A large portion of 2013 saw a steep decline in business confidence and business investment. The start of this can be traced back to the announcement of the Federal Election in February 2013, effectively turning the election campaign into a six month affair. Traditionally, a period between the election announcement and result is a time of uncertainty as businesses pause, awaiting the outcome and promises of the parties. Once an outcome is determined then companies typically recommence making longer term plans, taking into account the 'new' political landscape.

With the election behind us, the new Government are setting a major platform to assist businesses including unwinding the carbon tax. They consider this will reduce the cost of doing business in Australia, making our companies more competitive. This should be beneficial to many areas of the business community and assist with overall confidence. This may well not occur until the new Senate is installed in July 2014 as Labor and the Greens have both indicated they will oppose this action.

Notwithstanding this activity, the Reserve Bank has recently wound back its economic growth forecast for 2014 from 2.25%-3.25% to 2-3%. The reasons cited for the downgrade relates mainly to business investment. Mining companies are far more circumspect with their spending and project delivery. Surveys of the non-mining sector likewise indicate that whilst they are feeling more confident, there are few plans to increase investment in the coming 12 months. Expect unemployment to creep up through 2014, however don't expect it to reach anywhere near the disastrous levels of some European nations.

With businesses holding back on spending and thus holding cash on their balance sheets, we consider the year may provide increased activity in mergers and acquisitions.

This will be evident both in the large and medium end of town. We can expect to see continued bids from overseas for our companies particularly in the agricultural sector.

The best way to gain from this activity is via managed funds that invest in the smaller companies – those outside of the top 50 – as this is where a lot of the corporate activity is likely to be.

Consumer sentiment appears to have a slight uplift and spending into 2014 is forecast to lift. This should flow through to the retail and building sectors which have been in a definite slump over the past 18 months. Many households have held off upgrading their house over this period and there is now movement in this sector. Sentiment is strengthening with auction clearance rates increasing particularly in the Eastern states. The chance of a property bubble is unlikely with demand being at high levels and inventory at low levels. The low interest rate environment is likely to keep this sector buoyant however the record high levels of household debt are likely to constrain growth in the near term.

All in all, we consider business confidence will rise toward the latter part of 2014 however the headwinds highlighted by the Reserve Bank need to be considered when looking where to invest for the next 12 months. The Australian banks appear to be at full value (see Idea 10) whereas some of the companies outside of the top 50 may provide value. The best way to access these is via the better quality managed funds. Overseas opportunities should also be front of mind.

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