The ABS capital expenditure survey for the June quarter was released last week. It failed to show any lift in investment intentions and was consistent with our base case view that business investment over the coming financial year is likely to be quite subdued.
NO SIGN OF AN INVESTMENT TURNAROUND
The ABS capital expenditure survey reports on business capital spending for the current quarter, as well as progressive updates on expected spending for the current financial year.
Our earlier analysis of the March quarter survey revealed that the 2nd estimate of business capital spending for this financial year was a steep 25% lower than the comparable 2nd estimate for last financial year, as stated in the March 2014 quarter survey. This represented the largest percentage decline in a 2nd estimate of expected financial year spending since the survey began in the late 1980s.
The latest official June quarter survey of business investment expectations was released last week. Following on from the shock slump in investment intentions in the March quarter survey, the hope was that intentions might be revised up in light of the recent weakness in the $A and an apparent lift in business confidence indicators over recent months.
Sadly, the outlook has not improved much. The 3rd estimate of investment spending was 23 % lower than the comparable 3rd estimate for last financial year, as stated in the June 2014 quarter survey. This was also the largest percent decline in a 3rd estimate since the survey began.
As seen in the chart below, the expected decline in investment spending largely stems from the mining sector – with expected spending actually falling a little further in the last survey. Investment intentions were revised up marginally in the manufacturing and services sectors, though spending is still expected to decline in both sectors this financial year.
Of course, there is still some time for current investment estimates to be revised higher. As seen in the chart below, the 1999-2000 financial year stands out as a beacon of hope for what could happen if business confidence sufficiently improves. In that year, the 2nd estimate of spending was down 20% on previous year levels, while the third estimate improved to show only a 16% decline on previous year levels. The final (7th) survey based estimate of capital spending in 1999-2000, however, was only 1.8% down on previous year levels and actual investment in the national accounts rose by 6.6%.
The worry remains the example provided by the 1991-92 financial year, when also very weak early investment intentions were not revised up and actual investment in the national accounts fell by 9.9% that financial year
All up, the latest survey suggests the business investment outlook remains quite dire – though time has not yet completely run out for this outlook to be turned around.
Due to global instability, an arguably still high $A, and pockets of excess supply in the non-residential construction sector, our base case however remains that investment intentions will be not revised up significantly over the coming year – leaving the investment outlook still weak. This will continue to pose growth challenges for the economy and corporate profits, and suggests overall share price gains could be relatively subdued. The weak investment outlook also supports our view of further downside to the Australian dollar and local official interest rates over the coming year.
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 operate 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).