The Incoming Labor Government, Why It Happened, Trump In Trouble, Trade War, BHP, and more
Last Night's Markets
The Incoming Labor Government
Why It Happened
Powell at Jackson Hole
Trump In Trouble
Trade War Update
Notes from a BHP Briefing
Research and Diversions
Next Week
Last Week
Last Night's Markets
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The Incoming Labor Government
Can Scott Morrison unite the Coalition and make it electable within six months or so? Unlikely.
This week’s events, culminating in yesterday’s shambles, ensure a Labor victory at the next election, which means investors must get their heads around three significant changes.
First, the end of cash refunds for franking credits, second the end of negative gearing for investment in existing dwellings, and third, much more ambitious climate change policies.
Let’s deal with each of those three things in turn:
Dividends
Fully franked yield-paying companies will become marginally less attractive, so another headwind for the banks. I don’t think there would be a wholesale sell-off by disappointed low-tax payers, but some kind of sell-off is possible with less reason to hang on. These franking sensitive investors would be more likely to take a pure investment view on the stocks, rather than a tax-distorted one. Some of those stocks, such as the banks, and Telstra, have challenging investment cases.
If you rely on cash refunds for part of your income, I think it’s best to wait to see the legislation and specifically the extent of any grandfathering before dumping stocks and incurring capital gains tax.
The policy says: “The policy will apply from 1 July 2019, which means it will only affect future earnings and franked dividends that start flowing in following financial year.”
That implies there will be no grandfathering of future income from existing investments and that all dividends from financial year 2019 will lose their ability to carry cash refunds.
Charities and not-for-profit institutions will be exempt, so depending on your circumstances you may be able to get around it by setting up a foundation, but the ATO will be on the lookout for this so you would need some solid advice.
You can read the eight-page policy here.
Negative gearing
Here’s what the policy actually says: “Labor will limit negative gearing to new housing from a yet-to-be-determined date after the next election. All investments made before this date will not be affected by this change and will be fully grandfathered.”
It’s possible the starting date will be when the policy was announced, which I think was in January this year, although I can’t find the actual press release. But that’s probably unlikely.
It depends on what that statement about the starting date actually means. Does it mean the date will be determined after the next election, or the date itself will be after the next election? If the former, it could be any date, including today; if the latter, there is still time to get set in an existing property if that’s what you want.
The problem is that the policy will help ensure there is no capital gain on any property for some time, probably years. The whole point of negative gearing is capital growth, otherwise, there’s no point incurring the losses.
And the reason capital growth has disappeared for a while is that resale value will collapse. Even if, like me, you have an existing investment property and are using the losses for a tax deduction, capital gains have evaporated for now.
I doubt that the election of a Labor Government will trigger a property market crash that wouldn’t have otherwise happened, but as Peter Wargent said in this interview with me a couple of weeks ago, it could cause a “two-wave hold-down”. Here’s what Pete said:
“Like most Anglo Aussies I’m a pretty ordinary swimmer but the one thing I always fear in the surf is that two-wave hold-down and I think that could be what’s coming for the housing market. I think we’ll see prices continue to slide over the next year, I think we haven’t yet seen the full impact of those tighter lending standards but if we go into a scenario with an election and big change to how investment property is taxed then it will just create further uncertainty.
“I would say we’d probably see another 12 months of declines and then probably another year or two beyond that, that would be my base case but a lot can change, as you know, in politics.”
Well, yes, a lot can change in politics, and has already, but only in ways that confirm a likely Labor victory, which means the “two-wave hold-down” is real.
Climate change
There will definitely be an emissions trading or emissions intensity scheme introduced, depending what happens in the Senate, with two key elements: 45% reduction in emissions on 2005 levels by 2030, and 50% of electricity to be sourced from renewable generation by 2030.
The Coalition’s targets are 26% and 20%, so that’s a significant change and will lead to some important opportunities for investors. Now might be a good time to start positioning, since the odds of a Labor victory are approaching 100%.
It’s possible, but unlikely, that a Shorten Government will be thwarted from introducing its energy policies by either the Senate or the Liberal controlled states, or both.
Much more likely will be a set of policies, including subsidies, to meet those two targets. And, for the first time in a decade, a stable energy policy to encourage investment.
There’s no need to get stuck on the label – whether it’s a NEG, a CET, an ETS or a CPRS – the most likely mechanism will be a trading scheme that requires companies with high emissions, like coal-fired power generators, to buy certificates that offset them.
A key development with the NEG this year has been that the responsibility for emissions reduction has shifted from generators to power retailers and I suspect that principle will stay.
Also, it’s possible the ALP will stick with the idea of giving the ACCC greater powers to regulate, and possibly even break-up, the power companies to control prices. So negatives continue to abound for the big players, Origin and AGL.
Another possibility is that the election policy of the Andrews Government in Victoria – to spend $1.2 billion subsidising rooftop solar on 640,000 homes – will be picked up by the Federal Labor Party and made national. After all, Daniel Andrews has a lower renewable target than Bill Shorten – 40% by 2025 – which has been legislated.
