OzEconomics! | Nucleus Investment Insights

Hello and welcome to yet another instalment of our Nucleus Wealth Insights series. Just a quick reminder that the following presentation is general information only and does not take into account your personal circumstances. Whilst Nucleus Wealth aims to present informing and sometimes entertaining content, please consult your investment professional, financial advisor, or better yet speak to us before making any decisions based on any of the themes discussed in today's presentation. And don't forget that this is a live presentation, so feel free to drop any questions you like in the chat box below and we can answer them along the way. If you're watching this after the event, make sure you attend the next one so you too can participate in the live Q&A section of our presentation. Our presenters today include myself, Tim Fuller, a certified financial advisor who's worked with hundreds of clients over the years, helping to make the complex simple for companies such as AMP, Mercer, and independent advisories. We also have David Llewellyn-Smith, co-author of The Great Cash of 2008 with Ross Garnaut, founder of the internationally acclaimed Diplomat magazine and now chief editor of the enormously popular Macro Business Financial blog. Finally, we have Nucleus Wealth's head of investments, Damien Classen, whose 25 years in the world of finance has seen him as the founding partner and head of research at analyst firm Aegis Equities, head of quantitative strategy at Wilson HTM, and was responsible for mining energy and big data in the $60 billion global quantitative equity fund at Schroders, who are a multinational asset management company. And for more information, please check out our people section at www.nucleuswealth.com. Our presenters today include myself, Tim Fuller, a certified financial advisor who's worked with hundreds of clients over the years, helping to make the complex simple for companies such as AMP, Mercer, and independent advisories. Sitting across from me, we have David Llewellyn-Smith, co-author of The Great Crash of 2008 with Ross Garnaut, also the founder of internationally acclaimed Diplomat magazine and now chief editor of the enormously popular Macro Business Financial Blog. We also have Leith van Onselen, our resident Nucleus Wealth economist who has spent time with both the Federal and Victorian Treasuries, along with some time as an analyst with Goldman Sachs. Leith now co-authors the widely read Macro Business Financial Blog with David Llewellyn-Smith. And finally, we have Nucleus Wealth's head of investments, Damien Classen, whose 25 years in the world of finance has seen him as the founding partner and head of research at analyst firm Aegis Equities, head of quantitative strategy at Wilson HTM, and was responsible for mining, energy, and big data in the $60 billion Global Quantitative Equity Fund at Schroders, who are a multinational asset management company. And for more information, of course, please check out our people section at www.nucleuswealth.com. Yes, so hello and welcome to our next installment of Nucleus Insights. And today's one is entitled AusEconomics. I've been really looking forward to this one. And in fact, we've got in a special guest, a rare view of an economist out in the wild in Leith van Onselen, who is, of course, Nucleus Wealth's chief economic advisor, economic strategist. So welcome to you, Leith. And just a note as well that our regular mainstay and dulcet-toned member of our audience in David Llewellyn-Smith has unfortunately called in sick just moments ago. So if you're looking forward to him, don't worry, he'll be coming up in one of our later installments. On with the show. So the agenda today, we're going to be looking at quite a broad cross-section of the Australian economy. So strap in. We are going quite in-depth. We've got a pretty sizable amount of charts to run through today. We've tried to trim them back, but there's so much info out there and there's so much good insight to be had that it was quite a typical task. But we are going to initially look at the gross domestic product trends of Australia, national demand and how that's reflecting in corporate profits, a little bit of a look at our national savings ratio. And then we're going to move into some more common topics. And if you're a macro business blog reader, of course, you'll know these quite well. But looking at the upcoming and currently in place infrastructure boom, the population surge, a bit of a reflection on how this is impacting Australian housing and where we think it's going to go. And then finishing up with, of course, impacts on investments in the equity markets that, of course, we do every day here at Nucleus Wealth. So with no further ado, I'll hand over to Leith and we can kick off with our GDP trends. Welcome, Leith. Yeah, thanks, Tim. Thanks for having me and hello to everyone. Look, as Tim said, we just want to go through a few of the main sort of charts and trends affecting the Australian economy, which provides some insight into where we're at and hopefully where we're headed. The first chart on the left is obviously Australia's GDP growth going back to the last recession back in the early 90s. And what it shows pretty clearly is that Australia's GDP growth has been trending down for the better part of a quarter of a century, both in aggregate, so the headline GDP, as well as even more so in per capita terms. So in the year just gone to December 2017, Australia's GDP grew by about 2.4% year on year and only 0.4% in per capita terms. So it is very weak. And if we just focus in on just GDP per capita, the quarterly rate of growth, you can see that it has fallen very significantly over the past quarter century. And we have actually had two per capita recessions in that time, as well as two very near misses, where we had two consecutive quarters and 0% growth. So the aggregate economy is travelling, you know, okay, if you measure it on an aggregate basis, but the per person lived experience has actually been getting worse with falling growth for at least, you know, well over a decade. Okay, sure. And we'll look at some of the reasons why the GDP is up and the per capita is down, perhaps in a few slides later on in the show. So okay, any other further notes on that one there Lee? Yeah, no, not on GDP. Okay, sure. So let's have a look at national demand now. Let's swing around to what appears to be some signs of life, perhaps, you know, looking from 2013, there was a pretty reasonable fall. And then over time, there seems to be a bit of a period of consolidation. And then it