Are Facebook's golden days over?

AK: Hello, and welcome to Talking Finance, I’m Alan Kohler.  This week, well Laura Tingle, Chief Political Correspondent for the ABC 7.30 and columnist for The Australian Financial Review takes us through politics which have been a bit overshadowed by Cardinal Pell but still, there’s a bit going on.  In particular, Scott Morrison’s latest climate change play and can that win back any supporters.  Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital runs us through the latest economic data, which weren’t too good, to be honest.  Julia Lee, Equities Analyst at Bell Direct, dives into the markets.  And Steve Sammartino, Author and Futurist, tells me if Facebook is at risk of some sort of challenge from its Chinese challengers particularly since they are protected by not having Facebook or anyone else in their own market in China.

Listen to the podcast or read the full transcript below:

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[Parliament audio clip]

AK: And now on Politics here’s Laura Tingle, Chief Political Correspondent for The 7:30 Report and a columnist for The Financial Review.

Laura, do you think the climate solutions package and Snowy 2.0 will get Scott Morrison out of trouble on climate change?

LT: I don’t think they’ll get him out of trouble, Alan, they give him an alibi, but the whole climate position of the Coalition in general and his, in particular is so compromised.  The money he’s offering in the Emissions Reduction Fund is for a fund that Tony Abbott set up the value of which has been questioned.  It’s not a bad thing but since anybody involved in it from business to environment groups says that for it to work properly you’ve got to completely change the rules, so that’s a bit of a problem.

The Snowy Hydro, in some ways I think to a lot of people just a reminder of Malcolm Turnbull.  This is obviously Malcolm Turnbull’s pet project and whatever its goods and bads, it’s a Turnbull project and the fact that essentially Scott Morrison’s having to reach into the bottom drawer of things that either Tony Abbott on one side of the climate equation, or Malcolm Turnbull on the other are actually associated with.  It does suggest he doesn’t have a whole heap of new stuff to offer.

I think this is Scott Morrison’s big problem and of course, the potency of walking into parliament with that lump of coal haunts him rather more than he’d like.  It’s not something that’s going to persuade people who don’t think enough is going to be done on climate change and for those others, they still worry about what’s actually going to happen about coal.

AK: Yes, it does seem to me he’s walking a very difficult and delicate line in that he kind of relies on befuddlement really because on one hand, Snowy 2.0 is a pumped hydro storage scheme and also the Tasmanian Interconnect that he’s talking about is also based on pumped hydro storage in Tasmania, all of which would only be viable if a lot of coal power is replaced by renewables.  And so in a way what he’s championing is actually a renewables scheme, and a lot more renewables than we’ve currently got.

LT: Well, that’s true.

AK: But he’s relying on the fact that the right wing of his party doesn’t understand that or something.

LT: Yeah, well I think you’re putting your finger on the button here, Alan.  I mean it’s not a coherent policy with any conceptual framework, it’s bits and pieces of stuff that he can pull out of the bottom drawer.  Malcolm Turnbull was very, very keen once again, on the second interconnector to Tasmania.  He’s very excited about all the wind power on the West Coast, all those sorts of things.  But as you say, it is basically a very renewables-driven scheme at a time when the Coalition has been scathing about renewables and saying that we still have to rely on coal.  We still don’t know, by the way, and this is quite an important question:  What’s going to happen to that whole issue of whether the government is going to try to do any underwriting or any other form of propping up of coal projects before it leaves office?  The government’s been very elusive on that question.  Most of the advice is that they can’t spend money without the legislative backing to do so, but whether they try to appease the coal people on the other side with some sort of underwriting deal is yet to be seen.   I think it would all sound a bit more sellable politically if there was that overarching idea or an overarching principle that because the Coalition is hostile on renewables, is the protocol in general, can’t quite make up its mind whether we’re doing enough on climate change in general.  It looks as it is, which is just a range of things to sort of make people say, ‘oh look over there’.  I think the electorate is pretty much over that sort of stuff at the moment.

AK: The problem, of course, is they’re coming from such a long way behind that, as you put it in a very colourful and lovely column a little while ago, about chum.  They’re throwing all this chum about which is the stuff, the blood and gore that fisherman throw in the water to attract the fish.  You were quoting Scott Morrison and saying the Labor [sic] Party’s getting into the bottom of the chum bucket, but as you point out, they’re all chucking it about.

LT: Well, they are and this is saying something, this is one of the least edifying fortnights in parliament.  Just the sense of desperation on both sides of having to establish some bottom line ahead of the election campaign was really, really strong.  But the government did its best on asylum seekers, now the polls have been somewhat mixed but the Coalition Poll of choice is Newspoll and it suggests nothing has changed as a result of their negative campaigning on asylum seekers.  I suspect there’s probably been some sort of impact on it, and Labor, of course, has really gone to the whole question of governance using the Estimates Committee process.  But I think you’re going to continue to see a lot more attacks on that issue.

