Private sector investment is as dead as the Dodo

There is an investing narrative that suggests with three interest rate cuts in the past few months, companies are about to unleash a capex spending spree. I’m skeptical. Yesterday’s capex data, which surveys both past and future company capital expenditure, supports my skepticism.

Australian Private

I need to preface all of this with the observation (raised before) that for some sectors, forecasts are misleading. You need to be careful about which conclusions are safe to draw. Some sectors are good at forecasting capex, and some are terrible.

One of the only growing sectors is mining equipment:

But for mining, the good news gets wiped out by the bad.

Once you get into the industrial sectors, a bleak outlook is standard:

I have a keen interest in the construction sector, which I think will be patient zero if the Australian economy falls into recession. The construction sector has poor growth forecast.

Unfortunately, construction capex forecasts are historically inaccurate. I’m reluctant to read too much into construction forecasts, even though they support my thesis.

Optimists can seize on the one good subsector out of about 20:

No white horse, maybe a white flag?

  • The Reserve Bank has effectively run out of interest rates cuts to stimulate the economy
  • The Reserve Bank wants the federal government to spend on capital expenditure
  • The federal government refuses to spend more on capital expenditure
  • The federal government wants companies and state governments to spend more on capital expenditure and research
  • There are few property transactions, putting pressure on state government budgets which rely on stamp duty
  • State governments also can’t spend more on capital expenditure – the federal government collects most of the taxes and is focussed on delivering surpluses
  • Companies are refusing to spend more on capital expenditure due to the uncertain outlook

Far from riding to the economy’s rescue, the private sector seems to be hunkering down and not spending.

Investment Outlook

My view is that without considerable federal government stimulus, there is nothing on the horizon to suggest a recovery in the Australian economy. On the contrary, there is a range of risks which could result in considerable economic downside. For our investors and superannuation clients, cognisant of the risks, we are carrying close to minimum weight in Australian stocks.  

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Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

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Damien Klassen

Damien has a wealth of experience across international equities (Schroders), asset allocation (Wilson HTM) and he helped create one of Australia’s largest independent research firms, Aegis Equities. He lectured for over a decade at the Securities Institute, Finsia and Kaplan and spent many of those years as the external Chair for the subject of Industrial Equity Analysis.
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Comments

  1. GunnamattaMEMBER

    Well said.

    The new government the tax returns the rate cuts – and what? Retail consumption, business credit, sentiment and the outlook is floating face down in the pool. The economy is a corpse, and only the (rent seeking, population ponzi exhorting) scavengers are getting anything out of it.

    The coal, the iron ore, the lng? The students?

    How is that infrastructure to be funded again?

    Could we get another rainbow up the arse? Could we have a spoonful of ‘leadership’ which wasnt taking from the future to pay for an entitled present?

    Could we have a political leadership which acknowledged life as the punterariat currently experiences it?

    It is a simple matter of when one or more of those buckles, and without that acknowledgement there will be a heads on sticks moment….

  2. SnappedUpSavvyMEMBER

    we should already be in a recession, small and medium businesses have taken a big hit this year.

    if unemployment wasn’t fudged by casualisation it would be much higher

    • I have had a mate sending me photos of nearly empty carparks at Chadstone shopping centre each evening this week.

      I actually think we are in recession right now.

      • The recent pics of Scomo’s electoral office in a building surrounded by closed shops, apart from a massage parlour, were very telling.

        There’s lots of boarded up retail space in Canberra now. A bloke from rural NSW once described Canberra to me as a “money town”, so when things are hurting here I can only presume they’re lots worse elsewhere.

        • RE agents are calling me back a lot more these days than in my earlier forays into CBR house hunting. Although it might just be that I am trying to be slightly nicer to them these days (keep your enemies close, and all that).

          • I’m probably gonna buy a place late next year, so I’ve just started looking around and been to a few open houses and auctions. No doubt they’ll be pinging me shortly too.

      • SnappedUpSavvyMEMBER

        every small and medium sized business on the east coast is hurting right now, the economy is on the precipice as described in the article, its got to the point where you keep your wallet shut even though you know its not helping because the game has moved on and become survival of the fittest or dog eat dog

      • The wife is at Doncaster today, and there are queues of traffic on the road trying to get in for all the “specials” but normally its quite empty. I do believe we are in recession already, when we hit the point where it becomes apparent is the question. The RBA says it wont use negative interest rates, which means it has already considered them and probably will when needed. The RBA says it doesnt know why the economy is not recovering. They are truly ignorant or liars, i’m thinking the later.

  3. We’ve had significant interest rate cuts throughout this decade and all it has stimulated is higher house prices and a hollowing out of the rest of the economy.

    What do they say about the definition of stupidity?

  4. To be honest nothing but increased nominal wages will fix this. Why invest if there is no customer demand? Fundamentally the business sector on the whole wants to make more money than it spends (otherwise it goes broke) so expecting it to invest when the household sector is completely squeezed dry by debt is silly. Its not worth investing at any price/cost of capital just to lose money.

    Interest rates going to 0 (and that actually going to loans) may help quite a bit if you could pass it along but that’s not happening. The debt needs to be written down one way or another.

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