Aussie shares well-supported by economy

AMP Capital Investors strategist Shane Oliver says the US recession is the biggest threat to Australia, but remains an unlikely scenario.
The latest round of US credit worries, higher oil prices, local interest rate concerns, the impact of the strong Australian dollar, and the risk of another correction in Chinese shares are all significant short term risk factors for Australian shares. However, any correction is likely to be shallow compared to the falls into mid-August, says Shane Oliver, Sydney-based head of investment strategy and chief economist at AMP Capital Investors.

ôOver the last decade the Australian economy has been extremely resilient having sailed through relatively unscathed during the Asian crisis, the tech wreck, the deflation of the east coast housing bubble and the worst drought in generations,ö he says. ôAnd so far, apart from rising mortgage arrears in some areas, there is little evidence that rising interest rates have had much of a negative impact either.ö

The local share market is no longer cheap, but it is not expensive either. The current price of Australian shares is around 15.7 times forecast earnings for 2007, well below the 1999 high of 18.3 times, Oliver says.

The relative stability of the Australian economy reflects a whole range of factors including increased economic flexibility, sound economic management and good luck, he says.

Oliver is surprised, however, with the resilience of households in the face of numerous interest rate hikes despite household debt servicing costs reaching record levels.

He credits the resilience of the housing sector to the commodity-led boost in national income, labour market reforms, tax cuts, spending initiatives and the rise in household debt.

While Australian home prices are extremely overvalued and vulnerable to an economic downturn or much higher interest rates, prime mortgages amount to about 93-95% of total mortgages in Australia in contrast to the US where they are about 75%. And in Australia there is a major shortage of housing with vacancy rates at record lows whereas in the US there is a massive oversupply with vacancy rates and unsold houses at record levels.

Perhaps the biggest threat to the Australian outlook is a US recession dragging down global growth, Oliver says. But even that is an unlikely scenario. He believes the US will ômanage to muddle through with low growth and avoid a recessionö, thanks to the strength of the corporate and trade sectors.
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