CEO INSIGHTS – Week Ending 9 February 2018 By NAOS Asset Management

“I don't think there is anything to worry about, even if we do see further falls. I'm not in the business of being able to predict day-by-day or week-by-week movement of industries. But I'm not worried about what we're seeing” Andrew Formica, Co-CEO, Janus Henderson

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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Domestic Economy

“[The] Reserve Bank board does not see a strong case for a near-term adjustment in monetary policy” Philip Lowe, Governor, RBA

“We are still some way from what could be considered full employment and our central scenario for inflation is for it to remain below the midpoint of the medium-target range for the next couple of years” Philip Lowe, Governor, RBA 

“Unemployment remains the key driver of mortgage stress, and we've seen some overall improvement in unemployment rates during the year” Georgette Nicholas, MD, Genworth Australia

“The underlying trends [in the Australian economy] seem to be pretty good. GDP is growing, unemployment looks positive and a lot of the risks that have been talked about from a macroeconomic perspective, probably look a little bit better now than they did one or two years ago, so the underlying macro backdrop actually looks pretty good” Brian Long, Non-Executive Director, CBA

BUT…

“The fundamental strength in the macro trends isn't finding its way yet into developed markets, into wage growth and increased household income and it is naturally going to suppress family feelings of well-being and economic confidence” Brian Long, Non-Executive Director, CBA

Dairy

“In the domestic market, improved commodity prices have begun to flow through to contracts with pricing linked to rolling average commodity prices” Murray Goulburn Market Announcement

Livestock

“Sheep processing volumes in the Company’s abattoir were down 27% on the prior corresponding period due to restricted supply and high prices, however that trend eased later in the half, leading to improved profitability in the final two months of the calendar year” Wellard Market Announcement

“Live export from Australia continues to be challenging, however, the price of heavy cattle is trending downward. The eastern young cattle indicator for January 2018 is about 15% lower than the corresponding period last year” Fred Troncone, Executive Director Operations, Wellard

5G Network

“We are seeing 5G data speeds through our trial that are up to 15x faster than current technologies” Dennis Wong, MD of Networks, Optus

Credit Growth

“Overall, credit growth has slowed in 2017 for both owner occupied and investment lending on the back of additional regulatory measures designed to ensure that strong serviceability criteria [is] being met. These regulatory measures have had the effect of reducing the high loan-to-value market, investment, and interest-only lending” Georgette Nicholas, MD, Genworth Australia

“Low interest rates continue to drive refinancing activity, resulting in increasing competitive pressures amongst lenders to retain customers and maintain margins. And within this market dynamic the home loan market remains robust and responsive to regulatory market changes with lenders looking for opportunities to grow their business” Georgette Nicholas, MD, Genworth Australia

“We had strong mortgage growth in the first half, but saw some impact from the regulators macro prudential measures with volumes down slightly in the second half. The interest only market had the largest impact. We're expecting volumes to gradually recover over the first half of 2018” Craig Meller, CEO, AMP Capital

Global Economy

“Chinese economic growth was resilient during 2017 and global conditions have improved, which has seen higher pricing in most of their products” Christopher Lynch, CFO, Rio Tinto 

Tourism

“Auckland Airport exceeded one million international passengers (excluding transits) in a single calendar month for the first time since the airport opened in 1966. This was a 5.5% increase compared to December 2016. The strong performance was driven by increased capacity on Asia and Middle East routes” Auckland Airport Market Announcement

Urbanisation

“1 billion people are expected to move from the country into the cities over the next while. So the growth of cities needs infrastructure. Half of that we say is probably taking place in Asia. But we do a see very large part taking place in the developed world” Nicholas Moore, MD, Macquarie Bank

Retail

“The impairment announced today follows the continuation of difficult trading conditions in an increasingly competitive department store market. Whilst we are moderating our outlook for Target, the performance and outlook for Kmart remains positive” Robert Scott, MD, Wesfarmers

“We didn’t trade so well in the opening week of January, but December was strong. I just think it goes to show there's bit of volatility with the consumer. But, the market is still pretty good. If I look at the first week of February, it was positive, so there is nothing that's concerning me about it” Anthony Scali, CEO, Nick Scali

Commercial Property

“Our supermarket sales growth has increased as Woolworths continues to improve and our specialty tenants have continued to record healthy annual sales growth” Anthony Mellowes, CEO, SCA Property Group

“We continue to see strong investment demand for Australian office markets, with investors attracted by ongoing economic stability, relatively limited supply and improving tenant demand, which in turn is increasing the potential for rental growth” Grant Nichols, Fund Manager, Australian Unity

Gas

“China gas demand is attracting significant interest as one of the strongest thematics in the energy sector” Glenn Corrie, MD, Sino Gas & Energy

“In 2017, we witnessed almost unparalleled growth in gas demand, surging over 15% year-on-year, driven extensively by the massive coal to gas switching program in Northern China… We anticipate continued strong demand in 2018 and beyond with forecast in the range 10% to 15% growth” Glenn Corrie, MD, Sino Gas & Energy

Commodities

“We remain very positive about [aluminium] demand. We see annual growth around 4%, and we expect this trend to continue over the next 15 years. This is underpinned by growth in the transport sector with the uptick in electric vehicles” Jean-Sebastien Jacques, CEO, Rio Tinto

“We see our battery minerals business [as having] a long-term future ahead of it. I think the world's going to be looking to store power more efficiently going forward” Christopher Ellison, MD, Mineral Resources

Mining Services

“The mining services business continues to perform well… Camps and the like are performing exceptionally well” Christopher Ellison, MD, Mineral Resources

“We see cost inflation coming back. And it's not specific to Rio Tinto, it's across the entire industry” Jean-Sebastien Jacques, CEO, Rio Tinto

Green Energy

“From a transactional perspective, Green energy is growing faster than infrastructure” Tim Bishop, Head of Macquarie Capital

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.