CEO INSIGHTS – Week Ending 25 January 2018 By NAOS Asset Management

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“Overall, given the strength of CEO expectations on employment, Australia could add more than 400,000 new jobs in 2018. An achievement of this magnitude would make critical inroads into both the rate of unemployment and the naggingly high rate of ­underemployment” Innes Willox, CEO, AI Group

As part of the NAOS investment process, we pay particular attention to the comments made by company CEOs and business leaders in order to gain a greater understanding of the current investment environment and key trends that may be emerging. Below are quotes from the week which in our view detail some of the most important and prominent industry trends and economic factors impacting their businesses.

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Oil

“Looking at the oil market, the strong growth in demand is projected to continue in 2018, on the back of a robust global economy” Paal Kibsgaard, CEO, Schlumberger

“On a macro level, we're seeing optimism creep back into the energy markets and stronger pricing for oil” Ian Davies, MD, Senex Energy

“The production base in the rest of the world [ex North America] is showing fatigue after three years of unprecedented underinvestment. The underlying signs of weakness will likely become more evident in the coming year, as the production additions from investments made in the previous upcycle start to noticeably fall off. All together this means the oil market is now in balance and the previous oversupply discount is gradually being replaced by a market tightness premium, which makes us increasingly positive on the global outlook for our business” Paal Kibsgaard, CEO, Schlumberger

Commodity Cost Inflation

“Commodity prices have continued to move higher as the year has progressed. We knew we'd see higher pulp cost going into the year. These costs have continued to increase beyond initial forecast ranges” Jon Moeller, CFO, Procter & Gamble

“[The prices of] ethylene, propylene, kerosene, polyethylene and polypropylene resins have increased recently, primarily as a result of the fall hurricanes in the Gulf but also due to recent increases in crude pricing” Jon Moeller, CFO, Procter & Gamble

“We expect competitive activity will remain elevated…[And] we are planning for widespread selling price increases because of commodity inflation” Michael Hsu, COO, Kimberly-Clark

Tourism

“We're doing better converting people from aspiration to actually visiting Australia. Together with the tourism industry, we are focused on providing compelling reasons for people to holiday in Australia. As a result, we've seen strong growth across all key markets for the past several years” Steven Ciobo, Federal Tourism Minister

“We don't want to be seen as an extended destination of China. Chinese visitors want to experience things that are different and authentic, and you have to deliver what you say you're going to deliver. It's no good putting a Disneyland in the centre of Australia, because you can do that globally” Robert Ravens, Owner, Bridestowe Lavender Estate

“The middle class in China is becoming more savvy in terms of their global travel. Many of them have been to Australia and they're venturing further off the beaten track, away from the bigger cities” Robert Ravens, Owner, Bridestowe Lavender Estate

“[Chinese tourists] become interested in experiencing things beyond the big cities. For example, visitors from Singapore on average have been to Australia three or four times, the first time they will come to Sydney and Melbourne, and the second time they might explore a little further” Adele Labine-Romain, Partner, Deloitte Access Economics

Domestic Economy

“We are on the cusp of a year in which businesses are looking to invest heavily in capital equipment, in technology, in R&D and in staff training and we are on the cusp of a second consecutive year of record employment growth” Innes Willox, CEO, AI Group

“Investment plans and expectations of employment growth are higher than at any time since 2012. If these plans and expectations are realised, 2018 would prove to be a defining year for the Australian economy” Innes Willox, CEO, AI Group

“A reduction in the corporate tax rate to 25 per cent would allow us to maintain returns to shareholders while reinvesting more in our business, which in turn would allow create more, high-paying jobs…In effect this would mean hiring approximately 50 more software developers in Australia” Tim Reed, CEO, MYOB

Retail

“In contrast to the strong sales we experienced during 2016, consumer spending remained subdued throughout the 2017 calendar year and we did not see that change during the Christmas period” Richard Vincent, MD, Australian Pharmaceutical Industries

Financial Markets

“Going into 2018 we maintain a risk-on investment strategy because the cyclical drivers remain constructive for the performance outlook of risky assets”  Fan Cheuk Wan, MD, HSBC Private Bank

“The tech sector will emerge as a key beneficiary of the tax reforms. The sector has a higher cash balance than the market average so companies will have higher incentives to deploy their cash balances to benefit from the tax repatriation changes. That repatriated capital can be used for M&A as well as higher dividend payouts” Fan Cheuk Wan, MD, HSBC Private Bank

Telecommunications

“Growth from our high-quality fibre-based products continues to be offset by secular pressures from legacy technologies and competition” Matthew Ellis, CFO, Verizon

Domestic Manufacturing

“Fashion students are driving Uber cabs and becoming graphic designers, because there is no fashion work” Julian Lowe, Founder, The Textile Hub

Thank you for reading.

Important information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529) (NAOS) for general information purposes only and must not be construed as investment advice. Certain economic, market or company information contained in this material may have been obtained from published sources prepared by third parties. Nothing contained herein should be construed as granting by implication or otherwise, any license or right to use such third party content without the written permission of the owner.

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