BetaShares Market Insights: Business Investment Update | BetaShares

BetaShares Market Insights: Business Investment Update

BY David Bassanese | 1 December 2015

The ABS capital expenditure survey for the September quarter was released last week. It contained the all-important official update on private business investment intentions for the current financial year.  There is both good and bad news in the latest report. But overall it continues to suggest the economy faces a major slump in business investment this financial year – the likes of which has not been seen outside of recessions.

To my mind, the ABS capital expenditure survey (“Capex” report) is currently one of the most important indicators of the Australian economic outlook.  Australia is in the midst of a massive slump in mining investment and, so far at least, there has been little sign of the long hoped for pick-up in non-mining investment.  We have previously analysed the two previous reports here and here.

The good news is that the latest Capex report suggests a modest upgrade to business investment intentions.  The fourth estimate of capital spending for this financial year is down 21.9% from the 4th estimate of spending for 2014-15, compared with a decline of 22.8% in the 3rd estimate of spending compared to that of the previous year’s survey.

The bad news is that this is only a very modest upgrade in an otherwise dire outlook. What’s more, as we move further into the current financial year, these estimates become much more reliable – suggesting it’s less likely the weak investment outlook will be revised away in time.  Indeed, as seen in the chart below, the relationship between Capex survey’s 4th estimates of financial year spending on those of the previous year’s estimates is reasonably close to the actual outcome for nominal business investment in the national accounts.  That’s despite the fact the Capex survey does not cover all of the private business investment spending included in the national accounts – what’s important is that the degree of changes in the Capex measures of investment broadly track the changes evident in the national accounts.
 As we’ve previously noted, the great hope is there will be a major upgrade to investment intentions over the course of the financial year – as last most evident in 1999-2000.  In that year the 2nd estimate of spending in the Capex survey was down a worrying 20% on 2nd estimate of the previous year’s survey.  But by the 4th estimate, this expected decline in spending had been revised down to only 9% (and to only 1.8% by the 7th and final estimate).  Nominal business investment in the national accounts actually rose by 6.6% that financial year.

Fast forward to 2015-16 estimates, however, and the 2nd estimate of spending was down an equally worrying 25% on the 2nd estimate of 2014-15.  But unlike in 1999-200, the 4th estimate of spending for this financial year is still down 20% on the 4th estimate for last financial year.   The last time the 4th estimate of Capex spending was comparably weak was in 1991-92 (the 4th estimate of spending was down 18.5% on the previous year’s 4th estimate). Actual business investment in the national accounts that year fell by 10%.

In short, time for a notable upgrade in investment intentions is fast running out!  Unless it happens we’re on track for a slump in business investment not seem since the recession years of the early 1990s. In turn, that suggest considerable continued downside risks to economic growth, corporate profits, official interest rates and the Australian dollar.

Investment Implications

Investors wishing to express a bearish view with regard to the Australian share market can do so using our Australian Equities Bear Hedge Fund (ASX: BEAR) or Australian Equities Strong Bear Hedge Fund (ASX: BBOZ).  The Bear Fund seeks to generate returns that are negatively correlated to the returns of the Australian share market (as measured by the S&P/ASX 200 index), while the Strong Bear Fund seeks to generate magnified returns that are negatively correlated to the share market.

The Funds operates in such a way that a 1% fall (rise) in the broad Australian share market on any given day can be expected to produce between a 0.9% to 1.1% rise (fall) in the net asset value of the Bear Fund (before fees and expenses), and between a 2.0% to 2.75% rise (fall) in the net asset value of the Strong Bear Fund (before fees and expenses).

In addition, investors wishing to express the view that the $US will continue to rise against the $A can do so using our U.S. Dollar ETF (ASX: USD), which aims to track the change in price of the United States dollar relative to the Australian dollar, before fees and expenses. For example, if the $US goes up 10% against the $A (i.e. the $A falls in value) the ETF is designed to go up 10% too (before fees & expenses).

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