Nine's Fairfax takeover, by-elections, construction, Australia's [lack of] inflation and more
This week we discuss the Nine's Fairfax takeover, the pending global economic storm, the upcoming by-elections, construction outlook, and Australia's lack of inflation.
For the answers, I turned to:
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- Stephen Mayne, author of The Mayne Report;
- Jonathan Pain, author of The Pain Report;
- David Briggs, founder of Galaxy Research;
- Adrian Heart, senior economist with BIS Oxford Exonomics; and
- Jo Masters, senior economist at ANZ
G’day and welcome to Talking Finance I’m Alan Kohler, and it’s a bumper edition this week. Things were looking a bit snoozy in Australia, although plenty happening in the USA as usual, as well as the tragic fires in Greece. But then yesterday, up pops the Nine takeover of Fairfax, which is the biggest news in the media for years and who best to talk to about that than our own Stephen Mayne.
On the matter of Mr Trump, I gave my old friend Jonathan Payne a call, he’s getting a bit gloomy about things because of the trade war and is now suggesting we could be in for stagflation, which is the dreaded combination of economic stagnation and inflation, so I thought I better ask him to expand on that. Tomorrow is the five by-elections of which two really matter, Longman and Braddon, so I asked David Briggs of Galaxy, he does the news polls for The Australian, to give us a preview.
Adrian Hart of BIS Oxford Economics expands on his prediction of a severe downturn in housing construction from earlier in the week. And Jo Masters of ANZ Economics brings us up to date on Wednesday’s inflation data. Now here’s Stephen Mayne to talk about the Fairfax-Nine merger.
Stephen, one of the things that occurred to me when I saw the news about Fairfax and Nine merging is why did it take so long? And I then looked at the share prices and of course the reason is because a few months ago Nine was smaller than Fairfax in market cap terms and had a big pop up in its share price after the half-yearly results and became bigger, so then it’s on top.
SM: That’s right. You can often use your shares as a currency and Nine shares having run up to $2.52 gave it a premium pricing. Fairfax shares had fallen back down to around $0.77, so Nine could justify offering a 20% premium on those share prices and interestingly the prices have narrowed today. Fairfax up 13%, Nine down 10%, reflecting the premium. The control premium which gives Nine the chocolates, which is the Chair and CEO position. So yes, it is a takeover, they’ve got the name, the Fairfax name disappears and it’s going to have some big political and media implications.
My impression has been that Hywood and Falloon have been trying to sell the business for quite a while. Do you think that they’ve undergone a semi-formal process?
SM: I’m not sure, I mean whether they’ve gone to others in the market. I mean, this is the natural relationship because of Stan in particular. Stan has been a very successful video on demand business. They’ve got to know each other, they’ve worked well together. Greg Hywood is ready to retire, he’s a one-company CEO and you often get CEOs after many years they look to sell the business on the way out. He’s ready to handover, so I think it is a ‘Fairfax we’re ready to be sold’ situation and I think Nine saw their share price had got that high.
They’d previously shunned the Fairfax business because of the legacy of print, they weren’t interested in the legacy of print and I think Fairfax have got the costs down in print so much and they’ve shown the success of Domain and radio, that that is attractive enough to get Nine over the line in terms of paying a premium for an old media business.
And what do you think the implications are for media and for politics and so on?
SM: Well having Malcolm Turnbull coming out and endorsing the deal strongly today and Peter Costello, obviously a former Liberal Treasurer as the proposed Chairman of the new business. I think there will be some politics about diversity and Peter Costello and his influence and loss of jobs. I think $50 million of savings and the statement in the document that the Nine board will review the business to reposition it for its digital future, that’s pretty ominous for print and I think there’s a lot of nervous journalists around about newsroom consolidation, like we’ve seen in Perth where they’ve put together The West Australian with Channel Seven because they’ve got the common ownership over there.
So I think you’ll see quite a debate about political influence, loss of journalistic resources, mergers, cross-promotions and of course, the ACCC will do a formal investigation over 12 weeks because this is a deal that just could not have happened until the law was changed last year getting rid of the two out of three rule because Fairfax will be a powerful player in radio, in television and in print and we’ve never really had a company like that because it was against the law since those Paul Keating media laws of the 1980s.
Indeed. When they put The West Australian together with Seven in Perth did it result in a lot of journalists’ redundancies? Do they share news stories then between the TV and print?
