In its December report on the local economy entitled Australia Inc., Pimco said that Australian business is becoming increasingly unable to compete in the global market due to elevated cost structures and a high exchange rate.
“We think the RBA will have to remain accommodative for an extended period to allow this transition, this structural transition from mining growth to growth in other areas, to occur in the next 12 to 18 months,” Pimco senior vice president and portfolio manager Adam Bowe told InvestorDaily.
In response to these economic changes, Mr Bowe says that investors should position for a weaker exchange rate and target Australian bonds at the front end of the yield curve.
“Within our investment strategies we are overweight duration at the front to intermediate part of the yield curve and think that longer term yields will be more vulnerable to movements in global interest rates,” he said.
The report predicted 2014 will be a critical year as the Australian economy attempts to transition from growth reliant on mining investment to more balanced investment from the rest of corporate Australia.
“Eventually all this mining investment that we have been conducting in Australia, there’s going to be a return on that in the form of a large increase in exports of liquefied natural gas (LNG),” Mr Bowe said.
“That’s not expected to come on until 2015.
“As these mining investment projects start to come to completion, the investment intensity drops – which is the 2014 story – but the production doesn’t come online until 2015 so the boost from exports is 12 to 18 months away and we have this gap year in 2014 that is going to be very difficult and a bumpy transition for the RBA.”
