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
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
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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