SM: Yeah, there’s a joint newsroom. You can imagine that you’d think about Fairfax in Sydney and Melbourne, that wherever Nine and The Age and The Sydney Morning Herald are now, imagine a co-located future. You would therefore imagine that you would be doing some stories for TV and cross-promoting those in newspapers. I guess people talked about that as well when Fairfax bought Macquarie Radio and we haven’t seen too much overt connections, if you like, between 3AW, 2GB and The Age and The Sydney Morning Herald, so that will be a very interesting situation as to how they manage a $50 million in claimed savings. But you can understand the uncertainty amongst many of the old school journalists.
One interesting side line is that Fairfax and News Corp recently announced that they were going to share printing and also Nine and News have combined to do a joint venture on a new business TV channel called Your Money, so separately both Nine and Fairfax have done deals with News Corp, what do you think will happen to them?
SM: Well I think the News Corp Newspaper-Fairfax joint venture was probably one of the most important deals in terms of getting Nine over the line because it further reduces the legacy problem with print, so I think that’s just a logical sharing of resources because News in particular had surplus capacity because Fairfax had done much more aggressive closures of their major Sydney and Melbourne print plants. So I think that deal obviously stayed and makes sense and was attractive for Nine. As for the joint venture between Nine and News, that’s of a smaller scale, it’s just around programming and I think you would see less of those going forward because logically it would be Nine working with its own partners at Fairfax in terms of more programmatic arrangements.
Now to talk about the markets, I’m joined by my old friend, Jonathan Payne, and he’s feeling a little bit apocalyptic, here he is.
Jonathan, you’ve come back from a week in Bali feeling a bit apocalyptic, I think. You seem to be thinking that things are not going too well. Tell us how you feel.
JP: Well, Alan, yes it was an enjoyable time in Bali and I was there during the time one of the surfers told me they were seeing some of the biggest waves in 20 years. I think reflecting, sitting on a beach does provide one with some kind of perspective and perhaps kind of enabled me to put it all together with respect to my fundamental views on markets. As you know, Alan, at the end of last year and certainly into early 2018, I highlighted my very strong conviction that inflation in the United States, but in much of the developed world, would rise much more sharply than the consensus at that time was anticipating. And I think the data since that time has confirmed to me that we’re seeing a very significant increase in inflation. I’ve said, for example, that I think wage inflation in The United States is like a coil spring, which I think is currently springing.
If I look at all the data in recent months it would tend to suggest that the United States faces an almost perfect inflationary storm and I do believe we’re at an inflation inflexion point. More latterly, we saw the IHF market summary of manufacturing conditions in the United States – I just want to read a comment from their report which was just published a few days ago. ‘Trade frictions have clearly become a major cause of concern especially among manufacturers. Firms have become increasingly worried about the impact of tariffs and trade wars on demand prices and supply chains. July saw the steepest rise in prices charged for goods and services yet recorded by the surveys as firms passed rising costs onto customers. In turn, frequently linked to tariffs. What’s more, supply chain delays also hit a record high amid rising shortages of key inputs, which is usually a harbinger of further price rises.’
Now, we all know, Alan, that we’re about to see a second quarter GDP report from the United States this Friday. I think we’ll see a fall in front of the decimal point. The fundamental backdrop in The United States is very clear in my view. Number one, we have a very strong US economy, driven by obviously the stimulatory tax cuts. In fact, I’ve described the US economy as being on fire. I think we have a Fed that is pretty much on autopilot and at the beginning of the year I said I thought the Fed would increase rates four times, that means we’re going to have two more this year and into the next. The Fed really has painted itself in a corner. It has to raise rates because of the obvious evidence of a strong economy, accompanied by a rising inflation and I think the markets need to kind of really recalibrate all of their relative valuations insofar as for more than a decade, Alan, fund managers in particular have lived in this kind of cosy consensus of lower for longer and we’re at an inflexion point now in terms of both inflation and also the monetary policy cycle.
But Jonathan, you seem to also be predicting stagflation in 2019, not continued growth?
JP: Yes. This is where it gets, I think, rather interesting. We have this rising inflation and the present day strength in the economy, however the Fed therefore feels compelled to raise rates. We know from the shape of the US yield curve, which has been flattening as you know, that the market is saying, ‘Wow, you better take it easy here…’ because by 2019 the market is suggesting the US economy could be slowing. So we have this kind of combination of rising inflation but with an expectation of slowing growth next year. As we know, and Alan, you certainly go back long enough to remember those nasty pernicious days of stagflation, namely rising inflation accompanied by a slowdown in growth, if not a recession.