AK: Yeah, just finally, the government must have been terribly disappointed at that Newspoll.  They saw the Ipsos poll, which came out at 51:49 and then bang, back to 53:47 in Newspoll and they must have been disappointed at that.

LT: Yeah, I think they’re probably just secretly relieved it didn’t come out while the parliament was actually sitting because everybody was very sceptical about the Ipsos poll when it came out on both sides of politics because within it there were some very odd numbers, which happens in polls from time to time.  But for those who were desperately hoping that things were turning around and wanting an endorsement of the strategy they were pursuing, the Ipsos poll had been really psychologically important and 53:47 would have put them all back in their boxes, big time, I think.

AK: I really appreciate it, Laura, thank you.

LT: Thanks Alan.

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AK: And now for the latest on the economy, here’s Shane Oliver, Chief Economist at AMP Capital. 

Shane, were you surprised by yesterday’s construction data?

SO: I certainly was surprised.  We saw quite a sharp fall in construction in the September quarter so we were looking for a bit of a bounce for the December quarter to make up for that.  We know that things are a little bit soft, but maybe not that soft, but that’s the way the numbers went.  We’ve now had two quarters in a row with construction falling around 3% in each quarter, a little bit more in fact, and that the falls were fairly broad-based.  It was obviously engineering which is still mining related but also now weakness in the housing sector now starting to come through. 

This obviously feeds through into expectations regarding December quarter GDP growth and on the back of already soft figures for retail sales and soft estimates for the contribution from trade to GDP.  It looks like we’re looking at another soft quarter for GDP growth.

AK: Where does it leave you in terms of your GDP forecast – GDP for the December quarter, which I think is out next week?

SO: GDP for the December quarter is out next Wednesday and that is likely to show growth, we’re thinking about 0.2% for the quarter and that, of course, followed 0.3% in the September quarter and that’s the quarterly rate.  The annual rate would show a fall to around 2.4%, so a further stepping down in the pace of GDP growth in contrast the bank expectations that growth would bounce back a bit again.  That would be a rather disappointing outcome.  Of course, there’s still some more data to come out which will feed through into those numbers but it those numbers but it looks like we are seeing a fairly distinct slowing in the Australian economy.

I still don’t see recession here I think there are enough things going along that will keep us going, including infrastructure spending and hopefully over time business investment will pick up and hopefully our export numbers will hold up and notwithstanding slowdowns in Chinese ports regarding Australian coal.  But obviously we are looking at quite subdued growth going forward as the housing market turns down and that’s going to ultimately weigh on both the government’s thinking and the Reserve Bank’s.

AK: I was a bit surprised in that data yesterday, the construction data about the decline in public construction because I thought one of the things that was boosting the Australian economy was all the money that state governments are spending on infrastructure but that seems to have rolled over now.

SO: Yeah, that was a bit odd there.  Other [reputable] sites have suggested the infrastructure spending boom has further to go, so hopefully that was just an aberration but if it is the start of a peak then it’s obviously going to be more of a concern.  There is a bit of a risk here regarding the Australian economy.  We know the housing construction cycle has probably passed the peak and will start going down.  There’s debate about how much falling house prices will weigh on consumer spending, but it looks like consumer spending is going to be fairly subdued.  If that flows through to weak business investment at the same time, maybe there’s uncertainty about a change of government, maybe business has become concerned about the lack of demand growth of the economy, particularly on the consumer side, that could weigh on business investment, so that’s certainly a worry.  And of course, if at the same time, we start to see momentum rolling over in public construction, albeit there’s still a lot going on but if it’s not growing at the same rate than it was then that will obviously be a bit of a concern for the economy.  All of these things I think would feeding into the Reserve Bank’s thinking as to why they’ve moved from a tightening bias, if you call it that, towards a more neutral bias at present.  But I think they’ll ultimately have to shift towards cutting interest rates.

AK: Yeah, and you’ve been saying that for a while, Shane.

SO: Yeah, we adopted that view back in December.  I just thought we’d seen one too many poor economic data releases with the September quarter national accounts and then with the housing downturn flowing through as well.  There is a bit of hope maybe that there’ll be some sort of money in the pot for fiscal stimulus come the April budget for whoever wins the election.  Come July there might be some sort of stimulus in there with tax cuts, but I’m not sure that that will be enough to head off an interest rate cut by the Reserve Bank.

