Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

'Huge fan of your work. Very impressive!' - Scott Pape, The Barefoot Investor, Australia's #1 bestseller.

'Must-read, must-follow, one of the finest analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Business Insider.

'I've been investing 40 years yet still learn new concepts from Pete; one of the finest young commentators' - Michael Yardney, Amazon #1 bestseller.

'The most knowledgeable person on Aussie real estate - loads of good data & charts...most comprehensive analyst I follow in Oz' - Jonathan Tepper, Variant Perception, 2 x NYT bestseller.

Friday, 28 August 2015

Crapex again...

Actual capex

The ABS released its Private New Capex data for the June 2015 quarter yesterday, which revealed a 4 percent decline in total capex for the quarter to be 10.5 per cent lower than one year ago at $34.3 billion in volume terms.

This represents the fourth consecurive decline in new business spending on buildings, structures, equipment, plant and machinery, and follows on from a similar decline in the March quarter.

No surprises for guessing that mining investment was the main driver of the decline with a massive 11 per cent drop in the June quarter and considerably worse to come.

This wouldn't quite such a big deal if manufacturing wasn't also simultaneously going down the toilet with a 7 per cent decline in capital investment over the past year.

It has been estimated that "conservatively 25,000" jobs will be lost particularly in and around Greater Adelaide as the car assembly industry shuts up shop. 

On the plus side, "other selected industries" (data which does not capture all industries) are gradually responding to low interest rates with investment increasing by around 10 per cent over the past year.

Services investment in particular is now at its highest ever level at more than $64 billion over the year. 

State versus state

While other states such as New South Wales, Victoria, Tasmania, and especially the ACT saw an increase in actual capex, South Australia has seen new capex decline by 19 per cent over the year, which is somewhat concerning since the state never really got its boom in the first place.

A combination of residual LNG investment, project overruns and large asset purchases in Western Australia have temporarily arrested the inevitably huge decline in capital expenditure that state. 

The bulk of the capex decline has taken place in Queensland, with more than a 30 per cent decline in capital expenditure over the past year. 

As the chart below shows, the Queensland story mirrors the national narrative, this being that most industries ex-manufacturing including services are steadily responding to easy monetary policy, but mining and resources investment is heading into wipeout territory following an unprecedented investment boom.

While this will be reflected in healthy export volumes in the future, the near term story is that many mining and resources regions are already effectively in recession with demand descending into oblivion.

The outlook

At least as important as what has happened in FY2015, is what is expected to happen in FY2016.

Estimate 3 for total capital expenditure in FY2016 came in at $114.8 billion - refer to the unshaded bars as circled below. The main contributor to the decrease was a huge collapse in planned mining investment at -37 per cent. 

The positive news was that the third estimate sits some 10 per cent higher than the second estimate released last quarter, with the main contributor to this improvement once again "other selected industries" (+17 per cent).

However, as you can see this improved estimate is still some 23 per cent lower than the equivalent estimate last year. 

Thus at this stage the the chart continues to suggests a very significant drop from what has actually happened in this financial year to what is expected to happen in the next. 

That said, the estimates have been improving moderately, and the 10 per cent jump this quarter was the biggest such leap in half a decade.

The wrap

What many of us would like to know is whether this will result in further interest rate cuts.

While the Reserve Bank would evidently prefer to hold interest rates in order to assess the impact of previously delivered cuts, there are data releases which could bring forward further easing.

On Wednesday next week the National Accounts are to be released for the second quarter with the market expecting a particulalry soft print for GDP, perhaps as low as +0.2 per cent. 

Since net exports and inventories will not contribute anything like as much to the Q2 result as they did in Q1 there is even a small chance that the print is negative (call me an old sceptic, but as an accountant I'd say a downward revision to Q1 is far more likely than an outright negative result for Q2).

Either way, as I looked at in some detail here last quarter, while the +0.9 per cent result for Q1 was superficially strong, it was overwhelmingly concentrated on net exports and new housing, and there is every likelihood that future quarters will see much weaker results.

For all of these reasons futures markets are expecting to see another interest rate cut before too long, but we'll have to wait and see on that.