Has Facebook reached its peak?

Hello and welcome to Talking Finance, I’m Alan Kohler.  This week, we’ve got Bevan Shields, Federal Editor and Canberra Bureau Chief for the Sydney Morning Herald and The Age, talking about the latest goings on in Canberra.  Chris Weston, Head of Research at Pepperstone Group, tells us how the markets have been going and are likely to go over the next few weeks.  Alan Oster, Chief Economist at NAB, runs us through the latest economic news.  And finally, Supratim Adhikari, Technology Editor at The Australian, brings us up to date with what’s going on in Technology.  In particular, Amazon and Kogan.

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And now on politics, let’s turn to Bevan Shields, the Federal Political Editor and Canberra Bureau Chief for the Sydney Morning Herald and The Age.  Bevan, that thing about moving the Israeli Embassy to Tel Aviv to Jerusalem seems to have turned into one of those exploding cigars that the Government’s been going in for. 

BS:  [Laughs] Well, the PM’s really got himself into a bit of a jam here and I think whatever the outcome, it’s going to be one that doesn’t really please anyone.  Just a bit of background for you.  The PM announced only a few days before the Wentworth By-election and that’s a community that has a very large Jewish population that he was thinking about following Donald Trump’s lead as recognising Jerusalem as the capital of Israel and also reviewing Barack Obama’s Iran nuclear deal.  That was viewed with some cynicism at the time and it’s basically unravelled at a rate of knots ever since. 

Last week, we found out that not one diplomat or government official was consulted about this very big potential shift before it was announced.  We’ve now got Malcolm Turnbull in Indonesia warning that if they go ahead with this Indonesia will be very unhappy with the government and I understand that there are quite a few people inside the party room and cabinet who, while they might support the idea of this are very, very unhappy with this sort of shambolic process.  Morrison really needs to work out now how he deals with this because a lot of people feel he needs to back out of it, he needs to crab-walk away from it and that’s going to be a very embarrassing thing to do. 

He’s all but said that he thinks that this should happen.  So, that’s going to be uncomfortable.  That said, he could still go ahead with this.  We now know very clearly, including via Malcolm Turnbull that Indonesia’s going to be fuming and the Indonesia-Australia free trade agreement could be at risk if that happens. 

What’s going on with all these ex-Prime Minister’s running around doing things?  I mean, Malcolm seems to be a semi-official over there in Indonesia and Tony Abbott is officially envoy to the Indigenous people, and also Barnaby Joyce envoy on the drought…

BS:  And so this is what happens when we have so many PMs over five years, they’re bound to be floating around either making mischief or provoking a lot of interest.  Just last week in Parliament we had four PMs here.  We had Julia Gillard, Kevin Rudd, Tony Abbott and Scott Morrison, and I think the more they talk, the more it just reinforces in voters mines, this issue of instability in Canberra that I think is really driving people up the wall.

Yes, indeed.  How do you think the election campaign is shaping up at a federal level?  I mean, obviously the campaign hasn’t officially started yet, but does it look like we’re going to have a scare election, like media scare on one side and tax scares on the other side, just all about scares?

BS:  I think you’ve absolutely nailed it, which from a personal perspective I find terribly depressing because we’ve got leaders who should be able to talk about the issues without resorting to effectively lies and mistruths if you want to call it a nicer word.  I think on the Labor side we’ve got a very clear indication this week, that they’re going to revive the ‘Mediscare’ campaign. It was really so devastatingly effective in 2016, raising the idea that the Government, the Coalition is not committed to Medicare and they could sell it or they could outsource parts of it. 

They’ve announced Brian Owler who is a former Australia Medical Association President as their candidate for the Sydney Seat of Bennelong at the election and Mr Shorten’s already calling Professor Owler, ‘Mr Medicare’, and they’ve already started rolling out their lines that healthcare’s going backwards under the Coalition and they’ve seized on news that the Government plans to outsource some Medicare jobs in Hobart.  So, I think we’ve got a pretty early glimmer of where Labor might be going and I don’t endorse it but you can see why they would, because it was really a key issue in the 2016 election that people didn’t pick up on for a very long time but had a really devastating impact particularly in marginal seats. 

As you say, Alan, on the other side you’ve got the Coalition warning that if you vote for Labor your income tax will go up, the value of your home will fall, and if you’re a retiree you’ll be whacked with a new tax.  On both sides you and I know that the truth to all of that is far more nuanced and look, I remember when Malcolm Turnbull launched his bid for the leadership against Tony Abbott and you might remember, he basically said, “The Australian people aren’t stupid, they don’t want to be lectured with slogans.  We need to respect the intelligence of the Australian people.”  And I think in an ideal world that’s something that both parties would do, but it’s an election campaign and it’s an all or nothing campaign for both sides, so unfortunately I don’t think we’re going to be seeing much intelligence in the campaign. 

