Commonwealth Bank of Australia's (ASX:CBA) broking arm CommSec, Chief Economist Craig James gives The Capital Network’s Lelde Smits his biggest ASX, AUD, US market & interest rate predictions for the year ahead.
The Capital Network: Hello I’m Lelde Smits for The Capital Network and joining me here in Sydney at CommSec is its Chief Economist, Craig James. Craig, terrific to speak with you today.
Craig James: Certainly good to be here with you.
The Capital Network: If we can look at the Australian share market. The S&P/ASX 200 index lost about 2% in 2015. Where do you see the benchmark index trading this year and what are the driving factors behind that forecast?
Craig James: Well I think it’s going to struggle, struggle over the next couple of months. Global share markets are struggling at the moment. Worrying about oil prices, worrying about where the United States economy is going and worrying about where China is going.
We do expect it to struggle over the next couple of months and then start improving. And, if we look at the ASX 200 we’re looking at 5,200 points by mid-year, 5,500 points by the end of the year. So, certainly, gathering pace as we get towards the end of the year.
I think the other important thing to stress is that while the overall growth of the share market might be a little bit retrained, we think that dividends will continue to be paid. When you factor in dividend yields, round about, you know, about 4-4.5%, total yields on shares should be pretty healthy over 2016.
The Capital Network: Well it’s nice to have a bit of optimism there, but you mentioned struggle. The Aussie dollar certainly knew all about that last year, plunging about 11% against the greenback [US dollar]. Where do you see that trending this year and what kind of sectors are likely to benefit?
Craig James: Well is anything that Aussie dollar is probably going to struggle even further over 2016. We’re looking at around about 65 cents by March. That is provided that the Federal Reserve continues to lift interest rates. They may delay lifting interest rates, and that means the weakness of the Aussie dollar may move towards the mid year.
But, by the end of this year we’re looking at the Aussie dollar picking up to broadly where it is now, round about 69/70 cents, round about those levels.
Now clearly it’s the exporter sectors, the mining the resource type areas, that are likely to do well, insulated by that lower Australian dollar coming down. Got to remember that commodity prices are going to be weak. So, it’s really that resource sector that will be getting a degree of support from a weaker Aussie dollar.
The Capital Network: Over in the US, we saw US stocks record their worst annual performance since 2008. Do you believe that there could be an improvement this year or are your still feeling bearish?
Craig James: I think that there will be an improvement this year, but it’s got to be remembered that the US share market has been over valued and probably still is overvalued by probably about 10-15%. So, it may struggle, just like the Australian share market over the next couple of months.
But as we go through the year, what we are going to see is the US economy continuing to blossom. We do know unemployment is slow, we know that the housing market is picking up. So, I think as we move through 2016, and some of the risks have dissipated, then we’re going to see that share market brighten.
So, looking at the Standard & Poor’s 500, we’re looking at 2,100 points by the end of the year, which would be fairly useful sort of growth, something in the order of about 10% growth for the US share market. But, much more of those gains in the second half of the year rather than the first half of the year.
The Capital Network: So with that improving and brighter, hopefully, outlook by the end of this year, how does that impact what you think the US Federal Reserve and RBA (Reserve Bank of Australia) will do in regards to monetary policy?
Craig James: Well for the Reserve Bank I think it’s a fairly simple equation. Our economy doing quite well and probably going to gather a little bit of pace as we move through 2016.
For the US Federal Reserve, they are probably going to have a degree of caution early on in the year about listing interest rates. But, as some of the risks dissipate about China and about oil, we will see the US start to normalise interest rates, a little bit more than what they have done.
We’re looking probably at two or three interest rate hikes from the US Federal Reserve and most of those concentrated in the second half of the year.
The Capital Network: OK and the RBA, where do you think we’ll see the key cash rate end 2016?
Craig James: We think the cash rate is not going to change over 2016. We just think that there is a nice balance there at the moment.
Unemployment is coming down, housing market is becoming more balanced between demand and supply, inflation is under control.
Simply, there is no reason why the Reserve Bank would need to be increasing rates at the moment, or cutting interest rates. And, I think that is probably going to remain the case as we go through the entire year of 2016.
The Capital Network: Craig James, always wonderful to hear your predictions and outlook and all the best for the year ahead.
Craig James: Thank you very much.