Markets flying high, the credit crunch, and Facebook's privacy play
This week in Talking Finance:
- Dennis Atkins, National Affairs Editor at The Courier Mail, tells me how the election race between Scott Morrison and Bill Shorten is progressing;
- Diana Mousina, Senior Economist at AMP Capital, runs me through the latest economic data;
- Julia Lee, Equities Analyst at Bell Direct, explains why April was such a good month for the markets; and
- Steve Sammartino, Author and Futurist, tells me about the Facebook Developer Conference and what Mark Zuckerberg is up to.
Hello, and welcome to Talking Finance, I'm Alan Kohler. Well, this week, we've got Dennis Atkins, national affairs editor at Brisbane's Courier Mail, telling us about the race between ScoMo, Scott Morrison – I hate that term ScoMo – and Bill Shorten is going and, in particular, the impact that Clive Palmer, someone that Dennis calls a two-bit shyster, is having on the campaign. Diana Mousina, the senior economist at AMP Capital runs us through the latest economic data. Julia Lee, equities analyst, at Bell Direct explains why April was such a good month for the markets. And Steve Sammartino, author and futurist, tells us about the Facebook Developers Conference and what Mark Zuckerberg is up to, and how privacy is still front and centre, more so even now.
[Music]
[Parliament audio clip]
And now to discuss the latest in the election campaign, here is Dennis Atkins, National Affairs Editor at the Courier Mail. Dennis, you had a lovely line about the debate, calling it a smirk-off because they both started smirking and I thought that was quite interesting. But, where did you think they got to, at the end of the debate?
DA: Well, by the end of the debate, I think Bill Shorten sort of came out ahead, mainly because he had something more to talk about than Scott Morrison. Scott Morrison, I think, thought it was going to be clever for him to go into this election straight off the back of the budget and just use the budget with its big tax cut centre piece as his selling point. But that's basically all he's had. He hasn't had any really new big things to announce, whereas Bill Shorten started off with the budget reply on the cancer policy, and has since rolled out a number of other large policies with the most recent really big one being the child care one last weekend.
So, he's had new things to announce. He looks like he's talking to a greater percentage of the Australian population, and he looks like he's got some sort of vision and I think even a number of the usual conservative commentators who are on Scott Morrison's side have been saying, this week, that he is lacking the vision thing and I think they're right.
The headline on that piece that I was referring to there was ‘How did the Coalition get hijacked by a two-bit shyster’, and you're referring there to Clive Palmer. That was actually a quote from Bill Shorten, I think. But, still, you’d seem to agree with the sentiment. And it does seem like Clive Palmer is the wild card in this election. He's the thing that's different this time, really. And particularly since the Coalition did a preference deal with them. What do you think that's going to lead to?
DA: Well, I think Colin Barnett, the former Western Australian Premier, who did a preference deal with One Nation in that state, trying to win lower house seats in exchange for giving One Nation a leg up into the upper house. He didn't win any lower house seats, or not enough. He actually lost so many, Labor scored a record victory over there. And One Nation ended up with three upper house members. Now, I think the danger for Scott Morrison and the Coalition is they're not going to get any real benefit in the lower house from Clive Palmer. If they do, it will be pretty marginal. But they may end up having Clive Palmer back in the Senate with two, three, maybe more senators.
And we know what happened last time. They all argued amongst themselves. They all resigned. They all formed smaller and smaller factions. There was the Lambie faction, the Lazarus faction, and so on, and Colin Barnett was quite right. He said, "Don't do this. You'll regret it." Clive Palmer is a destructive force, an old mate of mine up here in Brisbane, I'd never let him forget it, he gave Clive Palmer one of his first jobs in the National Party in the '70s, and he says that Clive Palmer is only ever interested in two things, either self-interest or vengeance. He said the other thing you’ve got to remember is if Clive's lips are moving, he's lying.
[Laughs] Yeah, but the difference, I'm not a political expert, but it seems to me the difference between Colin Barnett and One Nation WA, and Palmer, and Scott Morrison now, is that Clive Palmer is spending 50 million bucks.
DA: Oh yeah.
He’s all over the place. One Nation has never had any money.