That was in the 70s, and in fact, stagflation is poison for the market. There was a bear market for most of, if not all of, the 70s.
JP: That’s exactly right. Stagflation in fact is a very uncomfortable environment for equity markets, you’ve got rising cost pressures and obviously declining revenues, that’s a very uncomfortable reality. I have recently in my weekly Payne Report been highlighting the prospect of stagflation and I’ve been very shy of late to use that word because I know how dangerous that word is, but everything I’m looking at now is beginning to paint the picture of stagflation over the horizon. Whether that’s kind of mid or late 2019, I’m not yet quite sure.
But, Alan, this whole conversation and the economic environment we’ve just been describing is taking place at a time where we have massive disruptive influences coming through in terms of the escalation in the trade war between The United States and China in particular. Now, we know full stop that protectionism and tariffs are in of themselves inflationary, so if we throw a trade war and the obvious inflation ramifications thereof into the mix of a very tight labour market, rising wage inflation, rising input costs and the expectation of a slowing economy, you then add a third kind of factor into this perfect confluence, which is why I’m beginning to think we face a perfect storm.
Markets are not good at looking at the kind of non-linear extrapolations. For example, investors generally look at the recent past and extrapolate in a linear fashion into the future. We saw that in 2006 and 2007, analysts and economists couldn’t get their heads around the simple reality that the United States was going to go through a period of very massive dislocation, because they’d seen the last five years, everything was happy and hunky dory and they failed to see the oncoming almost depression in the United States.
Right now, I think investors are failing to understand that we are seeing a very different change in terms of the economic environment, first and foremost then inflation which has been dormant for so long, is now revealing its ugly head and we have that at the same time that we have the disruptor in chief, namely Donald Trump in a de facto economic war with his great adversary, China. I don’t think Trump is going to take a backwards step and just before we went on air, Alan, you and I spoke of the significance of Steve Bannon. I’ve often said that I believe he was the primary architect of Trump’s victory and Steve Bannon has repeatedly said that the United States is at war with China and we also know as we move towards the all-important mid-term November elections in The United States which I believe is a referendum on the Trump presidency.
That anti-China talk for so-called China bashing rhetoric from Trump is very, very popular with his base, particularly in those significant states that won him the election, namely Michigan, Wisconsin, Pennsylvania. So I don’t see any reason why Trump, particularly that he now has an effective trade war cabinet with people such as Peter Navarro who, Alan, we recall wrote the book in 2011, ‘Death by China’, there is no way I think Trump is going to take a backward step…
I’m going to have to leave it there, Jonathan. We’ve run out of time unfortunately, but I think you’ve made your point.
JP: I hope so, Alan. [Laughs]
Very much so. I appreciate it, Jonathan, thank you.
JP: Thank you, Alan.
I’m joined now by David Briggs, the Managing Director of Galaxy Polls, and they do the news polls for News Corp. David, obviously it’s all about the by-elections on Saturday and it appears that Longman and Braddon are the two seats that are really under contest. Do you think it’s possible that the Liberal-National Party wins both of those?
DB: It’s very possible. Looking at these two seats, it’s interesting. There’s been no set swing in the section 44 by-elections, so we’ve got no real compass to go by. Barnaby Joyce enjoyed a 7% swing and John Alexander in Bennelong, almost 5% points against him. Things like this make these by-elections a little tricky. When we look at both Longman and Braddon, we actually see there’s incredibly good reasons that Labor should retain both seats, but there’s also very good reasons for Liberal or LNP to win both as well.
Just firstly looking at Longman, we found in our state breakdown for Queensland, which is a news poll survey that we do, that in fact Labor support in Queensland has increased from an historic low of 30.9% in the last election to around 38%. That should give Susan Lamb a sufficient buffer to retain the seat. But the problem that we found in the poll that we did for the Daily Telegraph recently was there’s a relatively high level of dissatisfaction with Susan Lamb within the electorate and that’s going to vote against her.
And what about One Nation preferences there?
