Boats, markets, trade & more

Hello and welcome to Talking Finance, I’m Alan Kohler.  This week, well, it’s been a big week in politics with the government defeated on the floor on a Bill for the first time since 1941, so we’ll ask Malcolm Farr, National Political Editor for News.com.au about whether there’s likely to be a flurry of boats, an armada of boats on their way from Indonesia to take advantage of the Medevac Bill that was put through and promoted by Dr Karen Phelps, the new member for Wentworth.  For the markets, we’ve got Michael McCarthy, Chief Market Strategist at CMC Markets, Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital tells us what’s going on with the economy and Steve Sammartino brings us up to date with the latest on Technology.

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Now to discuss a big week in politics here’s Malcolm Farr the National Political Editor of News.com.au.  Well Malcolm I imagine Coalition operatives are currently as we speak in Indonesia arranging for a flotilla of boats to head for Christmas Island which has been helpfully re-opened.

Listen to the podcast or read the full transcript below:

Yes, in anticipation of this armada.  Yes, these operatives will be standing on the beach waving their hands saying ‘this way, come this way and don’t forget to say Bill Shorten sent you’.  I’m speaking hyperbolic rubbish of course!  If there are people in Indonesia thinking of re-starting the people smuggling business they are doing so because Scott Morrison has all but invited them to get back onto the water.  He’s made such a song and dance and hullabaloo about Labor apparently, he claims, creating a big hole in our border protection defences that if you were a people smuggler you’d have to think, well this is a business opportunity, I’d better take it now.

But seriously though, obviously if a boat or some boats do not arrive between now and the election it’s likely to peter out as an issue, isn’t it?  Morrison kind of really needs a boat to set sail.

Yes, you would imagine so, but don’t underestimate his endurance on this topic and that of Peter Dutton, Home Affairs Minister as well.  We’ve just seen a dress rehearsal for what will happen during the election campaign and as one ALP figure told me, a day talking about asylum seekers is never a good day for Labor. Scott Morrison knows that and that’s why he’s been ramping up these recent law changes to the extent he has.  He’s gone over the top, there’s no doubt about it and I think as you’re indicating, if there is a boat that slips through then Prime Minister Morrison will blame Labor, but then again, he’s the man in charge of border protection, surely, he’ll have to carry some blame too.  But that will disappear within the heat of the campaign argy-bargy.

Your choice of words ‘slip through’ was apt because it seems to me one of the key elements of Operation Sovereign Borders was boats being turned back and presumably that still goes on.

Yes.  The interceptions, we’ve heard from the folk who do it, that have the greatest impact on the water-borne asylum seekers not the threat of spending five or six years in retched conditions on Nauru or Manus.  Presumably those patrols, that potential for interception, will in fact be increased because Peter Dutton has put border force on high alert and prepared all sorts of contingency measures and we can only presume that will mean naval vessels patrolling our borders will be well and truly on the lookout.

Are you beginning to think, Malcolm, that all this and perhaps other things will enable Morrison to win the unwinnable election?

No, I wouldn’t go that far but I would suggest you never underestimate his capacity to do things and say things to the maximum limit of their veracity, if I could put it that way.  He has a lot of energy and he knows he’s fighting not just for the Coalition but for his own standing as a prime minister, a job he’s wanted for quite a while and he will do and say just about anything.  He has an extraordinary amount of energy for a man who doesn’t exactly look like a fitness addict and much as the Coalition underestimated Bill Shorten last year I think Labor should be careful it doesn’t underestimate Scott Morrison’s capacity to rouse the troops.

Just finally, Malcolm, the capacity of politics to amaze and delight us was put on display the last couple of days by sex scandals in One Nation.  What’s that about?  Is that interesting or important?

