Dan Buchanan: Welcome to the latest in our Aberdeen Standard Investments Closed-End Fund podcast series, where we catch up with our closed-end portfolio managers and gain some perspectives on these complex market conditions. Today we are focusing on Australian equity markets with the manager of the Aberdeen Australia Equity Fund, ticker IAF, Camille Simeon. Welcome, Camille.
Camille Simeon: Hello Dan.
Dan Buchanan: Good afternoon. Good morning to you in Sydney. Camille, I thought we would start with an economic update on Australia and position with regard to the Coronavirus.
Camille Simeon: Absolutely, a good place to start. Australia has by design and luck actually managed the COVID pandemic relatively well when we look across -- and the various countries globally. We have seen outbreaks and short lockdown from certain areas, but at the moment we're actually going for long periods of time without any COVID restrictions resurgence, I should say, and restrictions are easing further. We've got zero community transmission, which is a really good outcome for Australia.
The government is targeting a fully rolled out vaccine by October, but I would think that's probably a little bit of a stretch. There might be some delays to that. But that's obviously important because our international borders are still shut, so it would be good to reopen them.
In terms of the economic news, it's been upbeat. We've seen high levels of confidence in economic recovery with macro forecasts being upgraded across the board. We had our Q4 GDP which beat expectations going 3.1% in the quarter. That was really underpinned by the consumer who’s been very happy to spend despite stimulus rolling off. The recovery is broad based so business spending has been lagging, but we are seeing a pickup in conditions in confidence there, which is a leading indicator.
CapEx is the weak point, but there's also government, federal government tax incentives. Also just where we are in terms of the COVID outcome, confidence is reaching across businesses. Where we're at the moment with economic activity is about 1% below pre-COVID level.
I’ll just talk to a couple of the steps which might be helpful to find where Australia is at. GDP growth for the next two years is estimated to be around about 3.5% per annum and that is below global peers, I will point that out, but that's because 2020 GDP for Australia only still around 2.5%. That's a very good outcome when you think about other countries and how far their activity. We’ve actually got economists who are obviously overshooting those GDP forecasts and looking for GDP growth in 2021 at 4% to 5%.
In terms of just what's actually happening on the ground since labor market is outperforming, unemployment is now 5.8% and it’s actually the lowest since March 2020, so pre-COVID, and that's expected to continue to fall. The housing market is booming. That’s obviously been driven by the low interest rates, what was a flat yield curve and high savings rates. We're actually looking at forecasts of 20% growth in housing over the next two years.
Then we've also had very strong commodity prices. Iron ore, which biggest export is at 11 [Inaudible 00:06:31] copper is at 8 [inaudible 00:06:35]. That's all important for our terms of trade, and has meant that our currency has actually appreciated and is now at around 9% in the last quarter. Just quickly on turning to Central Bank policy, which has obviously been very important as we're coming through COVID. They cut the cash rate to 10 basis points and they remain firmly [Inaudible 00:06:57]. They're saying that they're not going to increase the rate until they see inflation sustainable within their band but they look forward to 2% to 3%. They're talking about 2024 being the timeframe that that they would think about listing starting to look right. The policy support is also there and will remain ongoing as we continue to use economic recovery, because there are still risks around the resurgence and obviously the vaccine rollout, so policy will continue to support for quite some time.
Dan Buchanan: What is the feedback or the mood for management with the corporates on the ground there in Australia?
Camille Simeon: Yeah, so actually, if I just look back to February, where we actually had our reporting season, so that was our most recent updates on corporates, it was actually one of the strongest in the last decade amazingly. There were significant beats over misses of three times and we're now looking at APS growth for next year of 15%. What drove that better outcome was margin, so not high revenue, but margins, because businesses were really good at cost control through the period. That really speaks to obviously uncertainty that they were facing into.
But what was seen at the February result was a little bit more confidence from management teams. They were happy to put outlook statements in place as well, and that's really because those economic fundamentals I was talking to and where we are with COVID were really supporting businesses and improving their confidence levels.
Dan Buchanan: Camille, generally speaking, dividends were cut last year in 2020. What is the outlook for dividends in the Australian market?
Camille Simeon: We are also seeing dividends being reinstated. The yield is now 3.5% which is one of the highest yielding markets globally. If I break that down to what's driving that, so our two largest sectors domestically in the market is mining and banks. Miners’ obviously benefiting from a very strong commodity prices which I spoke to, so they're generating very healthy returns, their balance sheets are in really good shape. With commodity prices expected to be sustained elevated levels, given the global macro economic recovery, we expect that the higher returns will remain a feature for the miners.
Then the other part of the market the banks, so these are domestic banks with very strong retail franchises benefiting from numerous tailwinds, which I spoke to in terms of the economic recovery, loan losses structurally low after they've released the provisions that they had built up last year. Also, you've got the steepening of the yield curve which is an expectation of higher credit growth just from that housing -- that that strong housing market. The banks are very well capitalized, and we are expecting capital management later this year or additional capital management I should say. There is the potential for them to return around 5% of their market cap over the next 12 to 18 months.
Overall, we're seeing those two biggest sectors generating very healthy, well, healthier returns and that's feeding from capital management. Then just more broadly across the market we are expecting dividends to track higher, which is because of that confidence and where we are economically.
Dan Buchanan: Well, that sounds promising. I want to switch gears for a moment if I could, Camille. IAF is a closed-end fund vehicle and I'm just curious from a portfolio manager’s perspective, how does the closed-end fund structure help you manage a fund like IAF?
Camille Simeon: Yeah, that's a good question because it really is an ideal structure for a portfolio manager to manage because it is closed-end, and has a stable asset base, so we can position the funds without having to balance against any flow. It also means we can really minimize that cash and minimize that cash drag because we are not exposed to those daily cash flow movements. It really is an ideal structure for a portfolio manager.
Dan Buchanan: Finally, I'd like to take a look at the outlook for Australia and what could you say to clients and investors that would give them confidence to invest in Australia today?
Camille Simeon: Yeah, so if I think about the near term outlook, and we are cautiously optimistic, so we have a growing confidence in that domestic economic recovery. There's also that policy support, commodity prices are also underpinning Australian terms of trade, and that obviously means it's very good for our resource heavy market. Then just more broadly, in terms of the macro conditions and the more upbeat companies update, we're expecting that rebounding corporate earnings, as well as especially the consumer is willing to spend and we're seeing business investment returns starting to return, so that's a really good part. We are cautious though, because COVID is obviously resurging in the Northern Hemisphere in certain regions, and struggling to be contained and when we locked down so we can't rule out further deterioration in the global macro recovery entirely.
The recent spike in bond yield also indicates the inflation, it’s rising and making pillar faster than expected and wind of loose monetary policies. But we don't think that it's not our best case. Domestically, we're going to continue to monitor the signs of stress, particularly stimulus starting to roll off over the next month or so. But as I mentioned, the consumer has built up a savings buffer. Overall, the recovery in Australia is gaining momentum. There obviously still risk there, but with the economic data and the policy support and the way we've managed COVID it is showing itself to be resilient emerging from the depths of the pandemic.
Dan Buchanan: Thank you, Camille, for those insights today. We look forward to next quarter as well. Thank you especially to our listeners for tuning in. You can find out more about the fund at www.aberdeeniaf.com. I am Dan Buchanan with Aberdeen Standard Investments. Do look out for future episodes.
