A terms-of-trade test for credit investors

By Tracy Chin & Aaditya Thakur, PIMCO

While a moderate ongoing decline in the terms of trade for coming quarters will constrain profit growth, there are some benefits that are often overlooked, which should help many Australian corporates maintain strong credit fundamentals and provide investors with a framework for sector and company selection.

However, since late 2011, the terms of trade has experienced a gradual decline, which is set to continue as commodity prices moderate due to an increase in supply; the completion of mining-related projects comes at a time when China, Australia’s major trading partner, is set to adjust to a slower rate of growth.

Typically, a rise in the terms of trade (i. e. a rise in export prices relative to import prices) represents an increase in purchasing power and national income that helps drive higher investment, consumption and, hence, domestic demand.

Read more here: Business Spectator


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