AK: Yeah, thanks Shane, good to talk.

SO: My pleasure, Alan.

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AK: And now here’s Julia Lee, Equities Analyst at Bell Direct to bring us up to date on the markets, and in particular, the earnings season which finishes today.

Julia, earnings season just about finished or finishes today, it seems to have been a bit of a dampener on the markets overall, but against that, of course, we’ve had pretty solid support from central banks.  How do you think things have balanced up?

JL: Look I think we have seen it being net negative for the earnings outlook for the Australian share market.  However, the flipside is we’ve seen strong growth in dividends and that’s really helped to support the market.  In fact, in the month of February it looks like the market is on track for a 5% gain, so we’re seeing the market stepping up a notch.  In terms of the acceleration in gains that compares to a 3.9% gain in January.

I guess some of the things that we are watching is that the Australian economy, while there are signs of it weakening, the labour force numbers that we saw out this month, were extremely strong and the additional talk of more rate cuts here in Australia has certainly been good news for the Australian share market.

Altogether I think here domestically our shares are performing well, even with that reduced outlook for earnings for the full year.  What we are watching very closely though is the increase in geopolitical risk.

AK: Just back to the earnings season, you’re saying that really dividends are stronger than actual earnings?

JL: The dividends have been stronger than earnings growth.  We have seen strong dividend growth.  Part of that might be some potential tax changes down the track which has motivated some companies to pay high dividends and high franking credits now.  But also from the mining stocks we have seen an incredible amount of dividend income returned to shareholders from the miners, especially the iron ore miners like BHP Billiton and Rio Tinto and that’s really boosted the returns that investors have received from dividends this reporting season.

I guess, the other factor in that is that the Aussie dollar has weakened off significantly, part of that has been the outlook for weaker interest rates in 2019 by some major banks and economists.  But the Aussie dollar certainly coming under pressure has been good news for those overseas earners like the miners, as well as some of those global leaders like CSL.  Of course, the other thing keeping a cap on the Aussie dollar is that we are seeing increased geopolitical risk.  We’ve seen Pakistan shooting down the Indian fighter jet and capturing its pilot and the markets are watching that closely, and then combined with the trade talks between China and the US where we did see Lighthizer explicitly saying that China simply buying more US exports wasn’t significant and that signing a deal wouldn’t be the end of it.  The market’s a little bit cautious on the back of those comments as well.

AK: Yes, bottom line, it’s probably difficult to expect another strong month in March.

JL: I think we will see a bit of consolidation for the market.  A lot of that does hinge on the global headlines with the half year reporting season now over, the market is going to refocus in on those US and China trade talks.  I guess half year reporting season is also an important time of year because we get an idea of which companies are reporting strongly and may continue to perform strongly over the next six months.  Often it’s those pieces of information that do come out during reporting season where we do see those type of stocks outperforming and underperforming.

For example, last August reporting season, Appen, Altium, Bravura were the three best performers in the ASX200, and this reporting season we’ve seen all three stocks reaching all-time record highs, so continuing that trend that we saw from last reporting season.  I guess, if you’re curious on which stocks were the best performers this reporting season.

AK: Yes, I am.

JL: I’m looking up the numbers for you.

AK: What were the best performers?

JL: The three best performers, Appen, once again on the best performer list with an increase of 47% just this month.  We also saw Automotive Holdings with a 40% increase and Breville Group selling those expensive coffee makers, up by 38% for the month of February.  Alan, sometimes when people see stock performances like this, they get scared off from buying these stocks, but Appen, Altium were up about 40% last August and this August [sic] they’re up around about 40%, both of those stocks gaining quite strongly once again.

AK: Yeah, well that’s a really good summary, Julia.  Thank you so much.

JL: Always a pleasure, Alan.

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AK: And now with the latest in technology, here’s Steve Sammartino, to talk about what the Chinese social media businesses are doing.

Well Steve, tell us about TikTok, the Chinese app that’s just passed a billion downloads.

SS: Yeah.  TikTok is another short form social media app that has little videos to share and music.  It’s quite similar in some ways to Snapchat and Instagram stories.  Incredible growth in the past 12 months.  It’s passed a billion downloads and just last year it had 668 million downloads which is far bigger than Instagram’s powerhouse which is Instagram and that only had 444 million downloads last year.  It looks like Facebook’s dominance in social, which has been around for the past 10 years, might be coming to an end.  Facebook’s core product is in decline and now their powerhouse, Instagram, also looks like it’s finally got some serious competitors.

AK: Yeah, but China just doesn’t let Facebook and the other things into China does it?  I mean, it’s kind of complete protection.  It’s not just tariffs, they’re blocked.