Well, that’s a depressing but unsurprising note on which to end…

BS:  Sorry to bring you down, sorry!

No worries!  Good to talk, Bevan, thanks.

BS:  Thanks, Alan.

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Now for a word on the markets, let’s turn to Chris Weston, Head of Research at Pepperstone Group.  Chris, there’s a lot of politics affecting the markets at the moment.  We’ve got the mid-terms next week.  What do you think will happen if, as expected, the Democrats take the House and we’ve got a split Congress once again.

CW:  Well, efficient market hypothesis would suggest that the news has been discounted into markets, we’ve had the Democrats commanding anywhere between a sort of 7-9% lead in the generic ballot in September, so that should be, in theory, discounted into the market and various market moves.  That said, once we’ve got month-end out of the way, once we’ve got the Fed’s balance sheet redemptions out of the way, which come out tonight, then there is a possibility we might start seeing traders actually sort of catching onto what we’ve known for a long time and start fading US Dollar strength into the mid-terms, which may in theory support emerging market valuations and some of the moves there. 

That may also resonate into the Australian Dollar because at the end of the day we are going to say pretty much anything that makes Trump look good for the 2020 election being poo-pooed, we’re going to see huge gridlock.  The idea that we’re going to see these new tariffs, this $257 billion of extra tariffs being placed on the Chinese exports will probably not see the light of day, it’s not going to get through the lower house, it’s not going to get through the Senate.  It’s a difficult one but one suspects a lot is being discounted into the market if we do see a split congress. 

But that said, I still don’t think the market has fully reacted to the extent of the news flow that we’re going to see post that split in congress which of course is going to be a huge amount of legislative issues where the democrats are going to go fully after Donald Trump’s tax records.  We’re going to talk about a debt saving debate again, we’re going to start seeing the house investigation into Russian involvement in the 2016 Election come up again.  I don’t think that’s been fully discounted in which of course should be a dollar negative and perhaps a positive for emerging markets. 

And there’s a fair bit of politics going on in Europe at the moment too with Merkel announcing she’s stepping down, the possibility of a hard Brexit, problems in Italy… How do you summarise all that? 

CW:  Well, it’s a difficult one.  Most people in various markets, certainly in Australian equities, they’re like, well we’ll keep a beady eye on these situations and we’ll come back to it when it becomes a genuine volatility event.  I think the Merkel situation can be sort of put two different ways.  I mean, she’s been a huge figurehead for the whole monetary union for so long.  She’s going to be a great loss for them, but who’s going to step into her place?  Most of the candidates we’ve seen have a fairly similar economic alignment with her.  We can’t rule out early elections there but I think probably that’s a longer term story, something we need to think about longer term. 

The Italian situation is probably more pressing.  It’s gone off the backburner a little bit over the last sort of 48 hours, but there’s no doubt in the next sort of month or two they are going to have to come back to the European Union and show a revised budget.  The way things were going at the moment, both sides are not really looking to blink here and of course that opens up a whole can of worms there so I think that’s something that we were probably looking at there but for me, more pressing is obviously the mid-term elections, how does that all look like?  And obviously we can’t rule out a Republican clean sweep, we can’t rule out a Democrat clean sweep either. 

The other big thing is what’s happening with Brexit.  I mean, overnight we’ve seen S&P coming out and saying that they’re looking at their base case which at the moment is that we still will get a last minute deal.  But they’re saying that there could be a recession in the UK.  We don’t see a Brexit deal and that’s certainly looking more and more likely at the moment.

We’ve had a succession of rises on the local market this week.  Obviously, the correction for the moment is over finishing up last Friday, but do you think that’s right.  I mean, just looking at the market and your feel for it, how do you think things are positioned now just in terms of the ongoing possibly correction?

CW:  Well, I think we need to take our lead from two sources of locations, one is the US of course and the other one is China, and I think also to an extent, the Hang Seng.  China’s a bit of a tough one.  I think they’re showing real clear concern now.  I mean, the level of issue is that defaulting in China in September, which is where we got the last data, actually moved up to about 12 issuers which is the highest level they’ve ever had.  The amount being defaulted was close to $20 billion dollars, which is by far, the highest they’ve ever had.   They are very concerned about the equity markets and a lot of people in China will use their equity holdings to get loans from banks and a lot of that equity holding has soured.  You might see a lot of fore-selling and they just want to prop up that situation.