Lust and violence, the claims that are rocking One Nation – it’s a headline you couldn’t ignore.  Is it important?  Probably not.  Is it fascinating?  You bet you.  There are all sorts of allegations and claims of funny business between certain men and women going on within One Nation in Parliament House late last year.  These have returned and erupted in public with a confrontation between one of Pauline Hanson’s top advisers and a former One Nation senator now with – I forget who he’s with there – Clive Palmer or Bob Katter, one of those sides, Senator Burston.  Senator Burston’s claiming that Pauline Hanson once put the word on him and touched him inappropriately.  It is difficult to believe.  Pauline Hanson laughed it off and that was probably as far as it will go, but it just shows the capacity for One Nation to create all sorts of tensions and hostilities which have no way of being vented apart from the most basic sort of squabbling.  I think it’s because essentially, it’s a group of men and women who are extraordinarily inarticulate and they have no way of expressing themselves or mounting a case unless it gets down to the really basics of name-calling, and as we saw in a very minor way, a physical confrontation.

Look, there’ll be more of this.  I don’t know whether it will affect One Nation’s support, but it certainly does identify One Nation as possibly the most unique party ever to grace Parliament House.

Indeed, and Senator Burston is an Adonis, of course, and she couldn’t obviously, help herself.

Look, I might turn for him.  I mean truly he’s that sort of hunk.

Thank you, Malcolm.

Bye.

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Here’s Michael McCarthy, Chief Market Strategist at CMC Markets.  Well, Michael, things have settled down a bit this week, largely because of the developments on the trade front with Trump saying that he’s not going to hold to the deadline it looks like.  Is that how it seems to you?

Yes, it’s certainly the way the market’s taken it, Alan, when I drilled into the transcript of President Trump’s actual words, he was a bit more balanced than that saying he’d prefer not to, but he could contemplate it.  But I think the market particularly liked those comments because it speaks to an issue that we’re all very aware of, and that is that this is going to be a long negotiation.  And removing or even suggesting that that March 1 deadline could be lifted or moved back, is a recognition that that long term requirement, that the need for long discussions to sort out what are, at the moment, intractable differences between the US and China.

Yes, indeed.  In general, the market is looking a little more settled this week, wouldn’t you say?

Yes, we’ve had some confusing days trading, Alan.  I’ve got to say, there have been days when we’ve seen industrial commodities rally alongside gold, we’ve seen bonds rally alongside stocks.  Generally speaking those markets tend to move in opposite directions so trading has been a little confusing but it has definitely settled and we’ve seen a drop off in volatility across all of the asset classes.

What about the reporting season in Australia and in the US, how’s that affecting things?

It’s been very important in terms of the daily performance at the local share market.  On Wednesday for example, we had the situation where we had positive leads from European and US share markets and some good headlines, and yet the Australian share market fell on the day.  That was all about the results and in particular, a couple of market leaders like CSL, which despite seeming to deliver against analyst expectations came under pressure.  It does look like the moves up that we’ve had in the lead up to this result season has left even some of our top quality stocks a little bit vulnerable to correction despite good results.

That’s because they’re on such high PEs I suppose that they need to outperform expectations in order to justify their valuations?

Absolutely.  I heard one analyst say about CSL, “They only delivered 10% growth over the half”.  Now in a low growth environment I’d suggest that’s still pretty good, but given they’re all expecting something closer to 13% over the long run, that higher PE meant that CSL took it in the neck on the day.

How are you seeing things over the next few weeks?

Well we’ve only just past the quarter way mark with the reporting season so we’ve still got a lot to learn about the health or otherwise of corporate Australia.  But with expectations overall pretty modest, that is across the top 200 companies, we’re looking for about 5% earnings growth overall.  I think we’ll see enough to support the recent gains that market’s recorded.

What about the banks, Michael, obviously they had a good run after the release of the Hayne Royal Commission Report, and they seem to have held that, is your sense that the feeling is that they’ll hold at the higher levels?

They’re certainly still positioned defensively despite that recent rally.  If we look at key measures like price to book and going to their long term historic averages, they’re low and that suggests investors still don’t have a lot of confidence about the outlook. But the sell-down perhaps had been slightly overdone and while there is uncertainty, particularly around the Royal Commission Report, that seemed reasonable.  Now that we’ve had some of that uncertainty removed they have stabilised at higher levels, that seems sustainable at this stage.

Yeah, thanks very much Michael, see you, thanks.

Pleasure, thanks, Alan.

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And now to tell us about what’s going on in the economy and with the reporting season, early days as it is, here’s Shane Oliver, Head of Research at AMP Capital.  Shane, big fall in housing finance the other day, 6% for the month and 20% for the year.  What’s your take on that?