looking, you know, for all purposes, reasonably healthy. What are your thoughts? Yeah, look, it definitely has rebounded. Now, national demand or domestic final demand is actually a bit different to GDP. So it doesn't include net exports. But okay, so it's basically just the spending across the economy. So it's probably actually a better, better measure of what you're actually feeling. And it has certainly picked up to about 3% in the year that is December. So it has improved. And a lot of that is on the back of three things. Really, the big drag from the mining investment boom has, in business investment has disappeared. At the same time, we've had quite a lot of support from public investments, that's public infrastructure, and etc. And household final consumption expenditure has actually held up pretty well, which is actually the biggest, biggest component of GDP, it's about 56%. However, if you go to the next slide, again, in per capita terms, it's been travelling very poorly. So this chart actually shows a few different measures, but in there's the domestic final demand per capita. And as you can see, there's actually been zero growth for about five years, even though it has picked up more recently. So again, it's this situation where, you know, at an aggregate level, we've been doing okay, but in a per capita sense, we've really been going nowhere. And the next... Jump in there as well. Jump in there as well. So there's some, there were some very big projects that are just sort of starting to come in now. And I guess one, like the Gorgon project, and it's probably the Wheatstone and, you know, a whole bunch of them. So yeah, all the LNG players, and so and they're all a significant proportion of GDP as a percentage. So Gorgon was, I think, 5% of Aussie GDP spread over a number of years, obviously. Now, as that flips from spending money on Australian workers, and into actually earning money, is that sort of overstating, my take is that's probably overstating GDP a little bit in that Chevron owns it, the money sort of looks like it's coming in from a gross domestic income perspective in that, yeah, we've sold the oil, but the profits are all flowing straight back out to Chevron. So it's sort of just a transfer effectively. And it's not really, it's sort of like making, yeah, it's washing, washing through and it's making GDP income look higher than it really is, because it's in one side and out the other. Is that right? Yeah, definitely. The infrastructure, the mining projects are predominantly foreign owned, so there's about at least 80% foreign owned. So a lot of the profits that flow from that end up flowing offshore. And there's no doubt that the biggest impact from these projects was during the construction phase. So during the peak of mining construction, the CAPEX, mining CAPEX was about 9% of GDP, which is absolutely massive. And that, of course, it's very employment heavy. So according to RBA research, at the peak of the mining boom, the mining sector was employing about 10% of the economy. So that's about 3% I think in extraction at peak and the rest of it was all in mining construction. So obviously now those construction projects that come online, it doesn't actually require a lot of people. And it also doesn't require a lot of wages to be paid. And a lot of these miners are becoming increasingly automated as well. So yeah, look, it probably does, it does overstate GDP. And that could be another reason why the GDP per capita has been tracking better than actual domestic demand. And this actually is a beautiful segue into the next slide, which shows the impact on the share of the economy, I guess, profits versus wages. So as the chart shows that business profits have actually risen quite significantly over the past two years. Part of that's due to the huge commodity price spike, whereas actual wages and salaries have basically flatlined and have actually gone backwards. If you go to the next slide, they've actually fallen by about 4% over the past six years, at the same time as labour productivity has increased. So effectively, we've had this rotation where company profits, where businesses have gained the lion's share of the benefit of the national income increase, whereas actual wages and salaries, i.e. workers, have gone backwards. And again, this is a great segue into the next slide. You might note from that domestic demand chart earlier, that one of the big supports to domestic demand has actually been household consumption, which counts for about 56% of that. So it's actually the biggest share. As households' wages have been going backwards, they've actually been drawing down their savings in order to maintain the same level of consumption, which is obviously not sustainable. So the household saving rates fall into that lowest level since the global financial crisis has been falling very steadily over the past several years. At the same time, Australia's household debt has spiralled to the highest level on record. So we're in this situation where household consumption has been travelling okay, but again, it's not sustainable. In the face of falling wages, you can't maintain consumption levels unless you basically binge on debt and draw down your savings. And that's exactly what the Australian economy has done. So essentially, it's got to come from somewhere. And if wages aren't rising and productivity is rising and companies are making more money and not passing that through, then people turn to the home equity lines, perhaps. And obviously, there's increasing debt in general. Yeah, that's right. Actually, have you seen any stats on that? Just in terms of the part where you go, look, my house has just increased by $200,000. And so I better put a $200,000 extension on the house to, you know, draw down the money I've got and spend that to doing something. Have you seen any? And I guess the thought I've got is that, you know, as house prices have rolled over now and starting to drift downwards, is whether that's starting to just to slow up yet or what the thoughts are on that? Yeah, look, the Reserve Bank of Australia does release periodically, hasn't done one for several years, but it does release a home equity withdrawal data. It comes out in speeches every couple of years, they put it in there. And what it showed is in the run up to the GFC, the households were borrowing like crazy. And then when the GFC hit, and the housing market, you know, paused, or fell a little bit temporarily, home equity withdrawal, then households began to save. And then I think the last one, just a couple of years ago, showed they were starting to borrow