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.
First I talk to Tony Nash, the founder and CEO of Booktopia, the Australian competitor to Amazon.
And then I talk to AMP Capital chief economist Shane Oliver looking at the impact of the US-China trade war on the market.
But first, let’s talk to Tony Nash.
Global markets have been hit with the US-China trade war with Wall Street in freefall, wiping more than $1.4 trillion off the value off equity markets,
It all started when Donald Trump challenged China to return to the negotiating table and do a trade deal with him before the next US presidential election or face even tougher demands in his second term. In a bombastic series of tweets after talks failed to avert an escalation in existing US tariffs and gave way to threats of more to come, Mr. Trump accused Beijing of trying to stall until after the next election when it could negotiate against a softer Democrat president.
However, he warned late on Saturday (Sunday AEST) that “they know I am going to win” thanks to the “best” economy and employment numbers “in US history”. “The deal will become far worse for them if it has to be negotiated in my second term. Would be wise for them to act now,” he wrote, adding that he loves collecting “BIG TARIFFS! The outburst rounds out a week of presidential negotiation-by-Twitter in which Mr. Trump has doubled down on his strategy of goading China towards a hardball deal. US officials began on Friday imposing a 25% tariff- up from 10% – on $US200 billion ($286 billion) of Chinese imports and issued a formal notice that the process of slapping the impost on the country’s products.
China responded, saying it will impose tit-for-tat tariffs on an additional US$60 billion worth of US goods from June 1, hitting back at Washington in defiance of a Twitter threat from Donald Trump. China’s finance ministry released a statement on Monday evening stating that the US move to raise tariffs from 10% to 25% on US$200 billion in Chinese goods on Friday had escalated trade frictions between the US and China. China’s commerce ministry, whose officials are negotiating the trade deal with the US, said in a separate statement that China’s counter measures were “rational and restrained”. The start date would depend on US actions.
Morgan Stanley has warned that the escalation in stock market woes has increased the likelihood for a prolonged economic downturn – the most reliable killer of bull markets. JPMorgan Chase & Co’s head of cross-asset fundamental strategy, John Normand, warned that stocks could fall another 10% . “The risk of an economic downturn has increased substantially,” Wilson said in a note to clients Monday. “While last week’s correction helped move the risk-reward closer to balanced, we think there is likely more downside than upside based on our high conviction view that earnings expectations remain too high by 5-10%.”
Australia had another weak wages result, with no evidence of material pick up. Average hourly wages excluding bonuses rose by 0.5% after seasonal adjustments, undershooting expectations for a larger increase of 0.6%. Despite the quarterly undershoot, the increase in wages over the year held steady at 2.3%.
The value of housing finance fell by 3.2% in March, more than reversing the gain seen in February. After last month’s bounce, a fall was not surprising, although the magnitude of the loss was larger than expected. The yearly decline slowed marginally, though, from -20.3% in January, -18.6% in February to -18.4% in March.
Consumer confidence fell last week as Australians’ perception of the economy at large took a sharp negative turn following the central bank’s decision not to cut the cash rate, ANZ analysts say. The ANZ-Roy Morgan Australian Consumer Confidence index slid by 2.1% from the previous week, with the “time to buy a household item” dropping 2.5%.
Confidence levels at Australian businesses remain weak, according to the latest NAB Australian Business Survey for April. And business conditions have deteriorated sharply, with steep falls in employment prospects, as well as sales and profits, Perceived operating conditions sit near the lowest level since mid-2014. Forward-looking indicators such as new order and operating capacity remain at levels well below those seen in prior years. Business conditions fell to +3 index points after the short-lived bounce last month. While confidence levels did improve a touch with the NAB index lifting to 0, up from -1 in April, it remains both below average and near the lowest level since mid-2013.
Prime Minister Scott Morrison has made a last-ditch bid to boost his stalling election campaign with a pledge to help young Australians get on the property ladder, as a new opinion poll showed his government remains on track to lose Saturday’s vote.
Morrison will offer guarantees for first-home buyers, meaning they only have to save 5% of the purchase price as a deposit instead of the 20% typically demanded by banks. With many young Australians priced out of the market by a five-year housing boom, the issue has been pivotal during the election campaign.
The new policy may not be enough, however, to engineer a come-from-behind victory. Morrison’s conservative government trails the left-leaning Labor party 49% to 51%, according to a Newspoll published by the Australian newspaper on Monday. Should that margin be replicated at the ballot boxes, Labor will win power for the first time in six years.
The property market has been central to the election campaign. While prices are now falling, many Australians are trapped in the rental market. Oppositon leader Bill Shorten has already pledged to curb tax breaks for property investors that helped turbo-charge the market. He swiftly adopted Morrison’s deposit guarantee, meaning first-home buyers will get some relief regardless of who wins on Saturday. The 500 million plan to help first-home buyers into the market did not go through cabinet and was been modelled for its impact on property prices, as experts warned the policy will struggle to meet its objectives.
The Commonwealth Bank has set aside a new, $714 million provision for customer remediation costs, bringing total refunds for failings in its banking and wealth divisions and program costs to more than $2 billion. The bank’s quarterly earnings update on Monday highlighted the tough environment for banks as its cash earnings fell sharply lower. Unaudited cash profit from continuing operations fell about 9% to about $1.7 billion for the third quarter, excluding the extra customer compensation costs. Expenses rose 24% including the provision, and edged up 1% without it. CBA’s trading update on Monday comes after the three other major banks reported half-year numbers over the past fortnight, also dragged down by heavy remediation provisions as banks clean up after the Hayne royal commission.
National Australia Bank and ANZ Banking Group are “dragging their heels” on fully disclosing the risks to their business from climate change, climate activists say. Both banks have signed up to Task Force on Climate-related Financial Disclosures reporting, which requires regular reporting of the business risks of climate change to their investors.
