had a strong start but it will be a year that we believe will lose momentum,” Westpac senior economist Justin Smirk told a packed room of investors at the RIU Resource Round Up in Sydney on Wednesday.
Mr Smirk described the year ahead using an analogy with the Chinese lunar calendar.
The lunar calendar is based on a repeating cycle of creatures and elements. This year we entered the Year of the Dog paired with Earth — making it the year of the Brown Earth Dog.
“This is the year of the male earth dog – connected to dry soil and prosperity in real estate, agriculture or minerals… but also mountains — those things that will provide some challenges.
“Supply of resources and energy demand remain broadly robust but mapped against softer demand it will lead to a correction in prices.”
Westpac forecasts China’s growth for the year will slow to 6.3 per cent, down from 6.9 per cent in the previous year – and even further down to 6.1 per cent in 2019.
Globally, growth figures will remain stagnant at 3.8 per cent and 3.7 in the following – on par with current levels.
“There is a growth transition from investment to consumption in the Chinese market but the rapid uptake in new technology is shifting the relative demand of various commodities,” he said.
The bank predicts decreases in nickel, copper, zinc, aluminium and lead in the near term. Nickel and copper wold rebound in the longer term to 2025.
The negative relationship between commodities and equities was related to an overvaluation of the latter rather than an undervaluation of commodities, Mr Smirk said.
After sustained levels of growth for the past few years – buoyed by Chinese investment – he said a slowdown was on the horizon, further exacerbated by increasing US interest rates.
With rates on hold in Australia, and downside risks to growth, the fall in commodity prices will result in a weaker AUD.
Check out the full presentation here.
The RIU conference — which Stockhead supports as official media partner — kicked off on Tuesday and runs until Thursday.