DA: Well, that's dead right. They went off to America and tried to get some money out of the Koch Brothers, but that just got them into more trouble. Yes, he is doing more and we really don't know what sort of impact Clive Palmer is going to have on this election until voting day. Colleagues of mine who are up in Moranbah and Clermont for the Bob Brown, Anti-Andani convoy... Clive Palmer was there. Said that everywhere that he went, he was treated like a king. He was cheered in the pub. He was cheered out in the street. He was cheered at the mining rally and this is a guy who sacked 800 workers up in Townsville. All of that is forgotten. I'm not saying it's forgiven, but it certainly seems to be forgotten, and he's bought a memory lapse with this $60-80 million ad spend. It's quite extraordinary. We've never seen anything like it in Australian politics.
But he's a coal man, right? And he's playing to the north/south divide that now is in existence in Australia over coal, right?
DA: Oh, yeah, absolutely. Although Clive has never actually put a shovel in the ground. He's been involved in some iron ore mines over in WA, but his mining exploits are more buying and selling rather than prospecting.
Leaving Clive Palmer aside, how do you think the leaders are going?
DA: Well, I think Shorten has had a good week after a couple of pretty bad weeks, and I think that conversely, as these things usually happen, Scott Morrison has had a tougher week after two pretty easy weeks. Scott Morrison has been put under a bit of pressure this week, and also he's been dogged with the Palmer preference deal, he's been dogged by a number of coalition candidates who had things in their internet past that sort of came to light. He's sort of been dogged by all the rats and mice of the campaign, whereas Shorten has had a week where he's been able to go out there and get on the front foot with selling his vision for climate change and other policies that he wants to implement. He's also got something to talk about to counter, in his mind, the attacks on his taxation policies, which are very controversial. But he can now say, "Oh, look. We're going to use that money to increase child care. Tens and tens of thousands of Australians, are giving them either free child care, or greatly reduced child care. He's had more to talk about. Scott Morrison has been a been stranded in terms of something new to say.
Do you take much notice of the Newspoll, 51-49, which would suggest that it's winnable for the coalition?
DA: Well, every election is winnable until it's not. I think Newspoll... There was a bit of debate among the political scientists about the methodology. I've known David Griggs for a very, very long time I think he's certainly the best public pollster in the country. I trust his numbers. I think they’re probably as close to as you're going to get. But the big problem with getting a two-party preferred vote is that with Palmer in the field, you just don't know what his final impact is going to be. But I think this feels like an election that's about 51-49, 52-48. It's in about that space. Where exactly those votes are, we don't really know. They may be locked up in Labor seats. They may be stranded in seats where the Coalition has got the votes already and doesn't need anymore.
Just finally, I live in Hawthorn, Melbourne, in Kooyong and Josh Frydenberg has got two, what you'd call climate change people, up against him, Julian Burnside from the Greens, and Oliver Yates as an independent. But I was struck yesterday by a pamphlet that came in the mail from Josh attacking Oliver Yates. So, I don't think I've ever seen a sitting member, particularly in a safe seat, as Treasurer of the country, putting out negative material about an independent. It's incredible.
DA: It is extraordinary. I think Josh will be okay. But you would have seen what happened in that area, and nearby in the state election, and I think that gave everybody a fright, Josh included. I'm told that there is a swing on in Josh's seat, but it's not enough to take him into looking for a new job territory. But if there's a swing, and I've heard of a figure of about 6%, which would take him down to somewhere close to 53% on the primary vote. But if there's a 6% swing in Kooyong, imagine what's going to be happening in some of those other seats in the eastern suburbs of Melbourne. I think this is where Labor could end up winning the election in Victoria. Everybody said it was going to be up here in Queensland. I'm starting to think that the election is going to be won for Labor in Victoria.
Yep, very good to talk to you Dennis. Thank you very much.
DA: Terrific, Alan. Thanks. Cheers mate.
And here's Diana Mousina who's a Senior Economist at AMP Capital. Diana, what did you think of the credit data out this week?
DM: I wasn't really too surprised by the continual weakness in credit growth in Australia. It's really in line with the other indicators that we have around slowing investor demands in housing and for owner occupiers as well. The tightening in credit conditions that we've had in Australia is likely to continue for the next year. There's going to be another round of comprehensive credit reporting that the banks have to adhere to in the second half of this year, so we think the weakness in credit growth will continue, particularly in the housing component. The business side might increase a little bit because mining investment, and non-mining investment as well is looking a little bit stronger now.
Do you think that this will continue to weigh on the economy and inflation?
