Recent CAPEX figures indicate that the investment intentions of Australian businesses remains subdued. Whilst the declining investment in the materials sector has largely been anticipated it has been the weak response from the services and manufacturing industries on the East Coast that has been a surprise. We recently asked four fund managers what they believed was required to see a pick up in business investment. You can read their responses here:
Give us a weaker dollar and stronger leadership
John Abernethy, Chief Investment Officer, Clime Asset Management
A substantially lower $A and by that I mean below US70 cents. Further some disciplined political leadership with a propensity to make hard decisions that ensures that Australia is clearly at step with Asian growth is essential. It is essential that political bi-partisanship is developed. There is way too much pathetic political disagreement that surely makes business question the integrity of the economic framework they deal in.
An interesting correlation between confidence and the market
David Poppenbeek, Head of Australian Equities, K2 Asset Management
In Australia, business confidence tends to be positively correlated to share price movements. Unfortunately, business confidence also tends to lead corporate investment expenditure. This is not the ideal feedback loop. By way of example, from the start of 2003 through to mid 2007 the ASX 200 Industrial index rose by 23%pa. Industrial related capital expenditure concurrently rose by nearly 60% and peaked just as the GFC emerged. Also recall that from early 2004 up until mid 2008 the ASX 200 Material index grew by 30%pa. Unsurprisingly, mining capital expenditure grew four fold over the corresponding period. Hence, over the past decade, a number of major Australian businesses expanded capacity at the peak of the demand cycle only to operate the new capacity at the bottom of the price cycle. Unless this cyclical behavior alters, we believe that business confidence will remain challenged until such time that the ASX 200 holds above 6200. Disappointingly this means that corporate investment will most likely remain subdued for at least another year.
The undercurrents for improved confidence are there
John Deniz and Nick Reddaway, Managing Director, Paragon Funds Management
While the latest capex figures were weaker than expected, the estimate of future capex in 2015-16 was almost 10% lower than the markets expectations. The big drag here remains mining capex which is seen falling ~37% from the prior year. We remain positive that the undercurrents of reform in China will see benefits to the economy in future years, signalled by a strongly rising stock market. This of course would feed into demand for mining and future mining capex in Australia. Outside of mining, lower rates and stronger property markets should be driving the positive feedback loop for consumer confidence. This will only get stronger as job growth begins to improve, bolstered further by a falling AUD. Forecasted growth in major Australian infrastructure projects (+ ~30% growth over the next 4-5 years) will also help drive improving business confidence over the period.
Two key catalysts for growth
Tim Hannon, Chief Investment Officer, Freehold Investment Management
We judge there are two key catalysts that could bolster business confidence in the short to medium term:
- A lower Australian dollar, further lifting key export industries such as mining, tourism and education
- The Federal and State Governments driving infrastructure spending through selling existing assets and reinvesting in fresh productivity-enhancing projects.
Alternatively Government could provide a mild financial incentive to see private capital undertake the infrastructure spending (for example tax effective infrastructure bonds)