A political bonanza

This week in Talking Finance it's all about politics, the markets and the economy.

• Victorian Senator Derryn Hinch – the former broadcast legend runs me through what’s been going on in Canberra this week;
• Professor John Hajek from the University of Melbourne who specialises in Italian Studies tells me what exactly is going on in Italy right now;
• Scott Haywood, a.k.a. thefinanceguru.com.au and market commentator for Macquarie Media tells me the big issues affecting markets this week;
• Felicity Emmett, co-head of Australian Economics at ANZ runs me through the latest economic news; and
• Tim Lawless, Head of Research at CoreLogic gives me the latest news regarding house prices for May which came out today.

Hello and welcome to Talking Finance, I’m Alan Kohler.  It’s a real bonanza this week, that’s for sure.  Victorian Senator, Derryn Hinch, former broadcast legend, runs me through what’s been going on in Canberra this week and of course it’s all about Barnaby Joyce.  Professor John Hajek from The University of Melbourne who specialises in Italian studies, tells me what’s going on in Italy right now and it’s a fair bit.  Scott Haywood, AKA thefinanceguru.com.au and also market commentator from Macquarie Media tells me the big issues affecting markets this week and Felicity Emmett, Co-Head of Australian Economics at ANZ runs me through the latest economic news.  And last but not least, Tim Lawless, Head of Research at CoreLogic, gives me the latest on house prices for May which came out today.

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[Parliament audio clip]

I’m joined now by Senator Derryn Hinch, my old mate from 30 years ago when I appeared on his radio program on 3AW when I was a young journalist on the Financial Review.  I’m delighted to be talking to him as Senator Hinch to talk about this week in politics.  Derryn, it looks like Barnaby actually does have a medical certificate for his month off.  Do you know what it says?

DH:  No, I don’t.  It could say ‘Chutzpah’, I’ll explain that in a minute.  But when they announced he was taking 11 weeks’ leave, that was the National Party.  The put that out that he’s taking 11 weeks of personal leave.  Then when some of us started to criticise that and question it and say, ‘Will he be paid?’  I mean, he’s only been a politician, if you be technical, for the last five or six months since he won New England.  Before that he was making a fortune as it turned out illegally because he was a dual citizen.  Then they changed it from his personal leave to four weeks of medical leave and he’s now saying it will actually be 15 days, he’ll be back for the next sitting of Parliament and in the meantime his constituent’s work, his electoral work will still go on, so I really don’t know what’s happening.

If in fact he is having mental problems or emotional problems and he needs medical time off then I’ll back off him and that’s fair, but it’s their own fault.  They’re the ones who said he was taking 11 weeks of personal leave.  Also, his partner, I think she’s on maternity leave and being paid for maternity leave at the same time anyway. 

Do you think he’s washed up?

DH:  Yes, I do.  I think he’s preparing his exit, to be honest.  He’ll never be leader of the Nats again and he’ll never be Deputy Prime Minister again.  I think his credibility is gone and I mentioned chutzpah because the best definition of the word chutzpah is the Jewish kid – this is from Golda Meir actually, the former Prime Minister of Israel, her definition of chutzpah was the Jewish kid who murders both his parents, then pleads for mercy on the grounds he’s an orphan.  That is Barnaby.  

[Laughs]

DH:  Alan, go back to February when he was talking about privacy – ‘I need my privacy…’  and then to have the gall to take The Telegraph to the Press Council for invading his privacy when he then goes and sells not only his story, but as we’ve seen from the promos, television footage of the new baby.  If he took some of the $150,000 and gave some of it to the poor daughters who are going to go through hell when they watch this television show of their dad’s new love…  Now look, I’m not being hypocritical here myself because I’ve been married umpteen times and people do fall in and out of love and lives change and people get hurt along the way, but the way he’s done it has been just a shocker.  

Onto more serious matters, I note that Senator Brian Burston says he’s going to now support the Government’s tax cuts.  A couple of interesting things about that – firstly, does that mean that the tax cuts get through?  And also, what does this mean for Pauline Hanson’s authority and the cohesiveness of One Nation? 