DM: Definitely. The credit growth and GDP growth tend to move fairly well in line together. If we see a further step down in credit activity, we're likely to see that GDP will remain sub-trend or subpar, and we think that growth is only likely to be just over 2% in Australia this year, which is pretty low considering that in Australia, we have about 1.5% population growth, one and a half percent productivity growth, which means that our average growth rate should be at about 3% yearly.
Yeah, and the other day we had inflation for the first quarter at 0%, headlined at least. Did that cause you and Shane to increase your number of rate cuts that are likely to happen? I think you guys are at two cuts this year. Is that going to go up?
DM: We brought our rate cuts forward, so we have been expecting to rate cut since December last year actually, after we got that weak GDP print, and the reason for why we brought it forward, we now expect a rate cut to occur in May by 25 basis points, and another one probably in July, in the second half of the year. The reason why we brought it forward was because the Reserve Bank has not been talking about a situation where underlying inflation is actually falling, and that's exactly what we're getting here in Australia.
And although they have been saying that they need to see the unemployment rate moving higher before they were to consider interest rate cuts, we think that the weakness in underlying inflation will really prompt them to revise that scenario that they've been talking about, which is why we think that they are going to cut in May, although of course it's going to be a close decision. I think that Phil Lowe is more reluctant to cut interest rates than Glenn Stevens was, and he's probably more reluctant at this time now as well, because he doesn't want to inflate the housing market again.
However, at the same time, they also have to offset the negative wealth setbacks that's been happening in the housing market, which has been a regulatory driven downturn in housing. We still think that at the end of the day, they will cut the cash rate in May, and if not May, then in June.
And speaking of monetary policy, what did you make of last night's Fed meeting and outcome?
DM: I think that the Fed is still toeing the line that rate cuts are not likely. The market is still pricing in a rate cut actually, over the next six months or so by The Fed, which I think looks a little bit overdone. The Fed was probably, they have generally been quite neutral over the last few months in saying that they have to be patient and look at the data, but I think that Powell really emphasised the fact that they're looking through some of the weakness in inflation recently, they see some of the impacts on prices, things like portfolio management costs as being transitory, and on some measures of inflation, inflation's still running at their 2% target.
So, I think that they are still going to be, generally they will maintain a positive view on the economy. We don't think that rate cuts are likely from the Fed. I think that that will be taken out of market pricing and generally we're still quite positive on the US economy for this year. The consumer still remains pretty good, labour market's holding up really well, and it's driving wages growth up higher in the US. We're not as pessimistic as what the market is pricing at the moment.
Right. So, if that's adjusted so that the market has to take out a rate cut from its pricing, that's going to be negative for shares, positive for the US dollar isn't it?
DM: We have been of the view that US shares are likely to consolidate because they have had such a large run-up and we just see some areas of the market in the US by industries being a little bit overvalued and we think there's better value in other global markets like Europe or Japan where earnings growth is still okay. In Europe actually, earnings growth expectations are looking pretty good, whereas in the US, we think that earnings growth will also be revised lower for the fourth quarter, because fourth quarter earnings expectations are still running at a very high level.
It just looks like the market's pushed back what they were expecting for the first few quarters of the year into the last quarter. I wouldn't be surprised if we see a bit of a turn back in US equities, but generally we're still expecting decent growth in the US, which means that we're still positive on risk assets overall, but we might just see that near term weakness in US shares because they have had such a good run-up over the past few months.
Yeah. Great to talk to you, Diana. Thanks very much.
DM: Thanks very much, Alan.
And now to give us the lowdown on the market, here's Julia Lee, Equities Analyst at Bell Direct. Julia, May got off to a good start yesterday with the ANZ result beating expectations, taking the market higher, but today it's NAB, so it's a bit all over the place, and NAB cut its dividend, so I guess it's going to be interesting to see what happens to the market with the NAB result.
JL: I think one of the things that has been quite supportive of the market in May so far has been the bank results. Bank and...we will see three out of the big four banks release half year numbers, as well as Macquarie Group, and ANZ was off to a great start yesterday. Unfortunately, it looks like NAB out with a softer result today, and it's the first out of the big four to cut its dividend as well.
It looks like the shares could come under pressure, but of course, while we have a look at what the market is being driven by at the moment, it's not only the domestic factors, but the global factors which are key at the moment. The mantra for the markets at the moment seems to be down 5%. The Federal Reserve meeting overnight was a very important one for the markets, and we did see the US stock markets lower on the back of that.