In any case there is going to be a rooftop solar boom in Victoria at least, possibly nationwide, that will see tons of money flow to that industry.
Solar installation is a fragmented cottage industry so perhaps the biggest opportunity for investors lies in large scale storage.
Household batteries are not being subsidised, only the PV panels. That means there will be a big opportunity for some centralised, large-sale storage to aggregate the output from all those roofs.
It’s basically an arbitrage business: buy the excess electricity generated when wholesale prices are low in the day, and sell it during peak periods when prices are high. It will be easy money.
Who will do that? Well if Origin and AGL had any brains, they’d do it, but brains seem to be in short supply in big business these days.
I liked the sound of Genex Power’s Simon Kidston, who I interviewed in July. They’re building a hydro storage facility in Queensland using a couple of old gold mine pits.
But in general there are limited opportunities to invest in renewable energy on the ASX.
There’s Infigen, of course, which has three operating wind farms and more in the pipeline along with a 25MW battery and a solar farm on the runway as well.
Infigen is a solid business that went from 24c to $1.15 before the 2016 election but has sunk back to 60c since then. It’s currently on a 15 times PE and could do well with an emissions trading scheme.
Apart from that there are a few dual listed New Zealand/Australian companies – Contact Energy, Meridian Energy and Mercury NZ. My (entire) family is a customer of Meridian through its local subsidiary, Powershop, and we’re all very happy with the service.
Those three New Zealand utilities all have large capitalisations: Mercury $4.1 billion, Meridian $3.8 billion and Contact $975 million, and they are solid dividend payers (Contact and Meridian yield 5.5% and 5.8% but of course they’re unfranked). But New Zealand is a small, stable market and they lack growth opportunities apart from grabbing market share in Australia through discounting.
And then there’s Carnegie Clean Energy, the wave power and storage business that has been a huge disappointment over the past 18 months, collapsing from 8c to 2c. It’s just burning too much cash – almost $1 million a month – and at the end of June had seven months in the bank.
Overall the forthcoming change of government provides a chance for the first stable energy policy in a decade, although the Abbott-led Opposition (whether he is Opposition leader or not, which he won’t be, but it doesn’t matter) will probably continue with a frenzy of “cut the carbon tax” campaigning.
At some point, though, the Coalition will have to get on board with climate change mitigation or risk becoming completely irrelevant. What they find to differentiate themselves from the Labor Party can only be guessed at.
Which brings us to the deeper issues at stake…
Why It Happened
Obviously a lot of the leadership issues had to do with revenge and hatred, specifically Tony Abbott’s and the Murdoch newspapers, Sky TV, and 2GB. But in my view that stuff is superficial and marginal.
Scott Morrison was elected because of the incompetence of the right-wing faction led by Tony Abbott and Peter Dutton. The spill shouldn’t have happened, but having brought it on, the Abbott/Dutton forces needed to win. Their failure to do so is ignominious.
But the deeper and more relevant issues concern the collapse of the fundamental purpose of the Liberal Party, and the complete breakdown in the relationship between business and conservative politicians.
Business people are frustrated and angry that the Coalition has failed. They failed not just to get any pro-business reforms through, such as the company tax cut and any kind of energy policy, but even to keep themselves nice and stay in power.
For their part Coalition politicians are frustrated and angry about what’s coming out of the banking Royal Commission and things like AGL’s refusal to play ball on the Liddell power station.
But the issues run deeper than simply the relationship between the Liberal party and big business. That is the tip of an iceberg.
It used to be an accurate cliché that the Liberal Party is the political wing of employers while the ALP is the political wing of the Unions. As such the two political parties were engaged, alongside their respective sponsors, in the timeless struggle between Capital and Labour.
The problem is that the Marxist struggle no longer exists except in the minds of generals fighting the last war. Workers and bosses each in their own way are struggling against the same thing - the forces of globalisation and technology.
The Unions have been more or less destroyed by a combination of right-wing legislation and the gig economy, and Capital is ascendant, but surprisingly this has hurt the Liberal Party more than the Labor Party.
That’s because politics is all about the contest, and only losers need to keep fighting. The age-old industrial battles that energised the Liberal Party are no longer relevant.
As a result, the Liberal Party has lost its business moorings, having replaced “not believing in unions” with “not believing in climate change” as their key reason for existing,. One problem with that as a foundational principle is that business people, almost to a person, accept the science of global warming and are happy to engage in doing something about it.
The new tenet of conservative ideology – that reliable and affordable energy is more important than global warming – while appealing to a lot of people, is a dead end. It separates the Liberal Party from its traditional business base.
Meanwhile the ALP remains moored to the now-diminished unions, but they have managed to hold onto some relevance through industry super funds, thanks to the vision of Bill Kelty.
You can see how all this unfolded.
The Coalition overreached with the WorkChoices legislation in 2006 and as a result industrial relations became toxic – a no go zone.
After floundering around for a few years, the Coalition even flirted with a bipartisan approach to reducing carbon emissions following the report that John Howard commissioned in 2006, from “The Prime Ministerial Task Group on Emissions Trading”, led by the head of the Department Prime Minister & Cabinet, Peter Shergold, which recommended an emissions trading scheme.