Well they’re certainly negative numbers and they’re telling us that the tightening in credit conditions that became apparent as we moved through last year actually accelerated into the latter part of last year.  That weakness, of course, was primarily due to investors but also, we saw weakness in owner-occupiers and surprisingly, first home buyers also saw a bit of a setback over the course of last year with finance going to first home buyers down 12%.  I guess the good news is that the first home buyer share of total lending has increased but that’s only because lending to them has declined at a slower rate than its declined to investors and other owner-occupiers.

But overall, these figures are consistent with ongoing weakness in the housing market, particularly in Sydney and Melbourne, that’s where the weakness seems to be concentrated lately but also ongoing weakness in Perth and Darwin.  It’s really just, I guess, a sign that that weakness in the housing sector will probably continue.  I don’t think it’s going to be enough to knock the economy into recession as some people keep telling us or like to say, but obviously it’s going to be a drag on the economy as housing construction declines through the course of the year and also, we see ongoing weakness in house prices weighing on consumer spending.

I imagine it did nothing to dent your view about interests rate this year, there being one or two cuts?

Yeah, we’re still seeing rate cuts later this year.  The Reserve Bank moved a bit closer in that direction last week moving from what you might call a tightening bias to what you might call a neutral bias now.  But I think they probably still need a bit more convincing; they probably want to see more evidence that the weakness in growth is going to be sustained and that that will threaten unemployment and inflation.  We’ve got a bit to go before the Reserve Bank will cut and I think that’s probably still some time in the second half of the year.  You could also make an argument that the Reserve Bank would want to see what happens in the budget, it’s likely the government will deliver some sort of tax cuts, and who wins the election because that will determine ultimately, what sort of stimulus we see from July.  They’ll probably want to wait, I think, to see who wins the election which gets us to June at the earliest for a rate cut, but more likely I think around August or November.  I don’t think the economy is sort of falling off a cliff here, it’s certainly slowed down but it’s not falling off a cliff. 

If you also look at the Business Survey which came out in the last week from the National Australia Bank and Westpac Melbourne Institute’s Consumer Sentiment Survey, both of them had a bit of a rise on the most recent readings for business for January, and for the consumer, it was for February. But they’re sort of running around levels which are sort of middling, it’s sort of average sort of levels, not fantastic, but it’s not disastrous either.  That’s telling us that the economy is not fantastic but it’s not collapsing either and I think the Reserve Bank in that context can probably afford to hang on for a little bit longer before they ultimately move on interest rates later this year.  Bottom line is we still see two cuts taking the cash rate down to 1% by year end.

You also keep a close eye on reporting seasons, Shane, I think.  What are you seeing so far?

It’s early days yet.  My take on it is that it’s been okay but not fantastic.  I have seen less companies surprising on the upside than in the last few reporting seasons.  There’s a similar number of companies increasing their dividends but interestingly, there’s more companies either leaving their dividends on hold or actually cutting their dividends.  In the broad sense, dividends are still rising but in an aggregate sense, not as much as they were before.  Most notably the two banks that have reported so far, CBA and Bendigo, both left their dividends on hold and there’s been a few others who have either cut or left them on hold.  That upwards momentum in dividends continues but at a much slower rate.  Dividends aren’t going up at the rate they used to be.  That’s partly out of necessity; bank profit growth is slow or in some cases, gone backwards and obviously they need to preserve capital in this environment we’re going through.

But the overall impression I’m getting from the earnings reporting season is that it’s okay, but not fantastic.  You’re looking at earnings growth probably running around 4% which sort of gives a bit of momentum for the share market but not a lot.  It certainly tells us that the weakness we saw late last year is overdone.  But by the same token there is a risk that the strength we’ve seen lately with the Aussie dollar powering upwards, well through the 6,000 level, might also be getting a bit ahead of itself.

Good on you Shane, thank you very much.

My pleasure, Alan.  Great to talk to you.

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Now to tell us about the latest in technology, here’s Steve Sammartino, Author and Futurist.  Steve, Amazon has just gone open source with Alexa, what does that mean?

