The Eden Wealth Report

Global Outlook for the Decade Ahead

With the start of the next decade underway we provide an updated economic outlook and the implications for long term investors.

We focus on the regions of most importance to Australian investors:

The US - the debt fuelled, service based, consumer economy (the world's customer);
Asia (China) - the surplus fuelled, urbanization hungry, manufacturing economy (the world's vendor);
Australia - the moderately debt fuelled, commodity-driven economy (the geographically well-placed resource/energy provider).

Australian Economic Outlook

Strong growth in the developing and high population countries of China, India, Brazil, Russia, Mexico and South Korea was the dominant investment theme during the last decade and is likely to gain further strength in the current decade as growth moves from a reliance on net exports > to internal infrastructure investment and ultimately > to domestic consumption.

The Australian economy, with an abundance of natural resources, is benefiting from the urbanization of developing countries, in particular China, underpinning our remarkable economic resilience over the past two years. Australia is now the leading developed economy in the world in terms of economic fundamentals and growth prospects.

The strong performance of the Australian economy and continued growth is based on strong fundamentals including a healthy financial system, relatively low Government debt and unemployment rates, rising commodity prices, and surging house prices. We are well placed strategically to benefit from the projected growth of the Asian economies over the course of this decade.

Asia, Australia's major trading partner, has been less affected by the GFC overall and its future growth prospects plus generally healthy government surpluses will fuel the demand for commodities and energy.

Australian banks came out of the GFC relatively unscathed and the Big Four banks are among the top eight credit-rated banks globally. Our bank's prudent capital adequacy requirements (in simple terms: the amount of capital held versus loans made) and stringent lending criteria compared to countries in Europe and the US have protected our bank's balance sheets from losses related to non performing loans. The surge in credit impairment charges peaked in 2009 and the provisioning for bad debts should fall this year with an accelerating rate of decline in 2011.

Property prices remained buoyant throughout 2009 helped by low interest rates and no doubt from the Government stimulus package. Longer term, property prices are forecasted to remain high due to strong underlying demand and capital investment from overseas.

A positive indicator of Australia's economic recovery is the comparatively impressive rate at which our labour market has increased, underpinned by growing company earnings, and improving business confidence. The unemployment rate which peaked at 5.8% is now at 5.5%. To appreciate how surprisingly good a performance this is, note that the Government's Budget-Time forecast, made 9 months ago, envisaged a peak unemployment rate above 8.5%.

US Economic Outlook

Australian Economic Outlook

Recent economic data indicates improvement in the US economy with positive earnings signs, a recovery on Wall Street and improving business confidence.

The positive data likely to be released over the coming 12 months however will largely be influenced by the massive stimulus packages implemented by the US Federal government to support the financial system during the GFC.

Large parcels of stimulus money are still sitting on deposit at the Federal Reserve waiting to be lent out into the real-economy by the major US banking institutions.

The injection of funds over the next 12 months may provide a false sense of security for investors - we remain cautious and weary of the longer term implications.

The stimulus spending has lead to a US budget deficit of US$2 trillion or 14% of US GDP; in Europe things are no better and in some cases even worse.

While these efforts have stabilized the economy in the short term, globally we are now in a situation where almost all western economies need to deleverage - suck money back out of the system. Not just the stimulus money, but to some extent the injection of borrowed funds that has systematically occurred over the last decade.

This synchronized deleveraging may lead to longer term issues such as rising unemployment, a weakening USD, and years of low growth as spending is reduced to pay down debt.

The US economy is still the biggest driver of global growth and will impact all markets over the next decade; at times with frightening volatility.

Asia (China) Economic Outlook

While 'western' economies struggle to grow and are characterised by debt-laden balance sheets, Asia, led by China, has foreign reserves in the $trillions and is on a blistering growth path. China is set to outstrip Japan as the second largest world economy in 2010.

To thwart the effects of the GFC, the Chinese Government countered falling US demand with a massive US$585bn stimulus package along with US$1,353bn in new loans issued by Chinese State-owned banks. This has indeed boosted internal economic growth but there are also concerns about new asset and property bubbles, recently leading the Chinese to put on the brakes.

While the market seems to have been spooked by the thought of a 'Chinese slowdown', we feel that the Chinese government is being prudent in stabilizing their economy from recently over-heated levels as this should help to promote sustained longer-term growth throughout the next decade.

Commodity prices, driven largely by Chinese demand, will fluctuate as always based on short term inventory levels, periodic asset bubbles and other economic factors, however the long term trend should remain buoyant, driven by emerging market growth, thus favouring Australian resource companies.

China reports stoke credit-curb worries

Extract from Brisbane Times | February 1, 2010

"China, the world's third-biggest economy, sustained its manufacturing expansion in January as export orders jumped and inflation pressures grew, two surveys showed today.

Stocks tumbled as the reports spurred concern that the government will have to escalate efforts to rein in the credit growth that has fuelled the nation's infrastructure spending surge. After raising banks' reserve requirements this month and targeting reduced credit growth in 2010, policy makers may raise interest rates by the end of June, according to the median estimate in a Bloomberg News survey of economists. "It's a solidly expansionary reading, consistent with expectations of continued momentum in the economy" said David Cohen, an economist with Action Economics in Singapore.

Successful Long Term Investing - Our View Moving Forward

While many are espousing that the worst of the GFC is behind us, some of the global issues that are surfacing in the US & Europe point to the possibility that the worst impacts may lie ahead. We have never lived through a time of globally synchronized financial deleveraging - market reactions to any negative news are therefore likely to be highly volatile.

Eden holds largely the same view as we did in Oct/Nov 2009 - a view of cautious optimism with a recommended investment approach of small incremental portfolio purchases, avoiding the urge to 'chase the market', and maintaining a firm discipline in regards to the maximum purchase price paid per investment.

We may also need to be ready to quickly bank profits and move to the safety of cash to protect capital at various stages of the economic cycle.

Over the long-term we agree with Bill Gross of PIMCO (the largest bond manager in the world) that Asia and Asian-connected economies (e.g. Australia, Brazil) will dominate future global growth.

The urbanization of developing nations and the increasing healthcare demands of an ageing population are the two major themes that drive our recommended investment sector allocations.

In our view, those industries that will most benefit are Mining (bulk commodities), Energy, Financial Services, Consumer Staples, Construction and Healthcare. We also believe that a well-structured portfolio should include a prudent allocation to gold as an insurance-hedge against the inflationary effects of massive government stimulus spending, years of credit expansion, and fragile US dollar fundamentals.

Please note that the information contained in this report does not constitute financial advice. This information is for educational purposes only. All advice provided by Eden is delivered via a written personal Statement of Advice.

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