DH:  Well, she has none.  I saw some of this coming because a couple of weeks ago I got a letter circulated by Senator Cormann about just some mundane things and he sends it out to the party whips, of which I’m one and I’m paid to be the party whip.  I saw that Georgiou had become the party whip for One Nation, not Burston, so I knew something is going on inside the party.  The gossip I’m hearing is he’s not going to get preselection for One Nation next time so therefore he’s on his last legs.  But on this one, she has to sack him from the party, you can’t defy that.

But on company tax, I think in the end – Hinch’s hunch, and I’m often wrong – I think in the end Mathias Cormann will get the ex-Xenophon team – senator alliance, so eventually he’ll get those two.  He’s got Burston.  I think eventually after Longman by-election he’ll get Hanson back, she’ll have another epiphany on the road to Damascus and he’ll get her back.  But two hold-outs which he’ll never get are Storer and me.  I offered back in March – I told the Finance Minister, ‘Labor wants $2 million dollars for small business turnover…’ –  Jacqui Lambie and I got up to $10 million last year.  Then actually it was Pauline Hanson and I got it to $50 million and the government agreed.

I offered in March, ‘Let’s go to $500 million.’  That’s another 6,000 small businesses that you’re going to help out here down the track.  I just will not give a tax cut to the robber banks when they’re in front of a Royal Commission.  Actually, to him I used a quote at the Senate, an old Nick Young quote, this was about Ian Sinclair who’s father owned the funeral parlour and he used to talk about, ‘Stealing pennies from dead men’s eyes.’  Do you remember that? 

Yes.

DH:  And that’s what the banks have done, taking money from dead people’s estates.

Are you able to block it?

DH:  No, no.  Because they only need 8 out of the 10 now.  They’re having Steve Martin anyway, he’s voting for it, Leyonhjelm’s voting for it.  I heard Leyonhjelm on Sky today saying that, ‘If the government goes for my plan, $500 million, he’ll pull out.’  So then they’ll be one short.  But I think in the end the government will hold out, get through Longman, then they’ll get Hanson back on board and they’ll go with the big push.  Storer and I will stay out in the cold because I’m happy to go to the election saying I didn’t give the big banks a tax cut and I’m happy to stand on that.

I said to Cormann, ‘Look, the Prime Minister says he’s so keen, he’ll take it to the election.’, ‘Well, rotsa ruck, as they say, because I think it’s a mad thing to take.’  I don’t believe that 63%, if you look at it closely, it’s only the stock – we’re not all saying, ‘Wow, isn’t it great to have tax cuts for big business.’ 

But the reason they need it, Derryn, is it’s their only economic policy.  Without that, they don’t have one.

DH:  Well look, I have some sympathy for it personally when you’ve got Singapore coming down to 70% and Britain threatening 19% and some of these European countries, and Trump coming down to 20%.  But the problem is as we’ve found – and Nancy Pelosi threw this out in the US recently – a lot of that money from the tax cuts in the US has gone to share buybacks and dividends, it hasn’t gone into wage increases. 

Some months ago I was scoffed at by the Leyonhjelms of the world because I said, ‘Why don’t companies who want to get down to 25%, why don’t they do some sort of an EBA with the tax office?  And say to them, ‘If the government gives us 25% we’ll put a contract with our workers saying we’ll increase their salary by ‘x’, ‘y’ or ‘z’ per cent over ‘x’, ‘y’ or ‘z’ years?  And if we don’t honour it then we lose our tax cut?’  And I was told that couldn’t work.  Cormann said, ‘You can’t cut them in half or differentiate.’  And I said, ‘Well, you did at $50 mil.’  I mean, if somebody had a turnover of $52 million, they didn’t get it. With every tax rate – my tax rate is ‘x’ because I earn under ‘y’, so you can do it.

Just finally, Derryn, who do you think is going to win the election whenever it happens?