DB: The One Nation vote is expected to be high. The seat of Longman comprises two state electorates, Pumicestone and Glass House. In both of these seats, One Nation picked up 23% of the primary vote at the last election. Interestingly, in Pumicestone the One Nation candidate preferenced the LNP and 71.6% of preferences went to the LNP. In Glass House the One Nation candidate preferenced Labor ahead of the LNP and yet 62% of preferences went to the LNP. My expectation is a very high proportion of One Nation preferences will be directed to LNP and in our poll we found about 18% of voters in Longman were likely to vote for One Nation in this forthcoming election.
And so that removes, does it, Susan Lamb’s buffer?
DB: Potentially, that could remove the buffer. Don’t forget that in fact it was One Nation preferences that got Susan Lamb over the line in 2016 because One Nation preferenced Labor ahead of the sitting member, Wyatt Roy, and 56% of the preferences flowed to Labor at the 2016 election which got Susan Lamb over the line. That is not going to happen on Saturday.
Let’s talk about Braddon, what’s the polling saying there?
DB: The polling is showing that Braddon is line ball. Two party preferred there is 50-50. I mentioned before about the reasons why Justine Keay will be returned and the other reasons why she may not be. For Justine Keay, she does have a relatively high level of satisfaction amongst voters in the seat. 49% were satisfied in our poll versus 38% dissatisfied. In a tight election that sort of grassroots support might be enough to get her over the line. In conflict with that is that the state election for Tasmania, the Liberals actually picked up 56% of the primary vote against Labor’s 27%. If voters on Saturday voted in a similar way to that state election then that would see the Liberal candidate elected.
There was an interesting column from Niki Savva the other day which said that if the Prime Minister, Malcolm Turnbull, can keep Longman and Braddon it would be a historic once in a century feat because no government’s actually retained seats during by-elections or haven’t done. I can’t remember since when, it’s a long time anyway. Obviously, if he pulls that off it’s a big win, but if he doesn’t and Labor wins, that helps to ensure that Bill Shorten stays opposition leader. Is that a reasonable thing in the sense that Bill Shorten is a negative for the Labor Party as your polling suggests?
DB: Definitely, Alan. What we found in the poll was that the two party preferred in Braddon was 50-50. We also asked the question which was, if Anthony Albanese who was leading the Labor Party, how would you vote. What we found was there was an increase in the Labor support. The two party preferred lifted from 50-50 to 53-47 to Labor. Under those circumstances that would represent an easy win to Labor. The same happened in Longman, two party preferred in the poll, suggested that the LNP is ahead 51-49, that’s very close still. However, if when the respondents were asked if Anthony Albanese was leader of the Labor Party, who would you vote and again he came back to 53-47 for Labor and so in both seats if there is a possibility that Labor loses on Saturday, our polling suggests that the result would have not have been in doubt if Anthony Albanese would have been leader of the Labor Party.
Can you extrapolate those results to the national scene?
DB: It’s hard to, although I recall in 2013 when Julia Gillard was Prime Minister, at the time we asked the question, ‘How would you vote if Kevin Rudd was leading the Labor Party?’ and what we suggested at that time was that the Labor vote would increase by 6 percentage points under Gillard from 32% to 38%. What happened was, after Kevin Rudd became leader in the very first poll after the coup, we found Labor support was up to 38%. So, if it means that Anthony Albanese across the board is worth a 3% point increase to Labor, given that Labor are already ahead in our news poll and our national news poll is 51-49 for Labor, then the installation of Anthony Albanese as Labor Leader will be likely to increase that buffer ahead of the next election.
Interesting times. We’ll all be watching the by-elections very closely. Thanks very much, David.
DB: My pleasure, Alan.
I’m joined now by Adrian Hart of BIS Oxford Economics, it used to be called BIS Shrapnel, and he had a report out this week about construction which he says is turning down and could be a drag on the economy, so let’s hear from Adrian. Adrian, obviously the headlines around your report on construction this week were that you’re looking at a big slowdown that will be a drag on the economy. Tell us what’s behind that?
AH: Well, in the residential market which has been growing very, very strongly over the last few years, a lot of that demand has been driven by investors. We’ve seen very strong growth in the apartment part of the market, the density residential. That peaked at about 70,000 dwelling starts a couple of years ago and it’s been easing a little bit but over the next two years we see that really starting to crunch as investors are pulling away from the market.
But isn’t what’s driving investors the high level of immigration? I mean, don’t you think that underlying demand will continue to be strong because of population growth?
