A green light for the sharemarket

PORTFOLIO POINT: This year’s budget papers back stockmarket investment in resource-related industries and offer some surprise insights into manufacturing.

As our new investment writer Adam Carr writes elsewhere in Eureka Report tonight, this is not a contractionary budget, and it will not have a dampening effect on the domestic economy – it won’t offset the effect of 1% in rate cuts from the Reserve Bank, as many might have feared.

But there are plenty of wrinkles within that picture and plenty of opportunities for investors to take advantage of them.

As you’d be aware, Treasury is not a perfect forecaster of the Australian economy; in fact, to be quite truthful, it’s usually wrong. But Treasury economists are some of the best and brightest in the land, and their econometric models are by far the most comprehensive, so it’s always worth paying attention to what they say.

Specifically, Treasury’s “little boxes” in Budget Statement No. 2 – “Economic Outlook”, are always a useful guide to the most important themes. These are shaded sections that focus on particular hot topics about the economy that Treasury’s boffins reckon are worthwhile, so I thought I would pass on what they say.

Box 1 is “International Comparisons”, so we can forget about that – it’s not very useful for investors. Box 2 is “Direct spillovers from the resources boom”, and is worth a look.

You will recall that at Eureka Report, we have been strongly recommending investment in mining services businesses. Treasury backs this view up.

“A substantial part of resource-related activity is occurring in the construction sector. Around 60 per cent of capital expenditure on buildings and other structures over the past year has been mining related, up from 29 per cent at the start of the mining boom in 2003-04.

“There is also resource-related activity occurring in the manufacturing sector, especially the part which makes specialised machinery for mining.”

It also has a direct spillover into transport and services, including insurance and finance, and scientific and technical services, which are up 40% since 2002, versus 27% for GDP as a whole.

Box 3 is about “Indirect spillovers from the resources boom”, and includes such things as retail sales growing 6.4% in WA since the start of the boom, versus 4% in the rest of Australia, as well as the impact on aviation of using fly-in, fly-out workers. Overall, this box reinforces the message that attaching yourself to the resources boom in some way is a good idea.

Box 4 is about “Changing patterns of consumer spending”, which is also an important topic.

Treasury points out there has been a rapid increase in demand for services as a proportion of spending, as opposed to goods. “This has seen increased demand, particularly for some services such as overseas travel and recreation, the consumption of which has grown relatively rapidly as households have become wealthier.”

Yes, we all know that, Mr Treasury – tell us something we don’t know. It goes on: “Within retail, the pattern of demand has been uneven. While sales growth has been especially subdued for clothing and book retailers, and department stores, other retail segments such as food and beverages, and pharmaceuticals retailing have fared considerably better.”

Box 5 is about manufacturing, which has fallen from over 12% of GDP to 8.5%, while its share of employment has fallen from 11% to 8.5%.

“However, these high level trends mask important differences, with some parts of manufacturing struggling while other parts are doing well.”

Which parts are doing well? Those connected to the resources sector, of course!

“Over the past decade, professional and scientific equipment exports have tripled while chemicals and related-products exports have increased by around 60 per cent. Exports of machinery have also grown solidly.”

In general, Treasury is quite upbeat about manufacturing, concluding that manufacturers have also been more likely to innovate in the way they do business. In 2009-10, almost 30% of manufacturers reported making process innovations – about twice as much as the rest of the economy.

Box 6 is about “the impact of emerging Asia on Australian exporters” and points out that although China has been a major contributor, all the key emerging economies of Asia have grown more rapidly than the advanced economies.

Treasury says the reorientation of Australian businesses towards Asia is most stark for commodities businesses, but is “evident in all major export classes”.

“The emergence of Asia is likely to provide increasing opportunities for Australia’s manufacturing and service sectors.

“By 2030 there are expected to be 3 billion people in the middle income bracket in the Asia Pacific region. As their incomes increase they will spend more on high-value manufactured goods (such as medical and pharmaceutical products) and services (such as health, education, finance and tourism), and food, providing opportunities for Australian businesses.

“These changes are already underway. For example, over the past decade Chinese visitors arrivals have increased from around 160,000 per year to 540,000 per year and Indian arrivals have increased from 50,000 to 150,000 per year.”

Now, look, I’m not saying you should base your investment strategy on what Treasury says, but it’s definitely grist for the mill, as it were.

At Eureka Report, we have been on about these themes for years; it’s good to be supported in this by the Australian Treasury. Go resources!