They’re obviously very, very worried about this pull-back in real asset prices and feedback loop, that is, to the consumer behaviour and then business behaviour as well.  I don’t see a huge amount of upside there.  They show up to everything at the situation and we’re not seeing huge upside and that worries me a little bit.  In the US though, I think if you are bullish and I think personally, there’s still a lot of work to do to become bullish on that market, but we’re seeing huge intra-day swings.  Two months we were crying out for 1% moves in the whole index on a daily basis, we’re seeing sort of every hour, an hour and a half, we’re seeing one percentage point swings in the S&P and the Dow.  This a market for the brave at the moment. 

But let’s put it into context, the biggest buyer of equities is out of the market at the moment and that is the companies themselves.  As we go into November, once we get month-end out of the way, then we have about $180 billion of buy-backs that come through into the market and dividends being paid out as well.  That will be probably one of the biggest supresses of volatility we’ve seen.  If you’re bullish, that’s what you really want to see support as we go through November and a lot of their sort of macro concerns that have died down a little bit but that’s a big if.  My base case is that this volatility we’ll see will subdue to an extent.  We’ll probably see the VIX back into that 18-22% range and but you’ll still probably see the market chopping around and lacking any kind of real trend. 

Thanks very much, Chris, great to talk, as always. 

CW:  No worries, thanks.

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And now to bring us up to date on the economy, here’s Alan Oster, Chief Economist at NAB.  Alan, we saw building approvals data yesterday which showed an increase.  Should we take much notice of that?

AO:  I think you need to be very careful because what’s happening is you get bouncing numbers of units around.  The month before had a big fall and it had a big increase, but I think generally, reading through the volatility of the data, what you’re seeing is the construction sector is going to probably detract a little bit from growth as we go forward, so you can’t keep building new apartments at this sort of rate forever.  I think generally the story is that construction is probably going to detract a little bit from growth as we go forward but not a lot.

It’s noticeable that commercial approvals written on residential construction approvals at least were continuing to decline.  What’s going on there?

AO:  I think, really, you’ve got a situation where office space is sort of pretty tight in Sydney and Melbourne but is still very poor in Brisbane, Perth and increasingly, Adelaide.  I think really what you’ve got is a situation where, I won’t say they’re completely overbuilt but there’s probably not a lot of need to do a lot more as you go forward.  Again, it plays into this idea that both residential and commercial, the cycle’s going to be taking a little bit off.  The only other thing I’d say commercial is that what we’re seeing is a significant weakness in essentially retail office space, and so again, that reflects a consumer who basically still gets scared and a bit conservative in terms of their spending behaviours.

Well, no one’s going to build any more shops for a while, are they?  Or bank branches for that matter, I mean bank branches, shops, all those things, forget ‘em!

AO:  We put out a commercial property survey a few months ago and the retail space was appalling, it had a net balance of -30 and when we asked them about what’s it going to be like next year, it was like -40, so pretty poor outlook there.  

Bring us up to date with what’s happened in Europe, the GDP number, overnight?

AO:  Yeah, people were expecting GDP to be about 0.4 and it came in at 0.2.  We don’t have the individual numbers, although, looking between the lines, if you like, it could well be that Italy and maybe even Germany went backwards a bit.  There’s always a story that’s saying there’s a special factor and so in Germany they’re talking about – well, they’ve got to re-tool for some of the pollution problems, or cheating, to put it bluntly.  But generally, the story is the US economy is still really strong but everybody else is sort of slowing and particularly in Europe, in the UK and in Japan. 

The global outlook is still pretty good but the idea that we’ve had in the past that everything’s going up together is very different now.  I think the Euro’s been a bit weaker and the Pound’s been weaker, etcetera…  The world of coordinated upswings is well and truly past us and I think the global economy is probably going to slow as we go forward. 

What does that mean for Australia do you think?

AO:  Probably not a lot because the main economies that affect Australia, are the US which is doing really well, and China.  Now, people worry about trade wars but the reality is, so far we can’t really see a lot of signs of weakening in China and everybody models trade wars they make the assumption that nothing else changes, and in China we’ve already seen increased fiscal spending, we’ve seen loosening of monetary policy and the currency is weaker, so those things are offsetting those. 

From an Australian point of view, the world growth of around 3.7% is pretty good and the countries that matter to Australia are doing well.  The only thing you might say is that because the US is doing so well and interest rates are likely to go up best part of 1% over the next 12 months, you still get some weakness on the Australian Dollar and to be bluntly, that’s a US story, not an Australian story.  Given where the Australian economy is, it’s probably positive to growth as we go forward.

Great, well thanks for talking to us again, Alan.

AO:  Okay, thank you.

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And now to talk tech, here’s Supratim Adhikari, Technology Editor of The Australian.  The Amazon share price has fallen 13% in a couple of days after their quarterly earnings came out.  I mean, was it that bad, Supra?