DH:  Well, I certainly believe it’ll be next year, I cannot see Turnbull going early.  I wrote in my book – and I wrote this about last October when things were really bad for Turnbull – I said, ‘If I were Chloe and Bill I wouldn’t be measuring the curtains for the lots just yet.’  It’s going to be very close.  I think the pensioners have issued a strong one for the government over franking.  It’s very, very close.  The fact that, whether you like it or not, we do have a presidential style election here and with Malcolm Turnbull now leading Bill Shorten by 17 points as preferred PM, that does have an effect. 

I wasn’t at all surprised that the election was so close last time because I travelled 11,250 k’s around country Victoria in the Justice Bus and the Liberal voters who are going to split the ticket and vote for Libs in the lower house and us in the upper house or somebody else in the upper house as insurance, they were petrified about the Libs stuffing around with the superannuation.  It was palpable.  Whether it’s true or not, [9:27.5] could do, but the superannuation – people were suspicious of the Government – O’Dwyer was going to do something shonky with super. 

On a quick tax thing, I know you meant the horse trade, you meant stuff like that, but I said on Sky the other night, I told the Government, ‘I’m going to vote for your whole tax package, your personal tax package over seven years.  Labor should vote for it too, they’ve already voted for it in the lower house.  They should vote for it too and if they don’t like it, do what they threatened with the company tax, just overturn it if and when they get into office.  I think the Government’s personal tax cut play over seven years is not bad.

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Joining me now is Professor John Hajek, Professor of Italian Studies at University of Melbourne, to talk about what’s going on in Italy at the moment.  John, first thing is, I don’t really understand how come the Italian President gets to turn down the choice of Finance Minister.  What’s going on? 

JH:  He’s actually entitled under the Constitution to approve all nominations for ministers and he’s not the first by any means to have rejected the nomination of an individual minister, this has in fact occurred in the past.

And in the past what happens next usually?

JH:  What usually happens is that the parties that have put forward a minister then go back and find somebody else to put forward and then generally there’s resolution of the issue. 

Right.  A couple of days ago that looked like it wasn’t going to happen and everyone was heading for a new election, but last night seems to have changed things a little bit and they seem now likely to put forward somebody else as they have in the past. 

JH:  This is Italian politics, so what happens one day may not be reflected a few hours later or the next day and obviously there’s been a lot of discussions behind the scenes.  We’ve got two parties that were in opposition to each other before the election that have decided to come together.  There’s been quite a lot of discussions between them, they had different strategies in response to the President’s rejection to the nomination of the Finance Minister, but they’ve obviously decided that it might be better to try again and they’ve been authorised by the President to try and form another government.

Those two parties, the Five Star Movement and I think it’s called the League…?

JH:  Yes.

When you say they’ve been in opposition to each other, do they agree that they don’t like the European Union?

JH:  That’s certainly one of the things that has brought them together.  I mean, when I say they’re in opposition, the Five Star Movement said it wouldn’t be in coalition with anybody and the League Party was actually a part of another coalition.  However, because of the unexpected outcomes of the elections it turned out that these two parties were the most likely to form a government and as a result they’ve found common ground in a couple of issues.  One of those is the stance towards Europe and the Euro, and the other one is the new points on immigration.

But does it turn out that they can’t form a government because the President won’t let them?

JH:  No, no.  It’s not that the President won’t let them form a government, he’s simply not accepted the nomination for Minister.  They had the right to put forward another name and they said they wouldn’t, so for a short time it seemed that the president would nominate a technocrat to establish a government.  If that happened, the technocrat would have to take his government to the houses of parliament and there would be a vote of confidence and obviously the expectation would be that those two parties would reject it, leading ultimately to an election.  But they’ve obviously had a second think about this and have decided it might be better to try and form a government and not go to another election because one never knows what the outcome is.

Did the President accept their nomination for Prime Minister?

JH:  Yes.  The only sticking point was the nomination for the Finance Minister.  But the issue there was the Finance Minister, the person they had in mind who’s name is Paolo Savona, has very, very firm ideas about the Euro and what Italy should do with it and he’s firmly opposed to the Euro and would like Italy to leave the Eurozone.  It was for that reason, because it was starting to make the markets very anxious and nervous and there are a couple of other policies as well that these two parties would like to do that make the markets very nervous, which is why the president said no.  He said, ‘We need someone who’s able to stand by Italy’s current commitments on the economic front.’