again. So my expectation is that once, given we've got falling house prices now, there will be a time, it probably might take another six months to actually show in the data. But once households realise that their biggest assets falling in value, or at least not likely to increase, you're likely to get them increasing their savings rate and then also reducing consumption. So that is one of the headwinds that's facing the Australian economy. Okay, very good. Thanks, Leith and Damian. So we'll jump across now to one of our focuses on one of our mini booms, I guess, and this one, the infrastructure boom is pretty relevant to those, particularly those who are living in Melbourne and Sydney, with the amount of roadworks and closed roads and everything else. So what have you got to tell us here? Yeah, this is a chart that comes from ANZ. I think it's updated annually. It's probably, that's six months old, but it's fairly telling. What it shows is that Australia is going through an infrastructure boom, which we all know, if you live in Sydney and Melbourne, you see it. And a lot of this is government funded, or at least government supported. And last year, the growth was supported to a huge extent by infrastructure spending by governments. And that was shown in that chart earlier, public investment. However, we've got about probably 18 more months of that to run before it peaks. And the increases this year and then next year are actually smaller than they were last year. So the stimulus to growth is going to be less and less. And then it'll eventually turn around, a bit like the mining investment boom did, where it starts actually subtracting from growth and jobs. But at the moment, that is one of the supports. And again, that was why that earlier chart on final demand showed government spending being such a big support. And so just quickly on the infrastructure there as well, you can see it's sort of looking like it's tapering in 2020. Is that obviously a six-month old information, but is there a chance that the infrastructure boom will just build on and on and on? Or is there some sort of a ceiling or a limiting factor that might, you know, if they updated in six months time, would continue that downward trend as opposed to stacking more on? Is it could be a change in government or increasing more infrastructure? I can't see how we could jam any more construction vehicles into Melbourne at the moment. Yeah, look, it's hard to say. I mean, they could always do more projects. But in the end, it's got to be paid for somehow. And I think there are a lot of governments that perhaps, you know, might be getting to their limits on that. Look, I really don't know. But at the moment, that's how it stands. It does, the pipeline looks like it will peak and then fall. Whether it might get a second run, I'm not sure. At this stage, there hasn't been any evidence of that. But it certainly could come. Okay, sure. I'll basically just be guessing. No, no problems. Damien? Yeah, in terms of when the financial crisis hit, you know, we had this whole thing that we should have a bunch of shovel-ready projects that are all ready to go so that if something happens and let's say a trade war breaks out or whatever it is, and we get a bit of an economic downturn globally and Australia really cops in front of it, do we really actually have these shovel-ready projects? Are they ready to go? Or is that just a, that's a list of things we should have done, but never actually got around to the next time? Yeah, look, it is a problem with infrastructure more generally. Infrastructure Australia does have a list of priority projects. But none of them are really shovel-ready because there's a huge lead time required with these projects. So, if the proverbial does hit the fan, it's that the government, sure, they could go and try and increase the infrastructure spending, but it probably won't hit for at least 12 months. And then by that stage, the crisis might have, I wouldn't say necessarily be over, but yeah, we've already caught the worst of it. And there is the chance that then you're stimulating when the uptick already comes. So it ends up becoming sort of pro-cyclical. That's why during the GFC, we instead saw cash handed out in bribes, which is, I guess, a better way to stimulate in the short term, but it doesn't give you a long-term payoff. So, yeah, I think if another GFC hits, you're probably more likely to see that kind of thing, a cash splash that gives you no long-term benefit. It just worsens the deficit, but at least buys you some time in the short term. Okay, sure. And then moving, I guess, to the net effect of all this infrastructure spending, of course, being the change in jobs. And you hear bandied around the current government's responsible for creating 1,000 jobs a day, which is a lovely stat, but what can you tell us about the changes in jobs thus far? Yeah, look, the government a few months ago, or probably, yeah, three, four months ago, was boasting 1,000 jobs a day. And actually, Australian economy's traveling a bit better than that. We added 400,000 jobs in the year to January. So that was pretty good result. And a lot of those are actually full-time in the last year. So on the face of it, it is looking pretty good, and the infrastructure boom's certainly helping with that. There is one problem, and that comes with the next chart, is that Australia's population also grew by 400,000. So it's basically a ratwheel economy at the moment. We're spitting the tyres and not really going anywhere. And of course, this was on the back of mass immigration, which was running at incredibly high levels, particularly in the city of Melbourne. So effectively, we added 400,000 jobs. Population increased by 400,000. Net-net. Yeah, net-net. It's not that great a story. And this is showing up in the next chart, which is the labour underutilisation rate. Now, what this measures, it's probably the best measure of slack in the labour market. It measures both unemployment and underemployment combined. And this shows that labour underutilisation in Australia is still tracking at just under 14%, and it's at very high levels. And this is actually probably the best measure to gauge wages growth against. I don't actually have the chart on me, but it does track that when labour underutilisation is high, you get low wages growth, and when it's low, you get high wages growth. And it certainly is quite elevated at the moment. So can you just jump into how that's calculated, that rate? Yeah, so it's the underemployment rate, so people who would like more hours, combined with the underemployment rate. So