But without industrial relations as a differentiator, the Coalition was in desperate need of something else, and as with most political groups, the easy solution is to define yourself by your enemies: what they’re in favour of you are against, by definition, and vice versa.
Labor believed climate change was the great moral crusade of our time, so the Liberal Party had to be against it.
So by one vote in December 2009, they stopped Malcolm Turnbull’s negotiations with Labor for an emissions trading scheme called the CPRS and went with Tony Abbott’s idea of rejecting the whole thing.
In other words, the Coalition made the traditional conservative policies of small government, anti-union, and solid economic management, subsidiary to a climate change denial crusade focused on cheap, reliable, coal-fired electricity.
And it worked like a charm. In the early days business was still sceptical about global warming as a left/green issue so they were on board as well. Between late 2009 and 2013, there was no real conflict between the business-aligned moderates in the Liberal Party and the ideological conservatives in the Coalition because Tony Abbott was successful and business agreed with the campaign.
But Abbott was unable to convert from Opposition battering ram to Government consensus-builder and was sacked in favour of a businessman and a moderate, Malcolm Turnbull.
In the meantime, one by one, businesses and their representatives all got on board the climate change train, even including the Minerals Council of Australia. Its website says: “The minerals industry acknowledges that sustained global action is required to reduce the risks of human-induced climate change.”
The problem for Turnbull has been that the conservatives, both in the Parliament and the media, got stuck in the land on the other side of the wardrobe and couldn’t come back. Either because they really do believe global warming is a giant global left-wing conspiracy (some people still seem to think this, amazingly) or, more commonly because they can’t think of any other viable differentiator from the ALP and the Greens. That’s certainly Tony Abbott’s position, as he acknowledges.
Turnbull tried refocusing everyone back on a pro-business economic growth agenda with company tax cuts, but failed – thwarted by the manifest failings and unpopularity of big business, principally the banks hauled miserably through the Royal Commission, which allowed both the ALP and the cross-benchers in the Senate to block the tax cuts.
Meanwhile every business group, and every CEO, has been pleading with the nation’s politicians to confirm the National Energy Guarantee as policy, the last roll of the emissions reduction dice, invented by the Energy Security Board led by Kerry Schott, former investment banker and CEO of Sydney Water – and, yes, a business leader.
For years Australia’s business leaders and academics have tried to lead the political conservatives out of the anti-global warming wilderness, but have failed.
So while what happened yesterday has a lot to do with revenge and hatred, as well as Turnbull’s poor polling, in my view the issues for the conservative side of politics run deep.
The destruction of unions, plus globalisation, immigration, technology, and demographics have all conspired to make the old contest between Capital and Labour irrelevant, a relic of discredited and irrelevant 20th century Marxism.
In those circumstances the political contest becomes one at the margin, differences of degree rather fundamental beliefs.
So in a way the conservatives have had to cut themselves adrift from business because the endless campaign to reduce wages which used to be the foundation of right-wing politics now rings hollow.
In part because of the successful right-wing campaign against unions, wages are now too low; the economists and central bankers want to get them up, not down.
So right-wing politicians are in a quandary. They talk about small government and lower taxes, but actually do the opposite because spending cuts are always unpopular and tax cuts lead to deficits and torpedo economic management as a differentiator.
What else have they got? Same sex marriage? Nope – the national vote was two-thirds in favour. Other issues like health, welfare and education are strengths of the ALP. That leaves climate change denial which, as discussed, is a dead end and also leaves the Liberal Party adrift from its business moorings.
In fact it’s hard to see how the conservative side of politics can avoid splitting, as the ALP did in in 1916, 1931, and 1955. Each time that happened it reinforced the conservatives as the natural party of government; the 1955 ALP split between the Catholics and the rest allowed the Liberal Party to win nine consecutive elections.
If the conservatives do split, something similar could happen to Labor, which would be an appalling result for Australian democracy – even worse than what we saw this week.
Powell at Jackson Hole
Fed chairman Jerome Powell moved markets this morning with his opening remarks at the annual central bank symposium at Jackson Hole.
The US dollar fell pretty sharply and the stockmarket rallied to new record highs because the speech was seen to be “dovish” while also defending Fed rate hikes against criticism from President Trump. Here are the key bits:
“Let me conclude by returning to the matter of navigating between the two risks I identified--moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating.
“I see the current path of gradually raising interest rates as the FOMC's approach to taking seriously both of these risks.
“While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating.”
The fact that he singled out “overheating” for special mention and said he didn’t think it would happen, was the key to the market reaction because it means there’s no need to more rapidly put up interest rates.
Earlier in Powell's speech, I thought there was something else quite interesting – that the Fed would do “whatever it takes”, either way:
“I am confident that the FOMC would resolutely "do whatever it takes" should inflation expectations drift materially up or down or should crisis again threaten. In addition, a decade of regulatory reforms and private-sector advances have greatly increased the strength and resilience of the financial system, with the aim of reducing the likelihood that the inevitable financial shocks will become crises.”