SS: No, that’s right, it’s beyond tariffs and in fact this is the interest thing for investors to pay attention to.  In some ways there’s like a technology cold war happening especially between China technology and USA tech and it’s really interesting in a couple of ways.  We have some of the big Chinese companies, including Baidu and Alibaba which are actually trading on the Nasdaq and on the US stock markets, and yet on the flipside, we have Facebook, Google and all other technology companies excluding Apple which are banned in China.

What you have is, is the American companies are excluded from growing in China because of the Great Wall of China technology protectionism, and then you’ve got the Chinese companies, including Tencent which is a $410 billion market cap company, Alibaba $478 billion market cap company and Baidu which is closer to $100 billion, all infiltrating global markets that American tech companies can’t get into.

It’s a little bit like we’re looking for technology supremacy here and I can’t help but think that China’s strategy really serves their country a lot more than the US open market strategy does.

AK: But those Chinese things like Baidu and Tencent and Alibaba and so on, are they going to launch businesses in the US…

SS: Yeah, well they already have.

AK: And attack those businesses, Facebook and them, on their home turf?

SS: I think they absolutely are.  Of course, Alibaba already does, it’s a trading company where it sells goods and services, so it competes with Amazon and JD.com competes with Amazon in America and other markets.  Alibaba is in Australia as well.  But also, from a social perspective, we’ve got WeChat and Alipay and a lot of other social forms that are actually in here in Australia and they’re in America.  They’re doing very well and growing exceptionally, and TikTok is the prime example.  They’re starting to compete heavily with Facebook and those other companies.

The company that’s probably most at risk, I would say, out of the tech US companies would be Facebook.  We only need to look at a couple of the stats on Facebook, their revenue per user in America is $20, just over $20.  But their average revenue is around about $6 and they’ve really come to an end of that growth phase of what they can do in developed markets where they can get a lot of revenue per user and they’re locked out from China where you’ve got a growing middle class.

The barriers to entry and moving social are actually quite low, it’s much, much different to Google where you’ve got a device like Apple or a Google Android phone where you get locked into an ecosystem.  There’s no walled garden with social, so I can’t help but think that Facebook might face some problems that aren’t just the regulation and the issues that they’re having with privacy complaints.  But also, the growth per user, they might have reached the end of where they can actually get a lot of revenue per user and they’ve got competitors hitting them from other markets that Facebook can’t then go in and compete in.  It’s almost like we’ve got this new form of digital colonialism where the Chinese are going into other markets, but they’ve got big barriers in their own.

AK: You would have thought America’s going to have to block them from operating in America or something.  Surely you can’t just have this go on?

SS: Yeah, I haven’t seen any talk of that.  If you look through the technology papers and so on, there doesn’t seem to be much talk about regulating foreign technology companies other than infrastructure, of course, we’ve got the Huawei issue here in Australia with the 5G towers and that’s also been a concern in the US.  When it comes to technology infrastructure that’s owned internationally, there has been questions raised.  But in terms of the social infrastructure and the tools of communication infiltrating US and other markets, there hasn’t been any talk at all which I actually find surprising because the communication tools become the fulcrum for commerce.  The fact that you have one open market and one closed market is incredibly surprising to me from an international business perspective.  I’m very surprised that that hasn’t come up as an issue.

In fact, the opposite tends to be happening where America are more talking about regulating their own technology companies rather than worrying about foreign sources of technology infiltrating.

AK: Well that’s certainly true of the west entirely.  Everyone’s down on Facebook because they’ve been pushing the envelope so much and everyone’s trying to regulate them.  Not just in America but in Europe as well, in particular.  You’re right it’s fascinating.

SS: Yeah, it really is fascinating stuff, it’s something that we’ll have to watch closely.  I can’t help but think that China’s ability to have that autocratic government in a time of radical change where you have infrastructure resets, social resets and the way the factors of production and commerce are infiltrated with digital, is a type of time where you maybe almost need an autocratic government so you can get stuff done.  People forget that governments going back in the industrial revolution were a little bit more autocratic and built out the infrastructure.  And so in many ways, I can’t help but think that the western developed markets are too busy arguing with themselves while the developing markets are building world-best infrastructure.

AK: Well, very interesting stuff, Steve, thanks very much and have a great day.

SS: Absolute pleasure, Alan, cheers.

[Music]

AK: And happy birthday to Coldplay’s Chris Martin who turns 42 on Saturday, what a fantastic band they are, so many hits to choose from and I reckon one of the best and I really like, Viva la Vida, which means long live life after he saw the Spanish phrase on a painting by Mexican artist, Frida Kahlo. 

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AK: That’s all from me, have a great week.

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