NAOS News & Insights

CEO Insights – Week Ending Friday 16/12/16 By NAOS Asset Management

December 16, 2016
As part of the NAOS investment process, we pay particular attention to the comments made by company CEO’s 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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Disruption & Technology

“It [Amazon] is a big, big force and it has already disrupted plenty of people and it will disrupt more. Many competitors including us in a few areas, have not figured out to either participate in it, or to counter it”

Warren Buffett, Chairman, Berkshire Hathaway

“Our investment in automation will increase. We see technology, and specifically automation, as key to meeting our safety, volume and cost targets. A large focus of automation will optimise logistics, production and maintenance processes. We are working to automate fixed and mobile plants and process control and improve our equipment performance through smart and predictive maintenance"

Andrew Mackenzie, CEO, BHP

Domestic Economy

“Overall, the Australian economy remains strong and we expect economic growth and credit growth to be broadly similar to this year. Barring large individual company issues, we expect credit quality to remain generally favourable, while recognising there will continue to be challenges in selected industries and regions”

Brian Hartzer, CEO, Westpac  

“We are in a low growth world, that's a fact. And while I expect growth to still track along reasonably well, we are starting to see emerging signs of stress in some parts of the economy. Ongoing volatility and uncertainty around the world will only serve to further restrict confidence and growth”

Shayne Elliott, CEO, ANZ

“We believe that this [rising interest rates globally] is broadly positive for the economy in the short term, with strong commodity prices and a weakening Australian dollar supporting exports. However, in the longer term much depends on the outlook for global trade, and especially the health of China. This is because the transition to a service-based economy relies on continued demand for service exports – especially health care, education and tourism”

Brian Hartzer, CEO, Westpac

“I’m optimistic about the outlook for the Queensland economy, with some positive signs emerging. Tourism is an important contributor and Queensland has 3 of the 4 fastest growing airports in Australia: Gold Coast, Cairns and the Sunshine Coast. Queensland is also experiencing the highest net interstate migration since 2012”

Jon Sutton, MD, Bank of Queensland 

“Our experience shows that where governments invest in infrastructure projects, business investment – and particularly small business investment – soon follows. In other words, infrastructure investments have a multiplier effect on economic growth”

Brian Hartzer, CEO, Westpac  

Domestic Interest Rates

“While history would suggest they [interest rates] are more likely to rise than fall given the starting position, what the RBA will or won't do doesn't keep me up at night and I've given up trying to guess”

Shayne Elliott, CEO, ANZ

“Most likely the path from here [for interest rates] is probably up”

Brian Hartzer, CEO, Westpac  

“Despite employment growth and retail spending in Australia being positive, they are both softening, and the residential construction cycle may be peaking. So we expect the next move in interest rates will be more likely down rather than up next year, however I am anticipating a year of relatively flat interest rates”

Darren Steinberg, CEO, Dexus Property Group

Banking

“Economic growth remains mixed across the states, including Queensland and the other commodity based states. We remain cautious about increasing household debt, housing affordability and serviceability, growing under-employment and declining participation in the labour market, and the potential impact of rate rises and housing market weakness. Against this backdrop, future growth prospects for the banking sector remain subdued. These headwinds all impact the sector’s ability to maintain earnings growth and generate traditionally higher ROE”

Roger Davis, Chairman, Bank of Queensland

Oil & Gas

“We believe gas is ideally placed to be the transition fuel to Australia's cleaner energy future, through managing peak energy requirements in a reliable and secure fashion. The real problem here is the disjoint state-based energy policies”

Mick Mccormack, MD, APA Group

“We have always believed in gas as the transition fuel to Australia's cleaner energy future, shifting it away from reliance on black & brown coal fired generation, whilst sustaining Australia's economy. We therefore see opportunities in this shift, but believe that it needs to be done in a way that makes economic sense as nation-wide solution”

Mick Mccormack, MD, APA Group

Housing

"Lead indicators for our key markets remain largely positive. Our core existing home renovation and maintenance markets are expected to continue to provide resilient, profitable growth. In Australia, our primary market is approximately 10 million existing homes, 70% of which are more than 20 years old. Sales to consumers from retail home improvement channels have remained consistently strong, and the trade sector of the core renovation market is well placed to continue growing”

Patrick Houlihan, MD, DuluxGroup 

“Undersupply [of housing] is greatest in NSW with approximately 15 months of unsatisfied demand at June 2016. With interest rates expected to remain low for the foreseeable future, it is possible that the pent-up underlying demand for housing will be built out, resulting in an extended period of high activity”

Todd Barlow, MD, Soul Pattinson 

“Although new housing approvals have peaked, there is a solid pipeline of work yet to be commenced and completed, particularly in the multi-residential segment”

Patrick Houlihan, MD, DuluxGroup 

“Whilst the upswing in Australian housing activity has been strong over the past few years, the recent surge in activity follows a decade long period of underbuild between 2003 and 2013 and we remain below the historic trend in housing spend”

Todd Barlow, MD, Soul Pattinson 

“Commercial markets are expected to remain solid, however resources infrastructure markets will continue to struggle”

Patrick Houlihan, MD, DuluxGroup 

Retail

“The start of FY17 remains challenging as we cycle strong comparable store sales growth from last year in a continuing very competitive market”

John Schmoll, Chairman, Oroton Group 

Advertising 

“The advertising market remains extremely short in terms of forward bookings”

Paul Anderson, CEO, TEN Network 

Coal

“We remain very bullish on the outlook for thermal coal. 1.3 billion people, or 20% of the world’s population, are living in energy poverty or lack access to modern energy services. Increasing wealth and development is increasing demand for, and access to, energy”

Todd Barlow, MD, Soul Pattinson 

“I've spoken with a couple of CEOs of American coal companies and they are quite bullish, they are quite excited, one of them told me they are dusting off old projects”

Alberto Calderon, MD, Orica 

“Coal is still the most reliable source of low cost energy. Even at the current low gas prices, coal is less than half the cost of gas in Asia. There continues to be high levels of new investment in coal energy generation in Asia. Approximately 85% of all investment in coal energy is in the Asian region and will require long term supply of quality coal"

Todd Barlow, MD, Soul Pattinson 

“There are few reliable countries with access to low cost and high quality coal and it is difficult to see where any meaningful global supply will come from that is lower cost than existing operations”

Todd Barlow, MD, Soul Pattinson 

Tourism

“China is Australia's most valuable inbound travel market and the number of people in China travelling to Australia is growing rapidly each year"

John Borghetti, CEO, Virgin Australia

Global Economy

"The global shift to protectionism will be a challenge for an export-led Australian economy and a Trump presidency will only add to the challenges of the global economy over the next 12 months"

Shayne Elliott, CEO, ANZ

“We are confident China's longer term outlook for commodities demand remains strong. Despite reductions in China's headline growth rates, the sheer size of its economy will underpin demand fundamentals well into the future. The Chinese government has an extensive agenda of reform to rebalance China's economy and transition from investment to consumption led growth. They have also set bold national goals for trade corridors, climate change action and innovation and technology to further growth”

Andrew Mackenzie, CEO, BHP

M&A

“We will continue to see a healthy number of mega-deals ... For overall activity the deal value will be respectable. I'm just not sure the volume of deals by number will be shooting the lights out”

Tony Damian, Partner, Herbert Smith Freehills

Thank you for reading.

This will be the last CEO Insights of calendar year 2016. We will recommence as normal in January 2017.

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