Again, hardly a surprising statement but worth noting.
Trump In Trouble
"I will tell you what, if I ever got impeached, I think the market would crash. I think everybody would be very poor," - Donald Trump in an interview on Fox News this week.
Meanwhile, another right-wing politician has also got problems but they’re quite different to the problems of those in the Westminster system, where the party in Government can sack the PM, essentially without cause (that is, without them breaking the law).
In the US the party in control of Congress can sack the President, but only if “high crimes and misdemeanours” have been committed. Even then, if it’s the same party as the President belongs to, it’s probably not going to happen unless his party is forced into it.
Donald Trump is close to qualifying for impeachment. In fact, some analysts reckon he’s there already, although that’s arguable.
But it’s increasingly likely that special prosecutor Robert Mueller will come up with impeachment qualifiers when he eventually files his report, and the mere fact that Trump did that interview and is, in general, getting more and more hysterical, indicates that he knows he’s in trouble.
So we need to start thinking about whether what Trump told Fox News is correct and the market will crash if he’s impeached.
Short answer: definitely not. The opposite applies. His fiscal stimulus has boosted the economy, it’s true, but President Pence would keep it going.
What’s more the stimulus plus Trump’s tariffs are risking higher inflation and faster rate hikes than would otherwise occur. To that extent, Trump’s removal would also diminish that risk.
Trade War Update
This morning two days of talks between US and Chinese officials ended with no breakthroughs, which has led most commentators to say the trade war is still on.
Up to then, some of the heat had been going out of the trade war. That started in late July when European Union president Jean-Claude Juncker went to Washington and negotiated a cease-fire under which the US and European Union would not impose any more tariffs on each other pending discussions on resolving their trade conflicts.
Then the US and Mexico suddenly brought NAFTA negotiations back to life, and there is now a fair chance that they will agree on a revised deal before the end of August.
It’s clear that these things are designed to clear the air for the Trump Administration to focus on China. Early this month, after a round of golf with Trump, Senator Lindsey Graham told reporters that “the goal of President Trump is to unite the world against Chinese business practices that are outside the norm.”
This peace agenda also got a boost this month from two new laws.
The first was a bill strengthening reviews of inbound direct investments by the Committee on Foreign Investment in the United States, which passed with overwhelming bipartisan support and was signed by Trump on August 13.
The second was a rider to the annual defence appropriation, which expands export controls and enables the Commerce Department to block US companies from selling or licensing products and services in as-yet-undefined “critical, emerging and foundational technologies” to foreigners. The laws are written in general terms, but China is obviously their main target.
Then last week, Beijing announced that vice-minister of commerce Wang Shouwen will spend two days in Washington this week trying to re-start trade talks with Treasury Undersecretary David Malpass. What are we to make of this?
What has made a new conversation possible was the US Treasury’s abandonment of some of the more aggressive American demands, such as that China give up its industrial policies and technological upgrading plans. The talks will actually take place on the eve of the imposition of tariffs on US$16 billion worth of Chinese imports and at the same time as hearings begin on proposed tariffs on another US$200 billion.
That those talks have ended with no agreement is hardly surprising: Wang and Malpass are too low-level to do anything but report back, and certainly can’t head off the US$16 billion tariffs. The talks could have delayed the other lot, but apparently have not. We’ll see.
Fundamentally there are strong incentives for both sides to do a deal. China clearly does worse out of a trade war than the US, but American farmers and businesses are starting to hurt and complain about the increased costs and lower sales.
The problem is that neither side can be seen to capitulate, especially in the lead up to the November midterm elections. It even seems likely that the trade warriors in the Trump Administration, US Trade Representative Robert Lighthizer and Trump’s trade adviser Peter Navarro don’t want a deal at all, and think that China’s economy is fragile and that if they push hard enough it will fall over.
For that reason, it’s too early to declare peace in our time, but the signs are encouraging.
Notes from a BHP Briefing
Markets have an “end of cycle” feel about them at them at moment, perhaps even an “end of era” feel, as the United States gradually but firmly exits easy money and Donald Trump’s fiscal and trade policies act as a turbocharger.
In early July, I wrote about the gathering storm clouds from Trump’s Trade War and other things, whereupon global markets rallied 4%. Typical. It took a month for the rain to start, and surprisingly/unsurprisingly it was Turkey wot did it.
Surprisingly because everybody was looking the other way, towards China mainly, and also worrying about the impact of rising US interest rates on the American economy and markets; unsurprising because Turkey was, and still is, the wobbliest of the emerging markets (EM), and this is, so far at least, an EM bear market.
In Australia we only have to worry about EM every couple of decades when they have a currency crisis, because our key global asset allocation decision is not between EM and DM (developed markets), as it is for global funds, but between domestic equities and international, and international mostly means the US and Europe, via one of the big local funds.
Research and Diversions
Research
Annabel Crabb: "From Mr Turnbull's silence during the rococo events of this morning, some had envisioned him in a puddle of woe, or darkly sacrificing chickens on an altar to Robert Menzies. But the Malcolm Turnbull who sauntered out for a doorstop this afternoon was closer to his old self than the harried creature observed dumping the remains of the NEG overboard into choppy waters last weekend."