What was the reason for that? Because I thought that Powell said there's no need to move interest rates, either higher or lower. I suppose that's the thing, it's really now a rate cut I guess, isn't it?
JL: I think there was a bit of everything. Initially the markets moved higher on the back of the statement that as his press conference developed, we did see the market moving lower. The updated press statement did highlight that economic activity did rise at the solid rate, and that compares to the March meeting press release which said something along the lines of economic activity slowed from its solid rate in the fourth quarter.
But unsurprisingly, the Federal Reserve reiterated its intent to remain patient and it is very much going to be data driven. But on the back of the statement and the press release, by the end we did see the S&P 500 down by 0.8% and if we have a look at where the Aussie dollar is sitting this morning, it is weaker, so the US currency has strengthened and the Aussie dollar's at 70.2 US cents.
Yep. As you say, the April month was fantastic for the market, up about 12%, I think. The ASX 200. It's now only 5% off the pre-GFC peak, so looking quite strong. Where do you see the market valuation at the moment? Do you think that it's a bit stretched and might come back, or do you think it'll hold at this kind of level?
JL: First of all, April is the best ranking performance month for the Australian share market since 2000. The average return for April has been 1.7% and we saw the return of 2.3% so that was greater than the average, and every single sector moved higher. The only one exception being the materials sector, which was driven by the fall in iron ore prices with Vale hitting the greenlight to bring back supply online after its Brazil dam disaster.
But the best areas were consumer staples, as well as tech, and it really shows the momentum in the Australian market at the moment. I think what the market is tussling with in the medium term is the earnings outlook versus what's happening in terms of the central banks, and if we have a look at the earnings outlook for the Australian share market, a year ago we were talking of earnings growth of more than 7% for the market, and now expectations are below 3% for earnings per share growth.
In terms of the earnings picture, it does remain relatively soft. On the flip side, the Federal Reserve has indicated that it will remain patient and supportive of markets, and I think that's what giving the market a bit of confidence at the moment. The mantra still remains, don't fight the Fed, and the momentum, traders seem to be winning this one, but of course here in Australia, we're also watching domestic interest rate policy and the market has priced in two interest rate cuts. We are seeing some of the bond proxies in market, like Sydney Airports, as well as Transurban, seeing some renewed interest, and no doubt that the bank yields will look a little bit more attractive as well.
Yeah, my reference to 12% was for the first quarter not just the month, so it's actually been a fantastically strong first quarter. What interested me about that was that it's been pretty much across the board, the resources, banks, and industrials have all been up around 10 or 11% and I think the case of industrials, 15% for the quarter. That's not just the quarter, it's for the four months so far, just continued on in April, and then in May so far. Look, I mean, it's been a fantastic start to the year, hasn’t it?
JL: It has been an incredible start. I mean, you look at the top 20...and you don’t accept that it’s company...blow the lights out of the water, because they do tend to be more mature businesses with stable cash flows and high dividend yields. But they're up around about 12% in year to date so far. We're seeing the benchmark 200, index up around about 13%. Then you go to the small part of the market, the small odds and that's up around about 17% so it has been impressive.
I mean, the one area that's been a huge standout has been the tech sector. It's extremely small on the Australian share market but it's up 32% in 2019 so far. So, continuing to back those strong growth companies because they're the ones that are outperforming.
And I think...in this market, although we are seeing some good returns for some of those defensive sectors on the market like healthcare and utilities, they're actually the worst performing sectors with a rise of 9% year to date.
Yeah, very interesting Julia. Thanks very much.
JL: Always a pleasure Alan. Thanks.
Now here's our regular technology correspondent, Steve Sammartino, author and futurist. Steve, Facebook had its developer's conference the other day and Mark Zuckerberg made a speech, as usual, and he seems to have cracked the joke. What was the joke?
SS: So, he said that we haven't had such a good reputation on privacy lately, as if that was kind of an understated joke and he just was left with crickets. It's been going all over the internet where people can see Zuckerberg trying to make a joke and you can't help but think someone from his PR department has given him the script there and it just hasn't quite landed.
As we all know, the most socially awkward person runs the world's biggest social network, which is strange. But to make a joke about privacy and security when people's lives have been at risk and you’ve potentially impacted democracy, really in poor taste and strategically not such a smart decision.
But kind of the general response I've seen from the conference has been that really, they're not matching their words with actions. In particular, they're not allowing the deletion of history, which Google seems to be doing. What's going on?