Savona is also no spring chicken, he’s 81.

JH:  That’s not so surprising in the Italian context.  It’s not uncommon to have people of an older generation running ministries or running for parliament or whatever.  Berlusconi is also 81 and he certainly ran a strong campaign in the last election hoping to lead the right.

At least he didn’t win.  Just on a broader issue – I don’t know whether this is your expertise or not – but do you think that the EU has a democracy problem throughout Europe?  I mean, they’ve had Brexit now, the people in Britain voted to get out and I wonder whether the vote in Italy is fundamentally about the EU and against it?

JH:  Well, that’s a complicated issue because of course the Five Star Movement is very strongly anti-EU, as well as the League Party.  It does have to do with autonomy, etcetera…  However, during the elections they toned down their anti-Europe rhetoric, they were much more cautious about this, they didn’t want to scare too many voters.  One of the things that we have to remember is that for a very, very long time Italy and Italians were actually very strong supporters of the European Union.  In fact, Italians were amongst the most content over many years with the European Union. 

Really, the big challenge has been the Euro because what it’s done is it’s locked the Italian economy into the German economy.  Before the introduction of the Euro what used to happen was if countries like Italy that wished to remain competitive, what they did was they depreciated their currency and that was sort of a standard strategy that countries like Belgium, Italy and France adopted.  One of the problems now of course is they don’t have that mechanism and the only way to compete with Germany is to lower costs by some other way such as restraining wage increases, etcetera.   That’s really the challenge, it’s being locked in to the German economic model and not having a lot of flexibility around it. 

Do you think that the current storm in Italy will blow over?

JH:  I’m a little bit more optimistic in terms of being open from government instability because Italy does have the knack of being able to run itself despite any political issues.  It certainly has had a very high number of Prime Ministers and governments since World War 2.  I think the issue in this particular case is that the outcome of the election really took everyone by surprise and it wasn’t expected at all.  The idea was that the right wing coalition would come out ahead and we’d be sort of fairly secure in knowing what to expect.  The issue in this particular case is the unexpectedness of both the outcome and unexpectedness of what might occur in the next few months. 

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I’m joined now by Scott Haywood who’s with thefinanceguru.com.au and also as a market commentator for Macquarie Media to talk about what’s going on in the markets, which is quite a bit at the moment.  Scott, we’re seeing a bit of a return of volatility.  The VIX Index has popped up, it seems to be mainly about Italy.  How are you seeing things this week?

SH:  Yes, shares in Europe this week have come under pressure and the catalyst has been the political complications in Italy.  Following an inconclusive election outcome there is fresh election may be held.  The concerns of this could then result in a push for Italy to leave the Eurozone.  We’ve seen a number of countries over the last 5 to 10 years in this position and as you said, it is a huge factor in increasing volatility.  What’s happened in shares is that defensives such as gold stocks have been the flight to safety, so we’ve seen them rally.  But the other factor that’s also taken place, Alan, this week, has been the significant drop in ore prices.  Over the last 10 days the commodities dropped by 10% – it actually last night was up marginally – but this is due to concerns that Russia and Saudi Arabia are considering easing production cuts which could be in place for more than a year.  So, we’ve seen ore stocks also under pressure.  Unfortunately, Alan, it hasn’t resulted at the bowser – petrol’s still very expensive. 

Where do you think the market sits at the moment?  Are you a buyer or a seller, what do you reckon?

SH:  Well, we’re at four week lows and we have had a fairly good rally, having the all ordinaries sitting at around about the 6,000-6,100 mark.  We’re still well off our 10-year highs, but we are at around 2 and 2-3 year highs if you take out the last month.  I think I’m a buyer.  I’m still bullish that whilst interest rates remain low, which I think they fundamentally will, the share market still creates genuine opportunity and genuine capacity to invest in.  the only concern that I do have going forward, Alan, is this huge amount of money that is going to be spent on the Royal Commission and the pressure it could create to not only our market but to our bank stocks. 