The ATO has released a draft ruling that splitting a trust may trigger a capital gains tax event. New rights and obligations amount to the creation of a new trust.
Electric cars in India. Rising incomes and urbanization, a passenger vehicle sales boom and the drive toward cleaner air could be setting the stage for the transformation of mobility in India—and the auto industry worldwide.
Bill Gates reviews a new book called “Capitalism Without Capital – The rise of the intangible economy”, and says “not enough people are paying attention to this".
How will Nine and Fairfax resolve their differences over Google? I didn’t know they had any! (Fairfax is pro Google, Nine is definitely against).
Ten years after the crash in America. “Economically, the country has changed surprisingly little since 2008. The lasting effect of the crisis is in our politics.”
Who would have guessed the for-profit superannuation sector would be the one gouging its members? Oh that’s right, everyone except the government.
Eight of the best-performing stocks in history were led by CEOs who gave analysts absolutely nothing. No face time, no guidance, no conference call appearances, sometimes no cash earnings at all. They ignored The Street and produced massive gains.
The Australia Institute has worked out that the company tax cut would represent a $39.5 billion gift to the big four banks over the first decade of the cut.
An analysis of the trade war (so far). It’s a tempest in a teapot (which I presume is a bit bigger than a storm in a teacup).
“The leadership rumblings and leaks serve multiple goals: to push Turnbull towards dumping the Paris Agreement and shifting focus to power prices; and to gradually undermine Turnbull's leadership to a point the public becomes open to change, as happened with Rudd-Gillard-Rudd and Abbott-Turnbull.”
What’s the Purpose of Companies in the Age of AI? “If computer technology has the capacity to simplify and streamline transaction costs, more and more work can be done through these smart-contract arrangements, making traditional human-managed firms obsolete.”
Shane Oliver: why the A$ has more downside. (It’s about the interest rate differential).
The value of citizenship in a rich country has continued to rise. The cost of transport from poor countries to rich ones has fallen. It is not surprising, given those things, that more people from poor countries try to get into rich ones, and hence the bureaucracy of immigration and border control has had to grow. Why should poor people in rich countries make themselves poorer by allowing more open borders?
An interview with Jeff Bezos in 1997, when he still had to explain who he was, and what Amazon did.
Once the natural parties of government, the Liberals and Nationals have become the natural parties of opposition. And many of them are at home in that role. But why did this happen? How did a Coalition that dominated Australian government for most of our history become so divided that it cannot agree on a policy to tackle climate change — an issue that is not even a partisan matter in most Western countries?
In terms of purely pragmatic politics, a lurch to the right and the replacement of Turnbull by Dutton makes no sense at all. The opinion polls tell us — and have been doing so for many months now — that more people intend to vote (or preference) Labor than Liberal or National. Is moving further away from Labor really the way to lure them back?
This bull market is about to become the longest in history. Here’s what could take it down, says Jim Paulsen.
Fascinating profile of the hedge that took on BHP, Elliott Management, and its founder and CEO, Paul Singer: The head of Elliott Management has developed a uniquely adversarial, and immensely profitable, way of doing business
As the Mueller siege tightens, Trump’s twitter rage crests.
Diversions
Five questions about Nazi Germany and how it relates to Australian politics today.
Behind the incredible Catholic church sex abuse scandal in Pennsylvania - it’s all about male dominance.
The founding of Oklahoma City in 1889 was “the most disorderly episode of urban settlement this country, and perhaps the world, has ever witnessed.” Plots of land were given away to whoever got there first on a given day, April 22nd. “The town had an almost instant population of 10,000 with no organization whatsoever — no government, no law.
Choosing what to read takes time and effort and often results in disappointment. Do yourself a favour: Ditch the best-seller list.
The problem for fans of the philosopher David Hume is how we can be enthusiastic advocates of someone so opposed to enthusiasm.
You can think of death bitterly or with resignation, as a tragic interruption of your life, and take every possible measure to postpone it. Or, more realistically, you can think of life as an interruption of an eternity of personal nonexistence, and seize it as a brief opportunity to observe and interact with the living, ever-surprising world around us.
I’ve started watching a TV series called Patrick Melrose, based on the books of Edward St Aubyn. The story is horribly compelling, made worse by the fact that they’re true – based on St Aubyn’s own life. Here is an interview with him.
Mesmerising machines created by Andreas Wannerstedt.
Janet Malcolm: The morality of journalism. "I have been writing long pieces of reportage for a little over a decade. Almost from the start, I was struck by the unhealthiness of the journalist-subject relationship, and every piece I wrote only deepened my consciousness of the canker that lies at the heart of the rose of journalism."
The collapse of unions is corrupting capitalism.