SS: Yeah, in their conference 12 months ago Facebook announced that they will add a delete all history feature. So you'll be able to go into any of your Facebook services and delete all of the history, give yourself a clean slate. As we know, in life we want to have a clean slate and don't want to have everything drag around behind us from yesterday's behaviours. Twelve months has passed and they still haven't implemented that feature. They still have a lot of fines as well. They in their last profit announcement just two weeks ago Facebook added $3 billion to allow for an FTC fine that they're probably going to get within their allowances.
Guess what? In the aftermarket of that announcement they had a $40 billion market cap gain. It seems that the market doesn't care so much that privacy isn't a strategy that Facebook seems to be implementing. In their F8 developer conference they had some things like groups and events that are more private. They said privacy's the future. They're going to make likes less prominent and Messenger to be focused more on close friends than what other people are doing. So they're having some lip service in relation to that but they're not really doing anything that looks like action against privacy and security.
Google, on the flipside, have just announced a new feature where you can auto delete all of your search and all of your location history data, and even have a setting where every three months it deletes itself. I think that Google are moving towards this in a way that Facebook aren't. But I can't help but think that Facebook's business model is associated with long historical data and your personal opinions and value systems. Whereas Google's more based on transactional actions of things that you're doing and want.
The business model with Google has this one that probably can get away with having a delete history function, whereas Facebook's doesn't suit it as much. But I think that history's going to be on the better side of Google and enabling people to delete things than it will be for Facebook.
Do you think therefore that Facebook's fundamental business model is going to increasingly come into contact with legislators?
SS: Absolutely. I think this is the digital safety dance that we're seeing at the moment where big companies realise that we're going to see a lot more legislation in privacy and security, especially as digital now enters the physical realm. In the past you say well, you just got security hacked and it was just photos and information, maybe some banking stuff and finance but it didn't sort of have that physical impact. But now that you're going to see the internet driving our cars, managing our electricity grids and all manner of physical things from things that are inserted into our body that are regulated by the internet, it's going to get serious this legislation.
I don't think Facebook's business model is going to survive it. The idea that they're going to facilitate privacy and security within their business model which Facebook are claiming, I actually think that it's not possible. Because their whole business model is predicated on people sharing things in outrage, which gets 80% of the shares as things that are of an extreme nature.
If they move to a private messaging service the profitability just won't be there because the incentives to share will go away, which is what Facebook is based on, whereas Google is based on information that I'm seeking, so there's quite a difference.
Just finally Steve, tell us about this new legislation in California which they're calling The Right to Fix legislation. What does it mean?
SS: Yeah, the Right to Repair legislation, this takes us back historically Alan, to DMCA, the Digital Millennium Copyright Act, which came in around 2000 in the US where technology companies pushed for software to be protected so that people couldn't use software and fix software. As you know, we fix cars, we fix factories and tractors and all of those things in the industrial world but software's different. We're not allowed to fix it. It's seen as an infringement of copyright. A lot of people have been saying, well, that doesn't work anymore now that software is in physical things like motors in cars and tractors. They're all run by software and so we can't fix these things anymore.
California and a number of other states in the US are pushing for legislation which allows people to get into the software and fix things that are physical that have software inside them. Apple are lobbying against this. Rumour has it that they went and lobbied to people in Congress showing how smartphones opened up and lithium ion batteries could be punctured and because fires and all manner of things because they don't want people to be able to fix their product. Because people not being able to open it up and change the product and fix it is a big profit spinner for these guys because you have to replace the phones because you can't fix them.
Even John Deere, the tractor manufacturer, has been against it and many of the care manufacturers. But, for me it's an important legislation around the world so that we can sort of maintain our sovereignty. I think that once someone buys a product, whether it has software in it or not, we should be able to fix it. Watch this space. I think that the tech companies are going to lose this battle and that our ability to fix things and have privacy is going to come back. In fact, you know what, it's a really big business opportunity because privacy will become an industry and being able to fix things, so, something we're going to have to pay close attention to.
That's very interesting Steve. Thanks very much.
SS: Absolute pleasure, Alan.
Happy birthday to Frankie Valli who turns 85 tomorrow, would you believe the front man of Four Seasons. I wonder if his voice is broken yet. He's 85. Good heavens. I reckon there's probably no better track than Sherry. Let's hear that.
[Music]
That’s all from me, enjoy the rest of your week.
[Music]