you just add one to the other. So, yeah, underemployment's tracking near all-time highs, but unemployment's not. So, but combined, it's close to 14%. And is this closer, then, to the Roy Morgan? Obviously, there's one where they ask people, are you unemployed? And they get much higher rates than the official stats. Is this one pretty close to the Roy Morgan, or quite much closer? Yeah, it's definitely closer. The Roy Morgan might actually measure unemployed people that the ABS excludes altogether, because the ABS, you've got to be actively looking for a job, and you have to have at least worked an hour or something like that. It's pretty useless. But it is a globally recognised norm, so that's why we use it. Whereas Roy Morgan will still count you as unemployed if you'd like a job, but you're not actually looking for a job because you're discouraged. So, yeah, there is a bit of a difference, but it's certainly closer to Roy Morgan's. Okay, sure. And just while we're on the topic of employment, we've got a little bit of a, well, we've got a fantastic graph there, I think it's quite telling, of an annual change in jobs for the last year, essentially, broken down into sectors. Obviously, it's, well, I guess, you know, it's quite telling in the sense that you can run through the tail end of the sectors there, but there is a couple of overall themes I can see from there. Yeah, I absolutely love this data release. It comes out every quarter. It was released last week, the latest one, and it's current up to February. And what it shows is that the top four job creators in the past year are government-related or population policy-related. So, as you can see, the biggest one there by far is healthcare and social assistance, and then you've also got construction, retail and education, etc. And the healthcare and social assistance has gotten a big kick along from the NDIS, which apparently, according to some estimates, has added about 100,000 jobs in the past year. So, yeah, and in fact, the trends are even stronger if you look at it from since the global financial crisis in September 2008. And what that shows is, again, a similar trend, but as you can see, healthcare and social assistance has added about 600,000 jobs. So, these are the so-called caring jobs you read about. You know, we've got a caring jobs boom, people in old people's homes, hospitals, social workers, etc. Now, there is a bit of a problem with this. You know, my colleague David Loyles-Smith, who you all know, coined the phrase, he's very good at turn of phrase, and he coined the phrase Botox boom, which is basically a profitless boom that shifts money around the economy rather than actually creating wealth. That's basically what we've seen with employment and as well as with GDP. Basically, we've got a government-stimulated economy in both jobs and growth, as well as, obviously, a population-positive stimulated economy. And the problem with these is they're all low-productivity sectors. They're not actually creating new wealth, they're just basically, you know, paid for through taxation and shifting money around. So, it is a bit of a long-term worry, you know, in my view, that we don't have more productive drivers for the economy. Okay, sure. And, Damian? How much longer has the NDIS got to go? So, the rollout's, I think, sort of finishing up this year, and then I guess you sort of, I'm assuming there's a bit of a lagged effect of people getting the money and doing... So, there's probably, what, two more years, maybe, of sort of growth, I guess, in that sector? Yeah, I read an estimate recently that there's another 150,000 jobs to be created from it, and it is actually running behind schedule, and I can attest to this. I've got an autistic child, and we're currently being run through the NDIS, and it's been delayed by about six months. And the amount of red tape, as well as middlemen, et cetera, you have to deal with is quite unbelievable. So, it is creating a lot of jobs, but if you excuse my French, they're probably the epitome of the so-called bullshit jobs, which, you know, a lot of them don't actually need to be created, and they're really just middlemen. So, it's not a... Yeah, it's basically an extractor job. It extracts wealth. Well, it's essentially a service level job, but it's paid for through taxation, I'd say. Yeah, sure. And the concern always is, as you said, it's a bit like the education sector, where we had this big, you know, shift out of TAFEs, and sort of, it was going to stop paying for things, paying for taxes, and getting the government to provide these services, and we're going to start kind of providing it to private sector people who, with a profit motive, then extract... A profit margin, which just obviously naturally lifts the cost of everything, doesn't it? Yeah, and managed to extract those types of chains. And then, yeah, so I guess that's sort of the... Yeah, my fear as well is, yeah, it's positive for companies involved in that sector, but there's obviously... There's a person who needs some help, and there's a person who can give them help, and that's a good transaction, but if you end up with six middlemen sitting in between all, you know, giving advice on this, or giving advice on that, is where the economy obviously loses out. It might look good from a GDP perspective, but the net effect on productivity is very low. You raised a couple of interesting things there, Damien. I think one is that, I guess, the sort of semi-cyclical nature that we might be facing with the NDIS, and eventually it'll cap out as full, I guess, full allocation of jobs, and we'll see that fall back. But the other one is just looking more from an equity and investment standpoint, and there's been obviously a pretty big push into healthcare. We've seen some, you know, well, some stars, and some not so great equity holdings in the ASX, but do you think this is a direct correlation into this? Is the NDIS a pool of money that's now potentially creating a boom in the healthcare, or is this something that's on your radar, or is it something that you don't need to worry about? Look, it's certainly something to consider. The healthcare sector, we'd like to get more exposure to. The problem in the healthcare sector is it's so expensive, and it's, in particular, some of the big names in it are just, you know, 30 times earnings-type expensive. So, getting the right exposure is very difficult. I think there's a certain element, and that's where sort of my questions are leading with, in terms of this, is that, yes, I think there are some benefits, and there's probably some of the diagnostic-type ones