Population pressure, a lack of economic opportunities, environmental degradation, and new forms of travel are contributing to human displacement and unsafe migration on an unprecedented scale. And as millions more people see climate change erode their livelihoods, the problem will get worse
Today is the 100th anniversary of the birth of Leonard Bernstein, perhaps the first great American composer and conductor. Here he is doing Gershwin’s Rhapsody in Blue.
https://www.youtube.com/watch?v=cH2PH0auTUU
And happy birthday Bill Ray Cyrus, Gene Simmons and Elvis Costello, the last of which actually had some talent. “Oh, Alison, my aim is true.”
https://www.youtube.com/watch?v=byQIPdHMpjc
https://www.youtube.com/watch?v=LMcDg2HwOnM
https://www.youtube.com/watch?v=5_kMPMgVTj8
Mount Arafat, near Mecca, during Hajj…
Next Week
By Craig James, CommSec
Australia: Business investment, credit growth and housing data in focus
- A relatively quiet week beckons in terms of new economic data. Private sector credit, building approvals and business investment are the indicators of most interest.
- The week kicks off on Tuesday in Australia when the latest weekly reading on consumer confidence is issued by Roy Morgan and ANZ.
- On Wednesday the Housing Industry Association’s survey of homebuilders in the five largest states is scheduled for release. New home sales rose by 2.2 per cent in June 2018 – the first increase this year – reflecting changing conditions in the housing market.
- On Thursday the Australian Bureau of Statistics (ABS) releases the Private Capital Expenditure publication (essentially business investment figures) for the June quarter.
- New business investment (spending on buildings and equipment) rose by 0.4 per cent in the March quarter to be up 3.7 per cent over the year – just shy of the best growth in five years.
- Also the second estimate of investment in 2018/19 was reported at $87.74 billion, 1.4 per cent higher than the second estimate for 2017/18. Expected investment by non-mining and manufacturing firms has never been higher.
- Also on Thursday, local council building approvals data for July is issued. Council approvals to build new homes rose by 6.4 per cent in June – the largest increase since January. And approvals were up 1.6 per cent on the year. Greater Brisbane house approvals rose to a record rolling annual total of 14,715 over the year to June.
- On Friday the Reserve Bank releases the monthly Financial Aggregates publication, a report that includes the private sector credit measure (effectively ‘loans outstanding’) for July.
- Credit growth has slowed to four-year lows, led by the slowest ever growth in housing finance to investors. Tighter bank lending standards and falling home prices in Sydney and Melbourne are behind the weakness.
Overseas: US economic growth and inflation data in focus after Jackson Hole
- Following the Jackson Hole central bankers annual economic policy symposium over the weekend, US economic growth, trade, inflation, consumer confidence and business surveys will be in focus during the week.
- The week kicks off on Monday in China when industrial profits are scheduled to be released.
- Also on Monday in the US, business surveys from the Federal Reserve Banks of Chicago and Dallas are due.
- On Tuesday the ‘advance’ July data on trade in goods is released. A deficit of US$68.3 billion was posted in June. The Trump Administration is keen on reducing big trade deficits maintained with other countries.
- Also on Tuesday the S&P/Case-Shiller 20-city home price gauge is released with annual growth running at a healthy 6.5 per cent. The Conference Board’s consumer confidence index, the Federal Reserve Bank of Richmond Manufacturing survey and the regular weekly data on chain store sales are also issued.
- On Wednesday the second estimate of economic growth for the June quarter is released. GDP growth is expected to be revised down slightly to 4.0 per cent, but remain at the best level in four years.
- Also on Wednesday in the US, the July index of contract signings to purchase previously-owned homes (pending sales) is issued with weekly data on new mortgage applications.
- On Thursday the personal income and spending report is scheduled. The Federal Reserve’s preferred measure of inflation – the core personal consumption expenditure deflator – will be keenly observed. The deflator is expected to increase by 0.1 per cent in July.
- Also on Thursday the weekly data on new claims for unemployment insurance is also issued.
- On Friday in the US, the Chicago purchasing managers index for August is released with the final August reading on consumer confidence from the University of Michigan. The preliminary reading fell to an 11-month low.
Financial markets
- The earnings season (profit-reporting season) comes to an end in the coming week. Results so far have been broadly positive and stable. Amongst the Aussie companies expected to report earnings:
- On Monday are: AUB Group, Japara Healthcare, Reliance Worldwide and Spark Infrastructure.
- On Tuesday: Sirtex Medical, Accent Group, Northern Star Resources, Austal and Caltex Australia.
- On Wednesday: Boral, Autosports Group, Cabcharge Australia, Independence Group, Regis Resources, Oneview Healthcare, SpeedCast International, Virgin Australia and Westfield Unibail-Rodamco.
- On Thursday: Atlas Arteria, Gateway Lifestyle Group, Galaxy Resources, Perpetual, Perseus Mining, Ramsay Health Care and Sandfire Resources.
- On Friday: GTN, Harvey Norman, Metals X, NEXTDC, Orocobre and Sino Gas & Energy.
Last Week
Investment markets and key developments over the past week
- The past week saw most global share markets rise as Turkey slipped out of the headlines, but Australian shares were hit by political uncertainty. Bond yields fell a bit in the US and Australia, were unchanged in Japan and were up a bit in Germany. Oil and metal prices rose but the iron ore price slipped. While the US dollar slipped as safe-haven demand slowed, political turmoil weighed on the Australian dollar.
