Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast app, the Apple Podcast store or wherever you go to get your podcasts. Or you can get it at the Business Acumen website at www.businessacumen.biz.
I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number twelve in our series for 2019 and today’s date is Thursday, April 18.
First I have a terrific interview with Jayne Robbins, a buyer’s agent for theinformedbuyer.com.au giving insights into what investors need to do when buying into the Australian property market. And I’ll have a great chat with AMP Capital economist Shane Oliver.
But now, let’s talk to Jayne Robbins.
Global finance chiefs ended talks in Washington mixing concern toward the current state of the world economy with confidence that it will soon rebound. The shift away from the tighter monetary policy by central banks, recent stimulus in China and easing trade tensions were hailed as reasons to hope the slowdown will prove short-lived although nobody forecast a renewed boom. With stocks already rallying on optimism about the outlook, officials at the International Monetary Fund’s spring meetings said growth is set to “firm up.” IMF Managing Director Christine Lagarde nevertheless warned the world is at a “delicate moment,” and at risk of “self-inflicted wounds.” The IMF cut its forecast for global expansion to the slowest pace since the financial crisis a decade ago, but played down the risk of recession and predicted growth will pick up in the second half of the year to stabilize at about 3.6% in 2020. That would be an improvement over the 3.3% pace projected for this year, but below the 3.8% of 2017. U.S. Treasury Secretary Steven Mnuchin stoked optimism by saying he was hopeful the U.S. and China are “close to the final round” of trade talks. U.K. Chancellor of the Exchequer Philip Hammond said the government and main opposition party could strike a Brexit deal within weeks.
A worldwide increase in natural catastrophes is already hitting global supply chains and causing a spike in business interruption insurance claims, a senior executive with Allianz Global Corporate & Specialty has warned. AGCS chief regions and markets officer Sinead Browne said this trend, which she directly linked to climate change, was pushing premiums up around the world, adding this “correction” was likely to continue for the “next few years”. While property damage is the most obvious effect of extreme weather events, Ms Brown said business interruption resulting from these events was proving costlier, claim for a claim, than property damage.
Reserve Bank of Australia minutes revealed board members think an interest rate cut could be “appropriate” if unemployment rises and inflation remains weak. The RBA appears less confident about the jobs market, noting “mixed” indicators The minutes of the April board meeting, which saw the central bank’s board leave rates unchanged for a record 29th consecutive meeting, show a discussion of what it would take for the RBA to cut the cash rate. However, the RBA board did not appear in any rush, agreeing there was not a “strong case” for any near-term move.
Doubts over the election promises made by the Coalition and Labor have been raised with new predictions the Australian economy is softening on the back of falling house prices and stagnant wages. Ahead of a warning from shadow treasurer Chris Bowen that the Coalition’s tax cut plans would drive the budget into the red if the economy weakened, forecasts from Deloitte Access Economics point to budget problems that may curtail expensive vote winners. The Coalition is promising $290 billion in personal income tax cuts between 2022 and 2029 even after it was forced to write down expected revenue by $15 billion in its recent budget. Labor, opposed to key elements of the Coalition’s tax plans, hopes to raise billions from a string of measures including changes to negative gearing, franking credits and capital gains tax. But both are likely to run into an economy that will fail to grow at its long-term trend rate, Deloitte has warned in its latest outlook. Deloitte director Chris Richardson said local and global factors were playing into a slowdown that would continue this year and into 2020. Labor’s bigger tax rises than the coalitions would carve a third off economic growth Deloitte Access says. Deloitte, however, said that the loss to prosperity from Labor’s higher taxes would also come with some offsetting benefits.
The Morrison government would need to cut spending by about $40 billion a year by 2030 to afford its big personal income tax cuts and deliver on its budget surplus forecasts, a new analysis by the Grattan Institute shows. The Coalition has positioned its $387 billion in lower taxes than Labor over the next decade as the key economic fight in the federal election, including an extra $230 billion in personal income tax cuts that Labor is resisting.