But Market Forces executive director Julien Vincent said the two banks had produced “virtually nothing” in their new set of interim results. NAB more than doubled its coal exposures to $1.47 billion in the year to March but reduced its coal power generation exposures by $58 million. NAB’s investor presentation showed the company’s lending to the mining sector expanded to $10.5 billion from $7.6 billion in the prior year. Coal mining accounted for 14% or $1.47 billion – more than double the $608 million of coal loans a year earlier (8% of the total). NAB did not include a scenario analysis, which made them the “biggest loser”, he said. ANZ included a limited set of metrics that showed their progress towards emissions reduction targets and its development in funding green initiatives. There was no scenario analysis.
An $18 billion surge in renewable energy infrastructure is part of a stronger-than-expected spend on infrastructure that is offsetting falling residential construction and will limit job losses, the latest six-monthly forecasts from peak body Australian Construction Industry Forum show. The boost in new projects under the electricity and pipelines category over the past six months is more than the entire $14 billion worth spent in the sector in FY18 and nearly all of it – 97% – is on infrastructure to support the growing demand for renewable energy, the Australian Construction Market Report shows
Secret research shows that the reputation of the mining industry is “nearing crisis” in Queensland, with a “decline in positive sentiment” and a “bulge in distrust”, even among people who support the industry. The survey of Queenslanders found a belief mining profits benefited a few at the expense of the rest of the country and the future, The QRC funded survey found only the scandal plagued financial and aged care sectors have worse reputations than mining The distrust was mainly based on strong negative perceptions of open-cut coal mining The study, carried out by market research company Ipsos for the Queensland Resources Council (QRC), found that “perceptions of the resources sector in Queensland are almost entirely based on strong negative perceptions of open-cut coal mining”.
The results of the confidential research challenge the political wisdom that the electorate is divided between “coal-loving Queenslanders” and voters in southern states who want stronger action on climate change. The findings of the study, billed as a “reputation deep dive”, include:
- Only finance and aged care — industries whose conduct sparked royal commissions — have a more a negative reputation than mining
- Tourism and agriculture are viewed more favourably, but mining is seen as a threat to their existence
- Renewable energy and sustainability are “top of mind” and seen as “a future we should all be embracing”
- The resources industry is “focused on continuing to mine rather than invest resources and money into the progression of renewables”
- “The Government is not seen as taking a leadership role” on climate change policy
- The resources industry is “aligned with the government in continuing reliance on coal power stations”
- The resources industry is seen as “unsustainable” and “its strong association with coal and traditional energy leaves it vulnerable to attack”
Without prompting, nearly one in five people said the resources industry “damages the environment” — almost as many as those who said it “supports the economy” or “creates jobs”.The days of record-breaking broadcast deals for sports outside the major codes may be coming to an end as Foxtel looks to cut costs amid pressure on profits. The pay TV provider could also hit subscribers with another price increase. This follows an 11.5% or $3 price increase for Foxtel’s basic $29 per month service.
On Monday, News Corporation released the most-detailed look into Foxtel’s finances that investors have ever seen publicly. The documents showed Foxtel’s large and rising cost base, which has put stress on the business as it deals with declining revenue and earnings Over calendar 2018, Foxtel had operating expenditure (opex) of $2.56 billion and is forecasting its capital expenditure (capex) to be between $470 million and $480 million for the financial 2019, following a year where it rolled out Kayo Sports, 4K video, and is planning the release of a new user interface in the coming months. Of Foxtel’s operating expenditure in the same time, $1.6 billion was related to programming costs of which the pay TV provider said about $800 million was related to sports rights and the production associated with broadcasting them.
While sports costs are largely fixed over the length of the rights deals, News Corp said there was an opportunity and potential lever to “reduce spend on non-marquee sporting content”. However, the media conglomerate did not define what sport is considered marquee for Foxtel. On an audience and cost basis, Foxtel’s biggest sports are the AFL, NRL and cricket – all of which have long-term contracts with the pay TV provider. Foxtel will likely have to make some tough decisions to reduce its fixed-cost base, and sports that aren’t considered marquee could face a fall in the value of their rights deals.
Takeover target Automotive Holdings Group has warned profits for 2018-19 will be weaker than expected because of a downturn in new car sales and a soft performance from the refrigerated logistics business it is trying to sell. The downgrade, amid an extended slump in new-vehicle sales across the industry as consumer confidence is hit by falling house prices and pre-election jitters, raises questions about whether predator AP Eagers might do the same at its annual meeting on May 15.
AP Eagers has an agreed $2.3 million merger proposal with AHG that got the green light from the AHG board last week after the all-scrip deal was sweetened. A merged AP Eagers and AHG would create a market leader in new-vehicle dealerships with almost 12% of the sector and have 229 new-car dealership locations in Australia. The deal still requires the approval of the Australian Competition and Consumer Commission.
AHG said that operating net profit after tax was now likely to be about $50 million, compared with the guidance of between $52 million and $56 million outlined in February. And car dealership group AP Eagers has warned that profits for the June half could be up to 10% below the same time last year as weak new vehicle sales across the industry crimp the bottomline. AP Eagers chief executive Martin Ward said external trading conditions in the car industry nationally were difficult and across the industry, new vehicle sales were down 8.1% for the first four months of calendar 2019.
And that’s it for this week. And next week I’ll be talking to Chris Balazs, CEO and co-founder of Provenir, an ag-tech company which has built Australia’s first vertically integrated, commercially licensed mobile abattoir to process livestock at the point of production – on the farm where they were raised.
And I’ll be talking to Indeed economist Callum Pickering about Australia’s wages and labour force figures.
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.