that we're, you know, running useless, not useless, but low-value diagnostic tests, when you have to pay for it yourself, are less likely to be done. When you have money which you are, which has to be earmarked for some sort of medical procedure, and you have a medical procedure that someone's offering you, that fits the bill, yeah, I've got to spend it on something, it may as well be that service you've offered me. So, I think there's certainly that, you know, that for a lot of the local sort of either diagnostics or hospitals and things like that. I do suspect there's probably a bigger boom in some of the, I guess, some of the therapies and things like that, you know, whether it be speech or OT and those types of things, and those ones do tend to be smaller businesses as opposed to, you know, large, you know, multinational organisations, and so I think that's probably, yeah, there's benefits, but I think the benefits is probably more in the employment side and flowing to smaller businesses than, you know, as much in the larger businesses. In the investable space that we're dealing? Yeah, I mean, having said that, there is some benefits, but it's just not the, a lot of the benefits is ending up in other sectors of that economy. Okay, no, look, that's fascinating. Anything final on the population surge list, or shall we jump into one of the mainstays of Aussie housing? I'm sure everyone's sick of hearing me talk about it, or at least write about it, so I probably should move on. Okay, not a problem, but you can check it out on the blog for more details. Every day. So, of course, we move into one of our, I guess, almost essentially a super topic, because it is, you know, one of the core parts of Australian life, really, having and owning a house and having somewhere to live. And look, I thought we might start with this graph. It is an interesting one in the sense that we've got a little bit of a potential convergence going on here in the way that data is growing. Do you want to just elaborate on this a little bit there, Lee? Yeah, so for several years, Australia's population grew well ahead of dwelling construction, which was well talked about, you know, the housing shortage, etc. And then over the past couple of years, as population tapered down a little bit, dwelling construction picked up. And now we've got it going the other way again, whereby population growth is picking up just as dwelling construction is falling. So, yeah, Australia has had a huge dwelling construction boom over the past couple of years, a record dwelling construction levels. But we have now turned a corner and dwelling construction has now started to turn. It's shown pretty clearly in that chart with approvals, completions and commencements. But the next chart actually comes from the National Council release, and that shows the actual annual value of residential building construction. You can see there, it was a huge pickup, a big ramp up in the past few quarters, it started to fall. And again, I'll point you back to that domestic final demand chart that we showed earlier. Residential building construction was adding to growth for a couple of years, and now it's just started to subtract from growth, but only just. And we expect this to continue for several years as the epic construction boom unwinds all that slowly. And the question I've got is whether there's the population that puts a floor under this. So absent a change in policy, which is obviously being bounced around at the moment, but let's say we did get a Labor government and the Labor government stuck with a high immigration rate, is that, to me, that sort of puts a bit of a floor under how far that construction can fall, because of the demand side? What are your thoughts on that? Yeah, I agree. Definitely, I don't see, certainly don't see a construction crash in a residential building, but I think it's just going to be a sort of general slow tapering down for a couple of years, and then who knows what happens. But yeah, Damien's 100% correct. As long as we're At the same time, the Labor Party has promised that in their negative gearing package, which they promised to bring if they get elected, to shift negative gearing incentives towards new buildings. So that should also add a little bit of stimulus to new home construction. But I think as it stands, and this is also from the Housing Industries Association, pretty much everyone's expecting dwelling construction to sort of peter down over the next few years. Probably next three years, we're going to have falling dwelling construction, but certainly it will still stay at pretty high levels compared to historical experience. Okay, sure. Very good. And so we'll jump across now to another one of your very telling graphs on some of the very cyclical nature of some of our major cities and the price growth year on year. What can you tell us here, mate? Yeah, well, the first, this is CoreLogic's data for the five major cities. And what it shows is all the major markets, bar one, are now actually falling in value on a quarterly basis. In fact, at the five city levels, that's all the five major capitals, dwelling prices have fallen for six consecutive months, down a few million, 1.6%. So it's not, we're not talking big falls here, we're talking about a quarter of a percent a month. And this has been driven by city where prices have fallen by just over 4% over seven months. So the housing cycle certainly has turned. The next chart shows the same data except on an annual basis. So year on year growth. And again, pretty much all markets are trending down except for us, but that's still stuck in negative. And so we are looking at a sort of wall to wall weakening, but especially driven by Sydney. And this is quite interesting, because again, it comes despite the fact that population growth is running at huge levels, particularly in the New South Wales and Victoria. It also comes despite first home buyer incentives introduced on 1 July last year by New South Wales and Victorian governments, which are helping to boost first home buyer demand, but it's not offsetting investor demand, which is shown in this next chart, housing finance growth. You can see there that overall housing finance growth has gotten weaker. But this has been driven exclusively by investor finance growth. And this is all on the back of APRA's clampdown on investors as well as interest only investors. And do you think, obviously we've got our long awaited Royal Commission hanging in the air at the moment. Do you think that obviously there's going to be a bit of a look into lending standards? And certainly it's been a