As both parties go into the election campaign, the key difference is the coalition sees the royal commission and its recommendations as to the end process of bank reform, while Labor sees it as the beginning. This was highlighted in a report released on April 8 by a Senate committee into the resolution of disputes with financial service providers within the justice system. The inquiry was held to investigate whether financial institutions use the legal system to bully customers into accepting settlements and whether the asymmetry of power has been abused. It made a series of recommendations, including the introduction of an industry levy bankrolled by listed financial services companies to fund legal assistance and financial counselling for consumers and small businesses that don’t have the resources to fund the legal action. The report also called on the government to improve access to legal assistance services for small businesses. Other reforms included increasing the current compensation cap available to consumers through the Australian Financial Complaints Authority, the external dispute resolution body, to $2 million, including for credit, insurance and financial advice disputes; and setting up a retrospective compensation scheme independent of AFCA, to allow victims of bank misconduct who received a past external dispute resolution determination or court judgment to have the matter reviewed if they believed it was unjust. Labor backs all the reforms. Indeed, well before the report was released, Labor has pledged a $640 million “banking fariness fund” through a levy paid by financial institutions among Australia’s top 100 listed companies.
The levy would target nine institutions, including the big four banks and AMP, and the size of the levy would be linked to their market capitalisation. It said $320 million would be used to double the number of taxpayer-funded financial counsellors, from 500 to 1000 to give free advice and advocacy to an extra 125,000 people a year and increase the number of free financial rights lawyers from 40 to 240. A dissenting report was included in the Senate report, where Coalition members rejected certain recommendations including not supporting additional resourcing for community legal services and financial counsellors on the basis it believed the industry already pays for AFCA. It said: “Coalition members of the committee are satisfied that the financial sector contributes substantially to the cost of dispute resolution through membership of AFCA.”
It said any further contributions would require careful consideration. It said coalition members of the committee also note that the recommendation was “vague”. The Coalition members said a recommendation to increase AFCA’s cap on compensation to $2 million and review it now was premature and unnecessary as AFCA has been in place since November 2018 and the government had announced a review would take place 18 months from that time. The Coalition members slammed as “convoluted and ambiguous” the recommendation for a compensation scheme of last resort independent of AFCA. When it comes to whistleblowers, there are also noticeable differences. Labor has promised a suite of reforms to whistleblower protections if it wins office, including introducing a United States-style whistleblower reward system. Other reforms include a protection authority, the appointment of a special prosecutor to go after corporate crooks and an overhaul of the current whistleblower laws into a single act.
Despite a recovery in the March quarter, superannuation funds are heading for a disappointing 2018-19 financial year, with global growth challenges and a loss of market momentum meaning funds will struggle to make up for sharp losses in the December quarter. According to estimates from leading superannuation research house SuperRatings, balanced option returns were largely flat through March as markets were weighed down by weaker economic data and fears of further falls in home prices. The typical balanced option (defined as an option holding between 60-76% growth assets) returned an estimated 0.8% in March as the share market recovery came to a halt. The typical growth option also grew at 0.8% following strong gains in January and February of 3.2% and 3.4% respective
Moody’s Investors Service says that housing affordability for new mortgage borrowers in Australia, which improved over the year to March 2019, will continue to improve over the next 12 months, because of declining housing prices. More affordable housing reduces the credit risks of newly originated mortgages, which is positive for new residential mortgage-backed securities (RMBS) backed by such loans. Moreover, Moody’s expects housing prices to continue to fall moderately over the next year – due to reduced credit supply by the banking sector – and incomes are also rising, and these two factors are in turn driving further improvements in affordability. The proportion of household income needed to meet repayments on new Australian mortgages – Moody’s measure of housing affordability – declined to an average 26.5% in March 2019, from 28.7% a year earlier. In terms of specifics, median housing sales prices fell by 6.5% over the year to March 2019, while incomes increased an average of 2.8%. At the same time, average mortgage interest rates rose slightly to 5.4% in March 2019 from 5.2% a year earlier, but the effects of this were far outweighed by declining house prices and rising incomes. Housing affordability improved in Sydney, Melbourne, Brisbane and Perth over the year to March 2019, with the biggest improvement in affordability occurring in Sydney, where prices declined 10.7% over the year to March. However, affordability deteriorated in Adelaide.
