Capital Series Update - ComSec

Economic Overview
China
After rising to record highs in early 2007, China’s share markets have lost ground; the Hang Seng China Enterprises
Index (HSCEI) is down 7.5 per cent from 10,766 to 9,944 points. Concerns that a government imposed land tax will
erode earnings of property companies resulted in the sector slumping. However, it is expected that the HSCEI will
likely continue to trend higher in coming months, as corporate balance sheets remain healthy. The performance of the
sharemarket is being underpinned by robust investment and consistent growth in domestic spending. While the
Chinese authorities are attempting to moderate the pace of economic development with monetary policy and fiscal
reforms, there are no signs of a sharp slowdown. Chinese authorities are trying to reduce the economy’s dependence
on exports. With the end of the transitional arrangements for China to join the World Trade Organisation, the
government intends to further open the economy to imports and foreign investment. The government also intends to
reduce exchange rate distortions, but this is likely to happen at a moderate pace.
Japan
The Nikkei has been climbing steadily in recent months and has just surpassed the six-year high of 17,353 points that
was reached in April 2006. After seven months of positive growth in consumer prices, it seems that Japan has shaken
off the deflation era. Since the end to Japan’s quantitative easing policy early in 2006, the Bank of Japan has
increased interest rates only once by a quarter of a per cent to 0.25 per cent. However, economic growth remains
subdued, rising by only 0.8 per cent in annual terms in the September quarter. And speculation of higher interest rates
appears to have had a negative impact on consumers, with retail sales falling by 0.1 per cent in the year to November.
But research by the Bank of Japan indicated that retail spending would prove to be stronger-than-expected over the
end-of-year holiday period. Industrial production rose by 4.8 per cent in the year to November, and while it slowed
markedly from the October figure, it is still well above the 5-year average of around 2.5 per cent.
Europe
The Euro Stoxx 50 index is just below the record highs reached in mid-January. The Euro-zone economy and share
market should be supported by the accommodative interest rate environment. The Euro-zone economy grew at a 2.7
per cent annual pace during the September quarter, just below the 2.8 per cent result for the previous quarter – the
strongest growth in over five years. Inflation for the Euro-zone in November was 1.9 per cent – close to the European
Central Bank’s (ECB) comfort level of 2.0 per cent. The ECB raised interest rates to 3.5 per cent in December - the
third rate hike during 2006. The ECB continually asserts that it will hike rates again if inflationary pressures persist.
However, at its January meeting rates were kept on hold and the tone of the accompanying statement was softened.
Retail sales have been reasonably stable over the second half of 2006. Annual spending growth is 1.3 per cent, the
same rate as 5-year average growth. Unemployment trended lower over the course of 2006 and this should be
supportive of further growth in spending.
India
The Indian economy has experienced rapid industrialisation in recent years, and has grown at an annual rate of 9.2
per cent in the September quarter. The current growth rate is well above the five-year average annual growth rate of
7.2 per cent. The IMF expects growth to be 8.3 per cent over 2006, then moderating to 7.3 per cent in 2007.
Inflationary pressures are the main focus of the Reserve Bank of India (RBI). Interest rates have been lifted three
times in 2006 and look set to rise further in order to cool domestic investment and spending. The RBI is cautiously
optimistic on the outlook for business conditions going into 2007. The RBI business expectations index slowed during
the September quarter but was still firmer than in previous years. The RBI noted that employment is strong, capacity
utilisation is high and that demand should continue to improve as order books were being filled quickly.
You do not need to take any action on this update.
This Capital Series Update is issued by Commonwealth Bank of Australia ABN 48 123 123 124, AFSL 234945 for general information of existing
investors only. Past performance is not a reliable indicator of future performance. The Commonwealth Bank believes the information herein is
correct but makes no warranty as to the accuracy, reliability of completeness of that information. Except to the extent that any liability under any law
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