- Yet another PM in Australia, with Scott Morrison defeating Peter Dutton who had brought on a challenge to replace Malcolm Turnbull. All of the last four elected PMs have now been deposed by their own party and this is the sixth PM this decade, so we have now caught up to Italy. The turmoil is not great for Australia and has also seen investment markets start to get nervous about the coming Federal election. Of course, it’s dangerous to overstate the impact of the periodic bouts of leadership instability in Canberra seen this decade on the economy. It seems that as the “Lucky Country” the economy still manages to muddle along despite the mess in Canberra and I doubt that the latest leadership turmoil will change things that much. However, Australia should be able to do much better and the lack of durable leadership along with the problems in the Senate are making it harder to undertake serious productivity enhancing economic reforms and contributing to policy uncertainty, most notably around energy policy which has led to world beating electricity prices. More specifically, there are several implications from the latest change.
- First, Scott Morrison winning the vote is a reasonably good outcome from an economic and investment perspective. He did not bring on the challenge so can’t be blamed for the instability. More importantly he is seen as a reasonably sensible policy maker, is respected by investment markets in his role as Treasurer and is seen as a centrist giving the Liberals perhaps a better chance of victory in the coming Federal election. This probably explains why the share market and the $A had a bounce on the news that he will be the new PM.
- Second, while he will probably continue with the Government’s existing budgetary strategy the abandonment of the policy to cut the tax rate for large companies along with the budget coming in a better than expected does provide scope for earlier and bigger tax cuts for low to middle income earners which could help economic growth.
- Third, the latest leadership turmoil and Scott Morrison’s relatively low margin of victory (of 45 to 40) still poses the risk that there may still be more turmoil ahead, all of which could weigh on consumer and business confidence just as it did under the last Labor Government. The LNP victory in September 2013 provided a confidence boost as Australians’ looked forward to relative stability after the leadership turmoil of the Rudd/Gillard/Rudd years, but with instability clearly continuing confidence risks being eroded again. Business confidence is most at risk given the abandonment of the policy to cut the large company tax rate.
[caption id="attachment_168036" align="alignnone" width="538"] Source: Westpac/MI, NAB, AMP Capital[/caption]
- Finally, the leadership turmoil and Labor’s lead in opinion polls has focussed attention on the next Federal election and the likelihood of a change in Government and this has weighed on the share market and the Australian dollar over the last week. To keep Senate and House of Representative elections in alignment the election needs to be no later than May but if the new PM sees a bounce in poll support it could come before the end of the year. Labor’s main policies are increased public spending in areas Iike health and education, lower taxes for low to middle earners but higher taxes for high income earners, halving the capital gains tax discount and restricting negative gearing for residential property going forward to new properties and it would possibly adopt a tougher regulatory stance in relation to the banks, energy supply and industrial relations. The tax cuts would provide a boost to consumer spending, but the risk is that business confidence may dip which could hit business investment and the housing market could take a hit from the negative gearing and capital gains tax changes at a time when it is already down. The latter, particularly if combined with cuts to immigration, risks resulting in a sharper top to bottom fall in home prices than we are assuming (a 15% decline for Sydney and Melbourne and 5% nationwide) which would be negative for banks and consumer spending.
- As evident over the last week, political instability and more specifically uncertainty around a change of government is likely to weigh on bank, consumer and energy shares and possibly also the Australian dollar as it risks adding to the forces already keeping interest rates down.
- The longest US bull market in history or is it and does it matter? There has been lots talk lately that the current bull market in the US S&P 500 is the longest in history, but a lot depends on how a bear market is defined. If its just a 20% fall then the last record bull market started in October 1990 and ended in March 2000. But I tend to see a bear market as a 20% fall that’s not reversed within a year and on this basis 1990 was not a bear market as the fall was quickly reversed and as such the record started in December 1987 and ran to March 2000 and its still a long way from being surpassed. Alternatively, if the 1990 US share market fall is a bear market then the share market slump of 2011 which saw US shares fall 19.4% on a daily closing basis but 21.6% on an intraday basis should be treated as a bear market too in which case the current bull market is still a long way from any record. Its all semantics really as history tells us that “bull markets don’t end of old age but exhaustion”.
- Trade threat rolls on with the US and then China imposing 25% tariffs on another $US16bn of imports from each other as scheduled and little progress in the latest trade talks between the US and China. The focus will now shift to the proposed US tariffs on another $US200bn of imports from China next month. With both sides still dug in for now its hard to see much progress until after the mid-terms.
- Trump’s legal problems are not yet terminal, but they are still escalating. The conviction of his former campaign director (Manafort) and his lawyer’s (Cohen) admission of campaign finance violation and claims that it was at the direction of Trump up the pressure but the former’s crimes appear to have nothing to do with Trump and the latter is probably not significant enough (campaign finance violations usually result in just a fine) to move the Republican controlled House to impeach (although this may change if Democrats get control) let alone reach the 67 votes in the Senate to remove Trump from office (even after the mid-terms). However, the threats to Trump are clearly escalating. Its unlikely to impede policy making in Washington, but it does run the risk of Trump doing even less considered things to shore up his base and the risk that he will seek to close down the Mueller inquiry (which would be an admission of guilt if ever there was one). Whatever, it all remains a potential source of volatility for markets that could intensify in the months ahead.