SA:  No, the numbers actually were not that bad, I mean they were a little bit under what the market was expecting, but you know, I mean the numbers themselves were not as bad as what the share price reaction would indicate.  But you know, it’s probably more the timing of the numbers, it came at a time when the market itself has turned a bit sour on the big tech stocks, the high growth tech stocks.  I think given that the overall market sentiment has turned quite bearish on some of the big tech stocks.  I think Amazon’s numbers came at a time when  the market was perhaps a little bit less forgiving when it comes to the near-term growth prospects of Amazon.

Just fundamentally, what do you think the prospects of Amazon are now just looking at that and also just in Australia and how it’s likely to go in Australia?

SA:  Well, Alan, when you look at Amazon’s overall business, and that includes Amazon as a straight retailer where it’s directly selling goods to consumers or as a market place where it’s the middle man that sits and clips a ticket between a vendor and a buyer.  Then also of course it’s public house business which is a very healthy business, the Amazon web services business.  There’s no doubt that competitive intensity is ramping up, I mean not just in the developed markets like the US and parts of Europe, but also just in the developing markets, the future growth markets, like India for example. 

Amazon is facing greater competition.  In fact, one of the things about this Q was that it’s public cloud business, it’s Amazon web services business which makes up for about – it accounts for about 12% of Amazon’s overall business, was actually beaten by Microsoft in the Q, when it comes to revenue.  There is more competition, but does it undermine what Amazon is in the market?  Probably not.  I mean, I think a lot of people will say that the current Amazon share price is a bit of a buy opportunity.

Just on Amazon, I mean we saw Kogan’s results come out the other day and Kogan was blaming GST for their falling short – their share price fell 33% in the day, it was unbelievable!

SA:  That’s right, yes.

But I just wonder, is that going to be a continuing ongoing issue for Kogan and other Australian online retailers?

SA:  I think it is going to be an ongoing issue, but I think what’s going to happen is as companies like Kogan start to agitate more towards perhaps the advantage a global player like Amazon has, what you’re going to see is you’re going to see Governments take action.  This month, the UK Government is looking at a digital tax for example as well, right, which it would like to impose on some of the tech giants like Amazon and Google.  What we’re going to see is I think given the scale of these businesses and given the amount of revenue these companies generate globally, I think it’s inevitable that different jurisdictions and different governments are going to try to, I guess, get their part of the flesh from these companies.

I mean, justification might come from many different avenues.  It could be, we need to protect our local retailers, we need to protect the local e-commerce ecosystem.  But the general push is going to be to make these companies pay more taxes in the geographical locations where they operate and that is a long term factor that is going to way on all of these tech stocks.

Do you think that might mean that Kogan will recover, Kogan will end up doing okay?

SA:  Yeah, I think an operator like Kogan will recover.  I think this upcoming holiday season is going to be important.  It’s going to be important for all of the big e-commerce players because we’ll see what the public appetite is.  But, no, Kogan.com – I mean, the beauty of these businesses are is they’re able to manager their costs much better than say, a bricks and mortar player, right?  And they don’t have some of those overhead pressures that we’re seeing in the retail market in Australia right now.  We just saw Roger David shutting its doors which is a long-running retail entity here. 

But the thing is, the bricks and mortar model is clearly having to face so many overheads that that’s certainly on the nose.  But I think someone like Kogan where they can control their supply chains a lot better, they can really manage their cost per unit and move their inventory quickly through discounting or through special offers.  They should be able to recover.

Can we turn now to Facebook – I mean, do you think we’ve seen peak Facebook, if I can put it that way?

SA:  A lot of these stocks, when we talk about Amazon, Facebook, Google, all sort of investors are asking that question, it’s have we seen them reach the saturation point?  I think Facebook is particularly susceptible to that kind of thinking, because it’s got about 2.2b users.  But their audience numbers are not growing anymore, you know?  I think you could say in some ways the challenge for Facebook now isn’t so much on how much more they can grow their overall audience footprint, it’s really about trying to think about how can they make more money from them, right?  That’s the real challenge for Facebook. 

The other thing of course is the sort of regulatory pressure that Facebook is coming under right now and this will have an impact on all of the other tech stocks as well.  Which is, we’ve seen through GDPR there are new privacy laws coming out.  There’s a big focus on privacy in Europe and that’s sort of extending now across the globe.  That poses a real challenge, especially to Facebook, but even to Amazon to that extent, on how they can mine consumer data and monetise that data, that’s definitely coming under scrutiny. 

Great to talk, Supra, thanks very much.

SA:  No worries, Alan, always a pleasure.

Happy Birthday, Tina Arena, who turns 51 today.  Here’s her song, Sorrento Moon, reminiscent of her childhood memory spent at Sorrento on the Morning Peninsula, and it’s a beautiful song.

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