What the current state of Australia’s economy means for investing

This month’s release of Australian gross domestic product (GDP) and underlying economic data has been broadly presented by media commentators as ‘disappointing’. The fact is, bad news sells. However, we on the Dixon Advisory Investment Committee have delved deep into the data and believe that there’s much more to it than the pundit’s spin. If you’re an investor, there’s plenty to consider as we look towards 2018.

GDP growth was decent with signs of improving wages growth; but debt is still debt

The GDP growth number itself was decent at 2.8 per cent per annum. This is actually its fastest growth rate since the second quarter of 2016, notwithstanding expectations that it should have been higher. The ‘disappointment’ was mainly due to lower-than-expected household consumption numbers and weak consumer spending.

It’s important to remember, wage growth has been weak and household indebtedness high for quite some time now, and while the cost of servicing that debt is low, in the end it’s still debt that needs to be repaid – either by selling assets or earning more.

The assets underlying that debt are typically the family home and superannuation, neither of which can be drawn upon easily. This can make that debt number uncomfortable for most households in the face of low wage growth. However, there seem to be signs that wage growth is improving, and if it does, we should see that feed through into spending.

Corporate and government spending increased supporting property and employment

The sound GDP growth numbers were essentially supported by business investment and government spending, both of which bode well for the economy. The strength of infrastructure spending in the eastern states (conversely emphasising the paltry contribution of federal government) and its benefit to property prices and employment is being reflected in those growth numbers.

Business investment is essential to the long-term health of our corporations, but can be a mixed blessing for investors. There are increasing signs that the cost cutting phases of Chief Financial Officers are ending as companies gain confidence as reflected in business conditions surveys. For example, the October NAB Monthly Business Conditions Index hit the highest level since it began in 1997. Where this may disappoint investors is that company profitability in some cases has been unsustainably high, driven by lower investment and stringent cost cutting. As my old boss used to say, “it’s hard to cost cut your way to growth”.

As investors, it’s important to stay future-focussed and keep a close eye on key indicators

So, should we be ‘disappointed’ as suggested by the press? From an Australian economy perspective, not particularly. Weakness in the consumer side of the economy was entirely predictable and continues to hinge on wages. The long-awaited support for our economy from much needed infrastructure spending is occurring. Healthier corporate investment is also positive.

We do not believe the numbers are strong enough yet to support higher interest rates, hence wage growth numbers remain important. Static interest rates and a fall in terms of trade point to a weaker Australian dollar – good for our service exports (tourism and education particularly) and for the prospects of overseas investments.

From an Australian corporate perspective, an increase in capital spending and potential lift in wages point to a squeeze on corporate profitability. Overall, we remain cautiously positive for the Australian economy. However, we find it hard to see value in Aussie equities. We believe they should remain a core part of your portfolio, but not overweight. We recommend looking for value rather than being simply invested in the broad index.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

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Patrick Broughton

Investment Committee Chairman

With 25 years’ global investment banking experience in a broad range of financial markets, including equities, fixed income, hybrids and convertibles and foreign exchange, Patrick Broughton is charged with chairing the Dixon Advisory Investment Committee.

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