AH: Certainly. When we understand these markets, we try and understand that underlying demand. Unfortunately, we move above and below that underlying demand figure. Currently, when you look at net overseas migration and all the drivers of population growth, we estimate that we need about 197,000 dwellings to start every year just to house that demand over time. We’ve been doing about 220-230,000 starts per annum over the last few years and that’s really eaten into an undersupply that had built up over many years.
But we believe over the next couple of years we’ll probably dip below that underlying demand figure, but as you say, you can’t go too far below it because otherwise it just means that we need to be building more again in future and start another cycle. So the actual trough that we’re talking about, about 171,000 dwellings, is actually very high in a historical perspective and we certainly don’t want to go back to the days of 2008-2009 when we did 134,000 dwellings nationally.
But I suppose the point is that cycles do tend to undershoot and overshoot and what you’re talking about with investors is that they are motivated not simply by calculations of demand, but also by the ability to borrow and by tax deductions and so on. Are you saying that it’s possible the crunch on investment borrowing might lead to a bigger fall in construction than you might have thought?
AH: That’s certainly the risk. I mean, when we understand construction markets and investment and certainly the broader economy, we don’t believe the economy is ever in equilibrium, we’re always swinging up or passing by you know, high or low and gravitating towards that equilibrium, but often we overshoot and undershoot. The reason for that is asymmetric information, people making decisions in an imperfect world. Often, we see a lot of supply come on in markets over a period of time and just as easily you can get quite a significant drop-off again.
It takes time for the information to filter through to investors where the opportunities are and certainly at the moment what we’re seeing is that investors are pulling out of the market because of tougher lending restrictions, other conditions being placed on foreign and domestic investors and also we’re looking at sort of stagnating prices and we can’t underestimate the impact of capital growth and prices as a driver of investment decisions as well. Two years ago we were seeing very strong growth in house prices, but now we’re seeing that sort of stagnation and that sort of sends a bit of a price signal to investors as well.
When you say that it could be a drag on the economy, the question I guess is how much of a drag? And when you sit down with your colleagues who look at other parts of the economy, you obviously focus on construction. Do you together come up with a forecast of a recession?
AH: No, we don’t really come up with a forecast of a recession and the reason for that is that often the recession result comes because all of our investment markets are going down simultaneously. Just like during the booms when we would get simultaneous increases across the board, we don’t see that simultaneous downturn. We’re lucky in the moment in that this residential downturn will be cushioned to some extent by rising non-residential building activity as well as rising engineering construction.
That’s where a lot of the investment in infrastructure, particularly publicly funded infrastructure is coming through. The downturn in residential were happening at a time when other sectors were also pulling out, then we’d be a lot more concerned. But what we tend to find is that these cycles in construction, when they’re unsynchronised they tend to leave the economy just bubbling along at a below trend rate of growth but certainly not a recession.
Now for a quick chat about Wednesday’s CPI, here’s Jo Masters from ANZ. Jo, a bit weaker CPI yesterday than expected, does it change your view about anything?
JM: Absolutely not. The headline number was a little bit weaker than expected. A part of that reflected lower than expected fruit and vegetable prices but we did see in an annual sense, headline inflation accelerate to 2.1%. Probably the real focus though was on core inflation which was a bit weaker, showed some actual deceleration in prices, not enough to change our view about the RBA, but perhaps disappointing in a world where we’re looking for or hoping for some acceleration in inflation.
But it is astonishing, isn’t it, at this point of the cycle we’ve got inflation decelerating? That’s incredible.
JM: It’s certainly very unusual. We’ve actually got quite solid growth, some acceleration in growth in fact and the economy running above 3%, but very weak inflation. Part of that reflects ongoing retail price deflation, so we’re seeing the prices for things like clothing and furnishing and homewares fall, which does weigh on inflation but ultimately of course is quite good for household spending.
Do you think we’ll get to Christmas next year, 2019, with the cash rate at 1.5%?
JM: We don’t. We’re looking for the RBA to raise rates through the second half of 2019. We think that inflation is going to pick up. It’s going to be very, very gradual but we are looking for core inflation to get from 1.9% in Q2 in the most recent data, to about 2.1% by the end of next year and we think that’ll be enough for the RBA just to take out some of that stimulus that’s in the system.
And happy birthday Sir Michael Jagger. Here’s an appropriate number for these times from the Stones, ‘Give me Shelter’, which may well be the best rock song ever.
That’s it for Talking Finance, have a great week and I’ll talk to you next week.