Yeah, so Alexa is Amazon’s voice engine and what they’ve done is they’ve added a capacity for anyone to publish what they call skills.  It’s a little bit like publishing to a website, but you publish this information to Amazon Alexa and what you would do is if you had a website you would have a URL that you put in which is your web address.  And when anyone requests information about a brand, about some content, or a company that they may have invested in, the brand owner could put information in there so someone could say, “Give me the latest news on Woolworths” and you could have the investor relations page read out that information automatically.  Or any blog posts or you could say “Give me the latest finance and tech news” or “Give me the Constant Investor report” we could put that in there, and people would be able to listen to that straight through Alexa.

They’ve really gone open source.  It’s a little bit like an app store but what you’re doing is you’re directing the Alexa to go to the web look for information and then give the verbal report to people as if they would look at a screen.  It’s a really, really significant move, the move towards voice because I really think that this is the year of voice.  Commanding things on the web and technology by voice, and we also saw that at the CES where so many different items, including fridges and microwaves had Amazon Alexa added to it.

It seems to me, I must say, that it’s an obvious move.  Of course, they need to go open source because in a sense, Alexa, is a platform like Google in a way, isn’t it?

Yeah, absolutely, and it’s really the first voice platform.  One of the reasons it hasn’t been done yet is that natural language processing via computer is really difficult because language is more nuanced than just writing something down.  It seems as though they’ve perfected the technology just through the simplicity of ordering food or adding things to shopping lists on Amazon and it actually is the perfect move.

It’s almost like a little bit of a winner takes all because the company that gets the best platform that does it well, it’s almost like the switching costs become too high.  You’re right, it is the obvious move but I think the race really heats up and if Amazon Alexa has open source voice going through all of our devices and we’re using it as something to update our company news or people looking for information on corporations, then really it’s a winner takes all kind of position, I think.

The other thing that’s happened lately is you say Apple is going to launch a TV streaming service, so it’s going into competition with Amazon’s Prime and Netflix and obviously Foxtel as well?

Yeah, so Apple are purported to be launching a streaming service from March 25^th which will be a low cost streaming, something around the $10 mark, like we’ve seen with Prime and Netflix.  It’s really interesting because as the web seems to have almost monopolistic areas, you’ve got Amazon with product, you’ve got Google with search and the Facebook conglomerate with social media – they tend to be very monopolistic.  The one area that seems to have fragmented and has intense competition is the battle for the screen or the battle for the lounge room and it’s not without its implications here in Australia given we’ve got Channel 9, Foxtel and Telstra and a number of investments that Australians are largely invested in, but I think it’s going to get more competitive and more difficult for the Australian, both free to air and pay TV channels to compete against this.  We need to remember that the Apple Macs, the distribution they have with the phones in Australia, more than 50% of smartphones in Australia, it’s a very, very easy way to get people into the streaming once you’ve already got the hardware in the home.

I think that this is going to be a really big move and their move towards original content will also be super big with this.  Netflix have said that they won’t put their information through Apple TV once they compete and a lot of people use Netflix through their Apple TV, so it will be really interesting to see how this plays out.  But it’s certainly going to create intense competition for the screen and we’ll have some investment implications here in Australia for those.

I imagine the Apple TV thing will be a native app in the iPhone and the iPad?

Yeah, that’s right, it will be iPad, iPhone, MacBook, they’ve also got the little Apple TV that a lot of people have plugged into their homes, I think more than 20% of homes have that now.  The interesting question is will they come out and surprise with an actual Apple TV that’s a screen that we put onto our worlds, a beautiful nice piece of silver that people pay way too much for.  Yeah, it might even have a hardware move attached to it which is yet to be seen but certainly their ability to gain distribution almost immediately it seems as though that’s going to be easy.  I mean Netflix has more subscribers than Foxtel already in this country so it wouldn’t be hard to see Apple going beyond that.

Very interesting, thanks Steve.

Thanks Alan.

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Happy birthday, Eric Anderson, who turns 76 today.  It’s Valentine’s Day.  He used to hang around with Bob Dylan and Joni Mitchell and all those guys and he wrote a lot of songs that they sang as well.  He also wrote some songs for the Grateful Dead, but he did record a few of his own songs and the most famous was Blue River and he was a romantic, Eric Anderson as you can tell from the way he sings.

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

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