topic that's come out in the papers in the last few weeks that things are going to need to be done. Big question over the distribution methods of loans as well. Potentially a headwind for loan growth? Oh, absolutely. There's several headwinds which are going to affect the property market the next couple of years. First of all, we're currently seeing bank funding costs rise. Now, whether this is maintained is another matter. But assuming it is, that'll blow into higher mortgage rates and other things equal. The next chart here shows that we're facing a bit of an interest only time bomb. So APRA's clamped down on interest only lending. And basically, there's a whole bunch of interest only loans that are currently present, which are due to expire in the next few years. Because they're basically done on a five year basis. So at the end of five years, you've got to either refinance into another interest only loan, or you've got to take out a principal on interest loan. And under the new rules, they won't be allowed to rotate into another interest only loan, so they're going to become principal on interest. And according to UBS, and this is what the chart shows, we're expecting $105 billion worth of loans, interest only loans to roll over in 2018, and then another $133 billion in 2019, and another $159 billion in 2020. Wow. And all these loans are expected, because they won't be able to roll over an interest only loan, they'll have to go to principal on interest, that they could face between a 35% to 50% increase in mortgage repayments. So that's quite a significant headwind. It could lead to some homeowners having to sell, because they can't afford to keep up interest payments. And obviously, will also affect new home growth, because investors which would have taken interest only loans can't anymore. So that's a bit of a headwind. On top of that, we've also got Labor's negative gearing and capital gains tax reforms, which will likely come into effect on 1 July next year, assuming they get elected, which is looking, you know, more and more likely. So that's going to also smack the investor market. And then finally, just as Tim mentioned, we've got all the fallout from the Banking Royal Commission, which we don't know how it's going to play out, but it's not currently not looking good. And I wouldn't be surprised if we were going to get a tightening mortgage market, tightening lending standards, and also some crackdown from regulatory action. So, you know, not that... Yeah, I can certainly see some pretty stiff headwinds for the housing market in the next couple of years. Of course, against that, we've got ongoing, you know, very strong population growth, which, if continues, should put a blinder on it a bit. But these are all strong headwinds, which could also obviously run headfirst into a global shock in the next few years, which will make everything worse. So, yeah, I'm a little bit concerned about the housing market. Okay. Fair words, mate. Fair words. Okay, so look, we'll roll into an overall summation and outlook of our AusEconomics webinar today. So if you'd like, maybe just give us a bit of top level there. I've dotted a few dot points down for you, Lee, so if you want to drag away through those. Yeah, well, as that domestic final demand chart, which is probably the key chart, really showed, currently, growth's been driven by household consumption, government spending, and what was the other one? I can't remember. So anyway, yeah, household consumption, government spending, and something else which I've just forgotten. That's right. Anyway, the overall outlook's pretty soft. I mean, I'm certainly not expecting an imminent recession or anything like that, but just more of the same, more of a grinding out of growth in aggregate basis, and, you know, very weak growth in per capita terms. Basically, continuation of sort of per capita, almost recession we've had for the past five, six years. There is another flaw in the ointment, and this is more, I'm speaking more on Dave's side, but commodity price, we're expecting commodity prices in terms of trade to fall from the second half this year, and if that happens, that's obviously going to drag down company profits, national income, and tax receipts, which will weigh on the economy through various different mechanisms. Consumption, again, the biggest driver of growth is 56%. We're expecting to remain weak on the back of, you know, still immediate wages growth, high household debt, and, of course, falling dwelling prices. And then on top of that, the dwelling construction boom's going to continue to unwind, which, again, will drag down on jobs and growth. And the infrastructure pipeline will support growth for the next couple of years, but its impact's going to keep falling compared to the last couple of years. And it will eventually peak in about, by about 2020, and that'll start dragging down on jobs and growth. So, overall, it's, you know, probably more of the same. Pretty weak aggregate growth, like we've had the last couple of years, and very weak per capita growth. And this sets us up in a pretty precarious position, should another global shock hit us in the post. Okay, very good. And if we might now pivot from an economic standpoint to an investment standpoint, I'll call on Damien to, I guess, give us some reflections on the topics and themes and certainly the data that we're seeing today, and then how that reflects in what we do every day at Nuclear as well. Yeah, as, you know, as Leith said, it looks like the best, you know, best of it's behind us at the moment. I think we've sort of, you know, we've been through a record mining boom and followed by a record housing boom, and both of those are coming off. So, yeah, the question for us is very much whether we're interested in being in Australia at all, and or whether there's, you know, there's other markets where, whether it be, you know, cash bonds or international assets, where we think we can actually get better returns, the growth profile looks a bit better, and the risks are a bit lower. And so that's largely our take, is that we're sort of running it close to our minimum levels for Aussie assets within our funds, Aussie shares. So I guess the biggest thing we're sort of, there's two ways about saying this. One is we're expressing to say, look, we think that at the tail end of the boom is, and with relatively elevated prices and commodity prices rolling off and all those effects, is now's not the time to be investing in Australian shares, and that you can get a better return elsewhere. The question then is saying, well, we do, we still own some