Commodity boom
If we’re right with our view that China and India will continue to expand solidly in 2010, then this will translate into a pick-up in demand for commodities. Importantly it’s not just the expansion in China and India but also solid growth rates for economies across Asia and the commensurate expansion of the middle class and demand for consumer durables.
The key question is whether commodity supply can keep pace with demand. In 2006 and 2007 the scale of Asian expansion caught central banks and mining companies alike by surprise. The same could happen again – especially given that the GFC caused mining and energy companies to mothball facilities or curtail expansion plans.
A sharp lift in commodity prices, or even a new boom, would lead to higher investment in the resources sector and greater demand for engineering services; the other risks include a revival of inflation and further appreciation of the Australian dollar. The real risk for Australian companies is that the Aussie dollar holds above US80c or US85c rather than returns to the long-term average of US72c.
Chinese yuan appreciation
The GFC served to silence calls for revaluation of the Chinese yuan (or renminbi). However Chinese authorities would only contemplate revaluation or further moves to free up the link to the greenback if they believed that it wouldn’t lead to a major shake-out in the export sector and disrupt overall economic expansion.
The US is certainly in no position to force the revaluation issue, well aware that it needs China to continue its regular purchases of US treasuries.
And China will want to be confident that the global economy is on a much firmer footing before even contemplating changes to its currency.
A stronger Chinese yuan would lift the purchasing power for Chinese commodity buyers, in turn, boosting the Aussie dollar.
Climate change
Countries across the globe will determine their responses to climate change in 2010. Given that there is no common agreement on the extent or severity of climate change – and never will be – there is unlikely to be uniformity on the approach taken to the issue. The climate has been changing for centuries, but there are few signs that the process is accelerating.
Some countries favour a tax on carbon emissions, others favour a market-based approach where carbon credits can be bought and sold.
The fundamental principle is that carbon emissions – like pollution – create negative externalities. That is, carbon emissions lead to problems or costs for consumers or businesses. If a price were put on emissions then it is assumed that affected businesses would seek ways to reduce the costs or perhaps pass on the costs to consumers.
Eventually the Australian parliament will decide on measures to address climate change. And understandably there will be winners and losers. Some investors jumped too quickly, reacting to the Government’s proposed legislation on a carbon pollution reduction scheme. Other investors need to be careful not to fall into the same trap with any revised proposals. Any emission pricing scheme will be phased in over time – there can be costly mistakes for investors in trying to get ahead of the market.
Housing cost & supply
Just how tight is the housing market? Over the last year Australia’s population rose by 440,000 people – the biggest increase on record and the largest percentage increase in 40 years. The number of migrants increased by more than 285,000 people. But dwelling commencements only rose by just over 131,000.
On this basis you would have expected more people to be on the streets and for the rental vacancy rate to approach zero. But it didn’t happen. In fact, some Sydney landlords complained that they had to reduce rents or offer rent incentives.
CommSec found that Australia is building the biggest homes in the world, but at the same time there is new evidence that household size is increasing for the first time in at least a century, or perhaps since European settlement.
The debate about housing costs and supply will go on in 2010. There is no doubt that rising housing costs are causing children to stay longer with parents and for more young people to share accommodation. State and territory governments have to pay more attention to produce more land, reduce costs for developers and revisit zoning laws.
CommSec expects home prices to rise by 8-10% over 2010. Population continues to grow and not enough homes are being built. For investors, rising rents and home prices is an attractive combination.
Taxation
The review into Australia’s tax system – the Future Tax System Review – will report to the Government by the end of the year. Headed by Treasury Secretary Ken Henry, the review panel has taken over 1,000 submissions, but interestingly, there have been little in the way of leaks. The review will probably recommend a reduction in business tax and will likely recommend measures to create a more level playing field on the taxation of savings.
Could the review panel recommend a hike in the GST rate to fund other measures such as removal of state payroll tax? Certainly it’s a possibility. And while a lift in the GST rate makes a great deal of sense, the question is how the Government would respond with an election drawing near. Clearly both sides of politics will need to agree about the sensibility of a proposal to increase the GST rate for it to get through the political process.
It is uncertain when the Government will respond to the recommendations. The terms of reference states: “The Government will respond in a timely way to the tax review’s recommendations as they are released.”
The tax recommendations will have far reaching implications for the economy. If a more favourable tax treatment were given to bank deposits then investors would require both higher returns and greater certainty of returns from alternative investments such as property and shares. Still, it is also entirely possible that the review could come up with proposals affecting dividend payments by companies. Unlike climate change the Government would need to make changes on taxation with immediate effect.
Superannuation
The Super System Review has three parts: Governance; Operation and efficiency; and Structure. Headed by Jeremy Cooper, the review is due to release preliminary recommendations on Governance shortly.
Recommendations on Operation and efficiency aren’t due until March-April 2010. An Issues Paper dealing with the Structure of the Superannuation system is due on December 14. A final report is due by June 30, 2010.
What could the review come up with? Almost anything. But expect vigorous debate by industry bodies, fund managers and the Government. Clearly though Superannuation is an issue for 2010.
Just like the Climate Change issue it’s a case of watching the debate but not over-acting. Recommendations will need to be vigorously debated before the Government announces decisions, and lengthy phase-in periods are likely for any changes.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