- This is a fantastic little video on a guy called Bob who knew a little bit about life. He was a near neighbour who unfortunately passed away doing what he loved in the last week. I doubt he spent too much time worrying about Trump’s latest tweets or leadership turmoil in Canberra!
Major global economic events and implications
- In the US, the minutes from the Fed’s last meeting remain consistent with the Fed being aware of risks around trade, emerging markets and the yield curve but no sign of deviating from the process of rate hikes every three months – at least for now. US economic data was mixed with falls in homes sales and a dip in business conditions PMIs, albeit to still strong levels, but continuing gains in home prices and ongoing very low jobless claims.
- Eurozone business conditions PMIs were basically stable in August – up a bit for services, down a bit for manufacturers – suggesting that growth has stabilised at a still reasonable level after slowing earlier this year. It’s not enough for the ECB though given still low core inflation and threats from emerging markets and Italy.
- Japan’s core (ex-fresh food and energy) inflation rate rose to 0.3% year on year in August from 0.2%, which is good but far from being enough to move the dial for the BoJ.
Australian economic events and implications
- Australian construction data surprised on the upside in the June quarter and will help June quarter GDP growth. The growth came from dwelling investment and public engineering. Looking forward dwelling construction will slow as approvals are off their highs, non-residential approvals also point to constrained non-residential building, but public infrastructure spending is likely to keep overall construction rising – just not as fast as seen in the June quarter. Meanwhile skilled vacancies rose slightly in July but the pace has slowed.
- The June half Australian earnings reporting season is now around 85% done and results have proved to be pretty solid. 47% of results have surprised on the upside compared to a norm of 44%, the breadth of profit increases is high with 79% reporting higher profits than a year ago compared to a norm of 66%, 86% have increased their dividends or held them constant and 65% of companies have seen their share price outperform the market on the day results were released. 2017-18 earnings growth are on track to come in around 9%, with resources earnings up 25% thanks to solid commodity prices and rising volumes and the rest of the market seeing profit growth of around 5%.
[caption id="attachment_168035" align="alignnone" width="520"] Source: AMP Capital[/caption] [caption id="attachment_168034" align="alignnone" width="536"] Source: AMP Capital[/caption]
What to watch over the next week?
- In the US, expect to see a continuing gain in home prices and still solid consumer confidence (Tuesday), a small gain in pending home sales (Wednesday), a solid rise in July personal spending and a lift in inflation as measured by the core private consumption deflator to 2% year on year (Thursday).
- In the Eurozone expect unemployment for July to remain at 8.3% and August core inflation to remain at 1.1% year on year with both to be released Friday. Economic confidence data will also be released.
- Japanese data to be released Friday is likely to show continued labour market strength but flat industrial production.
- Chinese business conditions PMIs for August (Friday) will be watched for any slowing that may be related to tighter non-bank lending conditions and trade war worries.
- In Australia, June quarter business investment data to be released Thursday will help firm up expectations for June quarter GDP data to be released in early September and provide a guide to business investment over the year ahead. We expect June quarter investment to rise 0.8% and business plans for this financial year to rise slightly. Meanwhile July building approvals (also to be released Thursday) are expected to fall 5% after a strong rise in June and credit growth (Friday) is expected to remain modest.
- The Australian June half earnings reporting season will wrap up with 24 major companies accounting for around 5% of market capitalisation reporting including Spark Infrastructure (Monday), Caltex, Boral and Blackmores (Tuesday), Bellamy’s (Wednesday), Perpetual and Ramsay Health (Thursday) and Harvey Norman (Friday).
Outlook for markets
- While we see share markets being higher by year end as global growth remains solid helping drive good earnings growth and monetary policy remains easy, we are likely to see ongoing bouts of volatility and weakness as the US driven trade skirmish with China could get worse before it gets better and as worries remain around the Fed, President Trump in the run up to the US mid-term elections, China, emerging markets and property prices and election uncertainty in Australia. The August to October period is well known for share market falls and volatility.
- Low yields are likely to drive low returns from bonds. Australian bonds are likely to outperform global bonds helped by the relatively dovish RBA.
- Unlisted commercial property and infrastructure are still likely to benefit from the search for yield, but it is waning.
- National capital city residential property prices are expected to slow further with Sydney and Melbourne property prices likely to fall another 10% or so, but Perth and Darwin property prices bottoming out, and Adelaide, Canberra and Brisbane seeing moderate gains.
- Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.2%.
- We continue to see the $A trending down to around $US0.70 as the gap between the RBA’s cash rate and the US Fed Funds rate pushes further into negative territory as the US economy booms relative to Australia. Solid bulk commodity prices should provide a floor for the $A though in the high $US0.60s.