Australian assets, and that's sort of a mandate, investment mandate, a design to make sure you're not taking too much risk on one side or the other. And, you know, there is obviously the effect of people have got, you know, most people living in Australia are going to have Australian dollar liabilities, and so they want to make sure that they've got Australian dollar assets to offset those. And so within Australia, we've been looking very much at companies that will benefit from a lower dollar. Now sometimes that means companies that have overseas operations, whether it be, and sell overseas, whether it be things like CSL and Cochlear, that sort of global businesses, you know, headquartered in Australia, but largely selling right around the world, or whether it be something like a Treasury Wine, which is an exporter, and so they've got Australian dollar costs, and they're making US dollar or euro revenues, and so when the, as the Aussie dollar falls, they get a free discount, their costs stay the same, and their revenues go up. So they're the ones we've been pushing for for a number of years now. The real problem in that sector is they're just getting so expensive, is that there have been fantastic performers for three, four, five years, probably even longer, and the markets have sort of pushed the valuations you can in that sector, and so what we're tending to find is we're starting to take a little bit off the top, and some of those, you know, just over the last few weeks, we've sort of sold down a little bit, just because there's a price for everything. So, you know, at 10 times earnings, we'd be happy to own, you know, that whole entire sector. At 100 times earnings, we wouldn't, and we're sort of, you know, we're at 30 times for a lot of the stocks, and it's just to the point where, as much as we like them, and they've been great performers in the portfolio, it's just a matter of trying to find exposures that can give us something similar, but without having to pay too much for it. Well, it has been a pretty well trodden path, hasn't it, the dollar exposed, we've been reading about it for many years, so. Yeah, and we do think there's scope, you know, so the dollars just keep falling, and these guys, the profits keep growing, and so, you know, there is still scope there, but it's just a matter of getting the right price for it. Sure. You know, the big parts of the Australian economy, banks, resources, property, all sort of fit into the, you know, Leith's narrative as being relatively negative on all of those. The banks is actually the opposite story to the dollar exposed, in that, you know, everyone's pricing in a lot of negativity, and so your yields, you're getting close to a 7% yield on them, assuming the dividend doesn't get cut, that's a big important factor, but, you know, they're certainly trading at, usually they trade at sort of a 10% discount to the market, now they're trading at sort of closer to a 20% discount to the market, so they are on sale, there are some difficult headwinds, so you're sort of looking at the, you know, exactly the opposite. You can pick them up cheaply, but the fundamentals aren't looking particularly strong, and so, is now the time to try and clear out of that sector completely? We think that, you know, there's, we've still got an exposure, we're certainly underweight, but, you know, there will be a time where, or hopefully there won't be, but we're expecting a time when a lot of these will start to roll over, and whether it be the next global shock, and we see house prices come back, and things like that, and you'll be looking to try and clear out completely, but, you know, if you're getting a 7% fully-framed yield, you know, you're getting close to 10%, that's better than what you can get on most utilities, and so it's more just trying to work out how much downside is in the price. And the earnings releases over the next few years, given the Royal Commission, are going to be fantastically watched, I think, everyone's going to want to see how it's going to impact. But, you know, you could knock 20% off earnings of these guys, and 20% off dividends, and still be relatively happy with, you know, if you came out the other side of a crisis, you know, with that type of thing, or, you know, if we managed a relatively smooth transition, and, you know, earnings fell by 20%, and you could pick them up at today's prices, and pick them up a little bit cheaper, I'm sure, as things go on, but your net return after that, you wouldn't be too disappointed with. The issue, obviously, is there's a tail risk to, you know, global shock, you know, Australia's running out of ammunition, and running out of booms. That's right. We need to find another boom to invest in, and we're not quite sure what that is. Maybe it's an infrastructure and healthcare boom, but, you know, there's obviously a limit to how far they can push as well. Well, and the other side of that is that they're not sort of money-generating booms, they're sort of services booms. They give you, potentially, they give you productivity in an infrastructure sense, and they give you lifestyle and longevity, perhaps, in a healthcare sense, but there's no cash benefit, really, at the other end, there's no pay for it, is there? Well, I think, well, you know, I'd probably argue a little bit, you know, that improving the health improves the economic outcome for, you know, people who work longer, and things like that, so there's benefits, there's certainly, yeah, I wouldn't downplay it, but it's less cut and dried from a profit point of view. Yeah, that's right, and as we spoke, you know, a lot of the things that have been put in have got the potential for their middlemen to step in and grab, you know, 60, 70, 80 percent of the benefit that's ending up flowing from having somebody with a, somebody's got a problem, somebody's going to fix that problem, that's great, that actually, you know, the NDIS was showing that there's actually a net positive for society if you spend the money and you get rid of all these issues. Oh, look, it makes sense until the middleman is to say, exactly, the road to value. Get the middleman and then jump in and take it, and so, you know, I've got an anecdote I tell in the telecommunications sector, which is a similar type of thing, where, you know, we were trying to get some cables put in for telecommunications, and we're dealing with subcontractors, and we worked out that we're actually dealing seven subcontractors deep from the actual person who was, you know, we're dealing with, like, Ionet, and then there were Telstra, and then Telstra had outsourced, and