Embattled company Freedom Insurance has reached an in-principle deal to sell its policy administration business for $5 million. The banking royal commission strongly criticised the company for its unethical sales culture Its shares are worth almost nothing and have been suspended by the ASX Freedom Insurance came under intense criticism at the banking royal commission for its high-pressure sales tactics, which has effectively destroyed its business model. In a statement to the ASX, the company indicated that the price would have been higher had it not been for “clawbacks” of trail commissions and “remediation of customers who may have suffered financial detriment”. However, Freedom Insurance would not reveal who the buyer was due to “confidentiality reasons”. The company also said there were plans to sell its Spectrum Wealth Management business, after which it “will have exited all its operating businesses”. Furthermore, it said the funds would be used to “pay creditors, wind down its remaining operations and meet any financial regulatory obligations” — and if there are any “excess funds”, they would be returned to shareholders.
Mining giant Rio Tinto has reported a 14 per cent drop in quarterly iron ore shipments and cut its 2019 shipments estimate on the disruption caused by a tropical cyclone which hit its export terminal in Western Australia last month. Rio, the world’s number two miner of the steelmaking material, cut its annual iron ore shipments estimate to a range of 333 million to 343 million, from a range of 338 million to 350 million tonnes announced earlier.
Rio shipped 69.1 million tonnes in the quarter ended March 31, down from 80.3 million tonnes last year and well below the Goldman Sachs estimate of 74.7 million tonnes. Cyclone Veronica disrupted ports used by miners Rio and BHP Group in late March. Rio earlier flagged a loss of about 14 million tonnes of production in 2019 due to the disruption caused by the tropical cyclone and a fire at a port facility in January.
Aged care provider Bupa has been hauled into court by the Australian Competition and Consumer Commission (ACCC) for allegedly making false and misleading claims about the services it provides at nearly a quarter of its facilities. The ACCC alleges residents at 21 of Bupa Aged Care’s facilities have been charged for services either never provided or only partially provided, The services were often valued at thousands of dollars year. Bupa operates facilities in most states, and houses more than 6,700 residents The ACCC alleged Bupa Aged Care charged thousands of residents at 21 aged care homes across the country a fee for a package of extra, and often expensive, services that it did not provide, or only partly provided. The allegations cover more than a decade between December 2007 and June 2018 and affect 21 of 74 aged care centres the large privately-owned provider has run in Australia since 2007. The ACCC alleged the fees for the extra services package often amounted to thousands of dollars each year.
An Australian wine company is helping to research grapes that can cope with climate change. Brown Brothers have supported the CSIRO research — which aims to develop new grape varieties that tolerate a hotter and drier environment — by grafting prototype varieties on to existing mature vines and seeing how they cope. Brown Brothers chief executive Dean Carroll said the company had noticed its harvests were happening earlier thanks to hotter and drier weather.
Japanese giant Nippon Paint has made an agreed $3.8 billion takeover offer for Australia’s biggest paint maker, Dulux Group. The proposal is via a scheme of arrangement for $9.80 per share in cash, inclusive of a 15¢ interim dividend to be paid by Dulux. Nippon Paints is based in Osaka, Japan and has 20,000 employees worldwide. Dulux has a workforce of 4,000 people and is headquartered in Melbourne. It became a separately-listed entity on the ASX in 2010 after the business was de-merged from explosives and chemicals group Orica. Nippon president and chief executive Tetsushi Tado said the proposed buyout was an important step in the company’s global growth ambitions. The company intends to run the Dulux business as a stand-alone operation and keep its name, with very little overlap in Australia. Dulux managing director Patrick Houlihan said the proposed transaction was an endorsement of the strong company which had been built and the success of the group since the de-merger from Orica.
And that’s it for this week. And next week I’ll be talking to Fiona Reynolds, the CEO of PRI, the Principles of Responsible Investment. We’ll be talking about what businesses should be doing about climate change. And I’ll be interviewing economist Nicholas Gruen.
And of course, I’ll be bringing you all the week’s news. In the meantime, you can find me on Twitter at talkingbizz, on Facebook and on LinkedIn. And if you want, leave a comment. Wishing you all a Happy Easter. Have a great week, take care, be good and looking forward to bringing you Talking Business next week.