We’ve seen this week ANZ agree to sell its OnePath life New Zealand business for NZD$700 million dollars.  They’re going to make $50 million dollars after the cost they think. But banks now in Australia, due to the Royal Commission, are really going to be in the next 6-12 months simplifying its operations.  What that could mean for shareholders or investors is that it could mean a cut in dividend or it could mean increased interest rates at any level, personal loans, home loans, credit card or business loans.  That’s the big thing to look out for, so I think to be wary on the banks but overall I’m very bullish long term for our market. 

Given the banks are such a big proportion of our market, that’s quite an influence on the market as a whole, isn’t it?

SH:  It’s a huge influence and then if you throw in Telstra which is also under significant earnings pressure and also at the risk of cutting dividends, just investing in the index may not be the right solution for every investor, which means you may need to not just be in such funds as Vanguard, indexed funds.  You may need to look for active managers or engage a financial planner or a stockbroker to create an appropriate portfolio for you. 

What sectors do you like?

SH:  Well, I still like utilities.  I think companies like AGL and APA, I think they’re going to continually improve.  I really like healthcare.  I know Cochlear is sitting at record highs at the moment, Cochlear sitting around just under $200, CSL not far behind.  But I think even despite their high price, having such diversified earnings overseas really does create value for the Australian investor.

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I’m joined now to talk about the weekend economics by Felicity Emmett, Co-Head of Australian Economics at ANZ.  Felicity, what was the main data economically this week that you saw?

FE:  Well, I think the capex data is probably the most important, not just because it gives us a bit of a read on what happened in the first quarter, but because of the expectations for the coming year or so.  I think that’s really the highlight for the week.  On that front, it was a little bit disappointing, but still, I think, okay looking.  The number for the first quarter was a bit weaker than expectations, but the strength was concentrated in machinery and equipment investment, while non-residential building was weak and we knew that from construction data last week. 

Then it goes to the expectations and they still suggest that non-mining business investment will expand next year a little bit slower than earlier expectations, so now firms are saying they’re likely to increase investment by about 5% compared to 8% last time.  But interestingly, it looks as though really most of the drag from the unwind of mining investment is now over, so that is a really positive sign going forward for overall business investment.

And there was some housing approvals data as well, does that sort of feed into the sense of what’s going on with capital investments?

FE:  Yeah, housing again was also a bit weaker than expected, down 5% for the month.  That was driven by the volatile unit segment, it had risen quite strongly in the previous month and then reversed in April.  I think we have probably seen the peak in housing approvals and we’re likely to see a gradual decline from here.  No collapse is suggested at all at the moment by the data, but when we look at the housing finance data for the construction or purchase of new homes, that has trended lower over the last few months, so that does suggest that we will get a gradual decline in building approvals. 

There’s still though quite a bit of work in the pipeline for houses and particularly for high rise units.  That will keep the level of construction relatively high in the first half of the year and it won’t really be until the second half of 2018 and into 2019 that we start to see construction activity in the residential sector start to come off.  But we do expect that will be relatively gradual at this stage.

What does it all tell you about the economy overall?

FE:  I think the outlook for this year is still okay.  There’s quite a bit of activity going on in the pipeline, housing, no residential building, there’s quite a bit there going on for 2018.  I think 2019 there’s probably more of a question mark over.  In the building approvals release we also got numbers for non-residential building approvals and they were quite weak for the fourth month in a row, so that is a bit concerning.  I think that 2019 is perhaps looking a little bit more questionable than we had previously thought.  As well when you look at it the international dynamics have deteriorated a little bit.  The political front is more uncertain, the trade front is more uncertain, the economic surprises have certainly turned negative after being very positive through 2017.  I think the 2019 outlook has perhaps got more of a question mark over it than it did have sort of 3 or 6 months ago.

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I’m joined now by Tim Lawless, the Head of Research at CoreLogic, to tell us what’s going on with house prices in May.  Tim, what is the national house price change in May?