and so they got on the tail end of it, which is great in terms of, you know, people going, oh, it's very efficient and all that type of stuff, but there's a margin, a ticket being clipped every single step of the way, and so, yeah, I think if there's, if you end up with those types of issues, and it looks like, you know, that certainly happened in the education sector, and it's hard to think of a reason why it won't happen in the healthcare sector as well. Absolutely, and so we were talking before about running out of booms, just a quick, just some thoughts on the resources side as well. We've got, obviously, banks and property are fairly aligned, but from a resources standpoint? So the resources, a big issue there is China, and they're slowing, and the question is, you know, can China keep going at current rates and keep racking up the debt? Yeah, sure it can, but that's a, you know, that's an accelerate into the, well, you know, at least keep your speed as you're headed for an eventual brick wall. We do think they're trying to slow down, and all the stats and lending stats are showing that they are trying to slow down, and that's not good for resources generally. There's, there are some scenarios where you can paint that you get a, you know, you get a deal with, between China and Trump, you get renewed spending, and you get a worldwide global synchronized boom, and that would be great for resources, and so that's sort of a, we think of that as a tail event, though. It's not really risk, but that's your tail upside, whereas the bulk of the probability is more on the downside that you do get China, you know, starting to transition away. Yes, Trump's got a boom going on, but a lot of that's not going to be resources driven, and it's more sort of in services sectors and things like that, and so, and for Australia anyway, you know, the iron ore that's in Brazil is a lot closer to the U.S. and Australia, so than Australian iron ore is, and so that's sort of a, you know, the benefits flow elsewhere. On the property side, it's a little bit, I mean, there's two sides to it, is as we spoke about, you know, if population keep coming in, then if you're building property, you still need to have that property, so there still needs to be built for the people that are coming in, and also that if you own property, and we've got this huge influx of people wanting to come in, then, and we keep our limits on expansion, and try to cram everyone into the same space, and you just get this supply-demand thing that helps hold the value there. My side, though, is that, you know, given the valuations, and it's not as, there's other sectors I'd prefer to see defensiveness, you know, property is generally a defensive sector. I guess the issues I have is that if you're buying it for defensive qualities at this point, you have a tail event which could get, which could wipe out all your defensive qualities, and so, you know, I'm looking for defensive qualities in other sectors. What does that leave? Well, it's, as I said, it's extremely tough in Australia that, you know, you've wiped out dollar, well, we've sort of hit our limit on dollar exposed. Banks, resources, property are all, you know, for various reasons have got issues, and that basically means anything else that's, you know, got a heartbeat, and not incredibly, you know, not sort of poor quality, and not incredibly overvalued, sort of ends up in the portfolio. It is sort of certainly a very difficult part, which is why, for now, we're finding that, you know, either cash, bonds, or international assets, we can see opportunities, and we see upside, whereas it is very difficult. And I guess, you know, that's the beauty of having access to world markets, because you're not just corralled into the ASX, which, you know, for those three key reasons you put there, you know, the bulk of the top end of the investment market in the ASX. And actually, just to tail off the final comment I did want to make in terms of booms, you know, what's the boom that's going to, what is our next boom? I think for our perspective, the next boom is manufacturing services, you know, education, all these things like that, which all need a lower Aussie dollar to get you there. So what you need is, they're the only sectors that are big enough to actually make a dent in terms of taking away the capex that's gone, and the housing boom that's over, and those types of things. We need these sectors that are actually, basically need a lower Australian dollar to get there. And so the real play is, yes, we want to be investing in the Australian market at points in the cycle. Now it's not the point in the cycle. You know, we're lining up which ones we want, and as the Aussie dollar comes down, you'd just be switching international assets for Aussie assets. Sure. Okay, fantastic. Lovely. Thanks for that summation on what we're doing at Nucleus Wealth there, Damien. And thanks very much, gents, for coming along. Thanks, Lee. No worries. And thank you, Damien, for another terrific webinar. So just stand by now. We've got, for those that are interested in finding out a little bit more of what we do every day at Nucleus Wealth and the Macro Business Fund was put together to help give you access to quality, well-researched stock analysis and superior macroeconomically-minded asset allocation. We use technology to help us provide a service typically only available to high net worth and sophisticated investors at a fee level that rivals the more basic solutions available to these everyday investors. We do this by using separately managed accounts, which allows clients to enjoy unparalleled transparency in what they own and why. It also means that each client effectively owns their own separate and discrete share portfolio, which is managed by us. 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A bit of a focus I guess given the fact that we as I mentioned we're pretty underweight Aussie at the moment so the jewel in the crown is to find the value overseas. So feel free to log in proton.nucleuswealth.com to register your interest for that one and we'll catch you there. And just finally as always we'll be sending out our little review pack, our survey, which gives you the opportunity to give us a bit of feedback on how we've gone today and also give us some ideas for future webinars. More than happy to put together something if it's a topic that a few people were looking to hear about and we can do a bit of research and bring it to you. So on that note, well thank you very much for your attendance today and we look forward to catching you at the next one. Cheers.