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 fifteen in our series for 2019 and today’s date is Friday May 10.
First I talk to Tom Uhlhorn, who runs the Melbourne based Customer Experience consultancy Tiny CX. It has launched the first practical online CX course, known as the CX Academy.
And I’ll be talking to CommSec economist Craig James looking at what’s ahead for the markets next week.
But first, let’s talk to Tom Uhlhorn.
President Donald Trump ramped up pressure on China to finalize a trade deal during talks in Washington this week. Trump has dramatically threatened to shatter a five-month trade war truce by announcing tariff hikes on more than $US525 billion ($752 billion) of Chinese goods because Beijing is moving too slowly on a deal.
The sudden escalation in a series of incendiary Sunday afternoon (Monday AEST) tweets coincides with another round of talks due to resume between the two sides this week in Washington and after negotiations continued in Beijing last week. Mr. Trump said tariffs on $US200 billion of goods from China will increase on Friday to 25% from 10%.
The president originally planned to impose the 25% hit on January 1, but agreed to hold fire after he and China’s president Xi Jinping agreed on December 1 to a 90-day ceasefire. That deadline expired in early March and was extended indefinitely by Mr. Trump In addition, Mr. Trump said a further $US325 billion of goods now subject to no additional tariffs will also be slugged 25% on Friday. The expanded tariffs will cover most of China’s exports to the US. “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”, Mr. Trump wrote in a tweet on Sunday afternoon.
The president credited the US economy’s “great” strength on existing tariffs on Chinese goods, which were introduced last year and include a 25% rate on a further $US50 billion of high tech goods.
The surprise hitch in trade talks between the United States and China spooked investors sending global stocks tumbling. Wall Street’s nerve is being seriously tested for the first time this year as increasingly wary investors. Already jittery investors appeared to lose their cool as markets in the US barrelled through their final hour of trading in a blur of spiking volatility and collapsing valuations.
At its bleakest point, the benchmark Dow Jones Industrial Average tumbled 648 points before a brief rally in the minutes before the bell saw it close the session on Tuesday (Wednesday AEST) down 473 points, or 1.8%. The S&P 500 Index fell 1.6% ended weaker despite closing off the session lows, posting its broadest day of declines since the Christmas Eve sell-off. The Eurofirst 300 index closed down 0.9% and China’s CSI 300 index of major Shanghai- and Shenzhen-listed stocks tumbled 5.8%, marking its worst day since February 2016. On Wednesday, the ASX 200 index had fallen 0.8% to 6,237.
Every sector is in the red, with technology (-2.1pc) and energy (-1.5pc) being the weakest performers. Investors are worried that additional tariffs if imposed, could interrupt supply chains and hamper economic growth.
The Reserve Bank of Australia has signaled that it could cut interest rates to new record lows if the jobless rate does not fall below its current 5%, after it kept its 1.5% cash rate on hold and trimmed its economic growth forecast. Resisting financial market pressure for a pre-election interest rate cut, Reserve Bank governor Philip Lowe said the bank ‘‘recognised that there was still spare capacity in the economy’’ and downgraded its economic growth forecast to about 2.75% in 2019, from 3%.
ANZ Australian Job Advertisements showed some stability in April with a close-to-unchanged result, after five successive large monthly declines. In seasonally adjusted terms, job ads fell just 0.1% m/m to be down 5.6% y/y. This was an improvement on the 6% y/y decline recorded for March and the smallest monthly decline since there was a small increase in October last year. In trend terms, job ads dropped 0.9% m/m to be down a large 6.3% y/y. This is the largest annual fall in the trend series since January 2014.
The March Quarter 2019 Sensis Business Index has revealed that Australian small and medium business (SMB) confidence fell significantly across the country, following last quarter’s highs. Confidence levels decreased 16 points to +34, its lowest level since March 2016.
Australian retail sales rose by 0.3% in March following an upwardly-revised 0.9% gain in February. Markets were expecting sales to lift by 0.2% during the month. However, the improvement in recent months largely reflects higher prices, not turnover levels.
Westpac Banking Corporation said its first-half cash profit fell 22% to $3.296 billion because of ongoing compensation costs and its decision to exit the loss-making personal financial advice market. The bank’s crucial net interest margin — the profitable gap between what Westpac pays to borrow money and the rate it lends it out at — dropped sharply from 2.28 to 2.12%.
Costs at the bank rose 1% to $5.041 billion from $5.007 billion from the previous half however after major remediation and restructuring items were stripped out costs were down 3%. The number of staff at the bank measured by full time equivalents fell by 788 or 2% to 34,241 from 35,029. The bank’s crucial net interest margin — the profitable gap between what Westpac pays to borrow money and the rate it lends it out at — dropped sharply from 2.28 to 2.12%.
Westpac has also warned lending growth will continue to slow to 3% in the bank’s current financial year and 2.5% in the next one, putting further pressure on earnings over that period. The bank is expecting home prices to remain soft and home building activity to fall. The weakness in the housing market, as well as an increasing number of borrowers rolling off interest-only loans onto principal and interest, is resulting in a rise in mortgage delinquencies.
The proportion of borrowers at least 30 days behind on their home loan has risen from 1.4% in September to 1.59% at the end of March. The share of Westpac home loan customers more than 90 days behind has risen more sharply from 0.72 to 0.82% which Westpac said is partly to do with “lower market activity, leading to customers remaining in collections for longer” as it takes longer to sell repossessed homes. The bank also singled out the impact of the major bank levy on its financial performance.
Westpac and the corporate regulator have returned to court for the first day of a potential eight-day hearing on responsible lending, which could have wide ramifications for other banks and the home loan market. ASIC sued Westpac for irresponsibly approving loans that it shouldn’t have.