TL:  Well, we’ve seen another slip in dwelling values across May.  National values were down by 0.1%, so a fairly slim fall over the month.  But once again, it’s a fairly similar trend to what we’ve been seeing really the last 6 months in the market where capital city values are down a little bit more, particularly being driven by Melbourne now as well as Sydney.  But across the regional markets we’re seeing a bit of support here.  Regional values are up by 0.2% over the month.  Over the past 12 months they’re up only 2.2%, so just a little bit better than inflation. 

Melbourne values have fallen, have they?

TL:  Yeah, Melbourne’s been a little bit more resilient than Sydney up until recently and Melbourne didn’t peak out until late last year, whereas Sydney peaked out in the middle of last year.  But the last month we’ve seen Melbourne dwelling values fall by 0.5%.  Sydney values were down by 0.2%, so that makes Melbourne now the weakest performing market for the past 3 months, so on a rolling quarterly basis Melbourne’s down by 1.2%, which has been the largest fall of any capital city.  In fact, Sydney was the only other capital city to see values fall over that rolling three-month period they were down by 0.9%.  

Is there much of a difference within those markets?  For example, free-standing houses falling more than apartments or the other way around and the top end of the market versus the small end? 

TL:  There’s some really big differences and I think we’re seeing the effect of a lot more first home buyers in the market is really supporting the more affordable end of the market place.  For example, in Sydney most of the falls or really all of the falls we’ve been seeing in dwelling values have been across the most expensive half of the market.  When you start looking at the different product types, it’s very much more skewed towards houses rather than apartments. 

Of course, apartments have a much more affordable price point which is why they’re probably more appealing to first home buyers, but we are seeing I guess some early signs that first home buyer demand may be starting to wind down just a little bit.  Remember we saw stamp duty concessions become live in New South Wales and Victoria from July last year and considering we’re still seeing values gradually rising around those more affordable price points that first home buyers tend to target, those stamp duty concessions have already lost their appeal in many ways because we’ve seen values rise more than say the $30,000-odd that first home buyers are saving.

To sum up then on that side of things, the worst falls, the biggest falls are among the expensive houses in Sydney and Melbourne?

TL:  That’s exactly right.  Amongst the most expensive dwellings in Sydney and Melbourne and much more skewed towards detached housing.  Interestingly enough, these were the two segments of the market place that we’re also seeing the strongest capital gains when the market was firing.  

What’s going on in Hobart?

TL:  Hobart is still firing along.  In fact, we saw values rise by nearly 1% over the month in Hobart.  They’re up nearly 13% over the past 12 months.  But we are seeing a lot more media around the fact that affordability constraints and social issues coming out of such strong price growth are becoming more predominant across Hobart.  Even though we’ve seen values rise, housing values are up nearly 13% over the past 12 months, we’ve seen rents rise at nearly the same amount.  From an affordability perspective the market’s getting hit from both sides, really, so if you can’t afford to buy a house you’d typically rent but we’re seeing rents rising rapidly across Hobart as well. 

Was Hobart the best performing market in May?

TL:  By quite some margin.  Hobart was up 0.8% over the month.  The nearest other capital city was up 0.5% and that was Adelaide.  When you look at the trends, Hobart’s the only market that’s seeing double digit annual growth.  Every other capital city, the other best performer would be Canberra, where we’ve seen values rise by 2.3%.  So there is a really big gap between the capital cities, between Hobart and the other capitals.

As you say, there’s been a lot of talk about Hobart becoming unaffordable, which is surprising, amazing even!

TL:  Well, Hobart’s generally been considered the most affordable capital city to be buying into, at least the least expensive.  It’s going to be very soon, if not the next couple of months where we probably see Hobart falling behind say Adelaide or even Darwin, as those two cities start to see their median prices become a little bit more affordable than Hobart’s.  Because we’re not seeing much growth in either of those cities, in fact Darwin’s still slipping a little bit lower and there’s hardly any difference between those three capital cities at the moment in terms of the median prices. 

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Happy birthday to the queen of Australian pop, Kylie Minogue, who turned 50 on Monday.  What a career!  Still pumping out number one dance hits, but here’s one from the old days, ‘Can’t get you out of my head.’  And neither will you after this.

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That’s it for Talking Finance, I’m Alan Kohler, have a great week!