Both sides agreed to settle the case, but the Court refused to approve the deal. $35m would have been a record penalty for breaching national credit laws The Australian Securities and Investments Commission (ASIC) accused Westpac of breaking the law when it approved loans using the Household Expenditure Measure (HEM) — a relatively low estimate of basic living expenses — rather than customers’ actual declared living costs in its automated loan approval system.
The regulator also alleged Westpac failed to properly assess whether applicants could afford to repay interest-only loans after the loans switched to higher principal and interest repayments. Both parties reached a settlement last year, with Westpac admitting it breached the National Consumer Credit Protection Act and agreeing to pay a record $35 million civil penalty. But the Federal Court, in a highly unusual move, refused to approve the settlement, forcing both sides to re-litigate their case.
Gina Rinehart has won the latest stage of the marathon battle with her children over mining royalties in the High Court, and the case will now be heard behind closed doors. Mrs. Rinehart’s two eldest children – Bianca and John – wanted a dispute over deeds that reduced the holdings of her four children in three Pilbara mines from 49% to 24% heard by a judge. However, the nation’s top court ruled on Wednesday that Mrs. Rinehart could enforce a clause that said all grievances were to be settled by confidential arbitration instead of a hearing in open court.
One of the toughest advertising markets of the last decade has forced radio network Macquarie Media to downgrade its earnings expectations for 2018-19. Macquarie Media has warned it now expects earnings before interest, tax, depreciation and amortisation to come in between $27 million and $29 million for the 2018-19 financial year, down from previous guidance of between $29 million and $32 million.
The company said “trading conditions have fallen below expectations” in a statement to the Australian Securities Exchange. Macquarie Media is 54.4% owned by Nine, publisher of The Australian Financial Review. The Age and Sydney Morning Herald. Nine acquired the stake in Macquarie Media as part of its $4 billion merger with Fairfax Media, which completed in December 2018. Nine is keen to buyout the stake in Macquarie Media it doesn’t already own but has not yet made a move.
Deloitte must supply a further laptop containing data of its audits of failed retailer Dick Smith after failing to strike out claims made in two shareholder class actions that allege the firm’s accounting work on the retailer was negligent. The order over the laptop, issued on April 24, came after the court ruled against the firm’s application earlier in the month to strike out the claims, saying they did not outline what the firm should have done.
The class actions allege that had Dick Smith’s “financial statements been corrected or a qualified audit opinion issued in respect of them, [the retailer] would not have floated and been listed on the ASX and [the class action shareholders] would not have acquired their shares”, according to the judgment of the strike-out application by NSW Supreme Court Justice Michael Ball. The shareholders, who have also made claims against the liquidated Dick Smith entity, ex-CEO Nick Abboud and ex-CFO Michael Potts, allege that Dick Smith did not correctly account for its inventory, meaning that the retailer’s financial statements did not give a true and fair view of its financial position in the 2013, 2014 and 2015 financial years.
Deloitte’s failure to identify these inventory issues during its audits of the company meant the firm failed to conduct its audits according to the required auditing standards, did not exercise reasonable skill and care, and engaged in misleading and deceptive conduct, according to the class actions. Dick Smith was floated by Anchorage Capital Partners in December 2013 for $520 million but went into voluntary administration in January 2016 and was placed into liquidation in July 2016. The collapse was caused by factors that included a rebate driven culture that led to excessive inventory. Inventories at the retailer increased from $171 million to $293 million between June 2013 and June 2015. Dick Smith also wrote down $60 million of inventory in late 2015.
Hong Kong’s GMT Research claimed Australia’s biggest construction group, CIMIC, had used “accounting shenanigans” to inflate pre-tax profits by $1 billion over the past two years. CIMIC, which is building many of Australia’s biggest infrastructure projects including Sydney’s $16.8 billion WestConnex motorway and the Melbourne Metro, has been “dressing up” its financial statements since it was acquired by Spanish construction group ACS in 2014. CIMIC had taken an aggressive approach to revenue recognition, consistently recognising large amounts of unbilled revenue that added about $400 million to profits in 2017-18, GMT said.
Rio Tinto has invited the big American Caterpillar to deliver 20 haul trucks, four autonomous drill rigs and all the loaders, bulldozers, water carters and diggers that will be needed at what will eventually be the Anglo-Australian’s biggest Pilbara mining complex. The deal effectively makes Caterpillar the exclusive provider to a project that Rio bills as the first digitally intelligent mine.
And the good news doesn’t stop there for Caterpillar and its Australian dealer, the Kerry Stokes controlled WesTrack. This contract covers only the 43 million tonnes a year first phase of Koodaideri’ hi-tech future. But Rio’s ultimate aim is to lift production to 70mtpa. To make that happen will require more fleet and, all things being equal, it is hard to imagine that Rio would shift equipment providers half-way through the race to planned capacity.
Until now Rio has retrofitted its existing mining fleet with the still-evolving digital technologies that have revolutionised the way miners work. Koodaideri is the first mine that has been designed and built to best utilise the two generations of in-house innovation that is Rio’s trademarked Mine of the Future project. Rio’s robots will arrive with a high level of predictive intelligence that will then be enhanced by what its machines learn. For example, the experience will hone the robots’ ability to prioritise individual and group needs.
And that’s it for this week. And next week I’ll be talking to Tony Nash, the founder and CEO of Booktopia, the Australian competitor to Amazon. And I’ll be talking to RMIT economist Jonathan Boymal.
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. Have a great week, take care, be good and looking forward to bringing you Talking Business next week.