At almost exactly the same time the Reserve Bank was pressing the button on its first interest rate rise in 11 years yesterday, Seven Group chief executive Ryan Stokes was revealing a “stronger for longer” infrastructure boom was gathering pace across the nation, just as commodity prices keep the good times rolling for Seven’s WesTrac heavy equipment division.
A few hours earlier, Wesfarmers chief Rob Scott had declared his confidence that the lowest unemployment rate in decades, rising incomes and an enlarged savings pool meant Australia’s household and housing sectors – so vital to the health of his Bunnings chain – could withstand rates rise.
And Mirvac boss Susan Lloyd-Hurwitz pointed to unheard of tightness in the industrial property sector, a recovering office and retail market, and positive medium-term outlook for apartments.
So while the RBA’s unexpectedly large interest rate rise might have underscored the growing challenge of inflation, the mood from company chief executives at the Macquarie Australia Conference in Sydney was clearly optimistic.
Supply chain dislocations and labour shortages are presenting real challenges, and cost pressures keep building, but an environment of strong demand is allowing most companies to pass through these inflationary pressures and underpinning confidence.
The conference, which brings together investors and companies across 103 presentations and close to 1000 one-on-meetings, is being held in-person for the first time since 2019, and it was no surprise to feel a real buzz in the room.
Not only has the Australian funds management community come out in force, but a strong contingent of international investors has made the trek to Australia for the first time since the pandemic struck in early 2020.
As always, the outsider view is interesting. For these international investors – it is understood the big names visiting include T Rowe Price, Fidelity and GIC – the Australian market can play a range of roles in a portfolio.
For example, the ASX is exposed to China, but has less of the volatility and geopolitical risk that the market has seen in recent times. It’s experiencing a level of inflation, but much less in the United States, where anxiety about earnings and valuations is growing.
And it offers great exposure to the commodities thematic that has become so popular (perhaps even overcrowded) since Russia invaded Ukraine.
The companies presenting at the conference would have given these international investors plenty to think about.
Wesfarmers, which sits across a big chunk of the Australian economy – retail, the industrial sector via its chemicals business, small business via its Officeworks and workwear divisions, and resources and energy via its new lithium project – painted a picture of broad economic resilience, even as inflationary pressures continue to build.
CEO Scott said while rate rises “obviously puts a lot of focus back on the housing market”, the conglomerate remained “very confident about the Australian housing market and household spending generally”.
“Low unemployment and household savings, combined with a structural benefit as people spend more time working from home, provides a strong base for future investment in and around the home,” he said.
Real wage growth, Scott pointed out, was good for the economy and good for Wesfarmers. And while inflation created challenges for the broader economy, it would give smart companies that can limit cost rises the chance to take market share from competitors.
Mathematics says higher interest rates puts downward pressure on asset prices, but Charter Hall managing director David Harrison downplayed the impact, arguing sensible market participation would take a long-term view on rates like they do through every cycle.
Higher borrowing costs could also create opportunities, as corporates with “lazy”, asset-heavy balance sheets consider options such as sale and leaseback arrangements.
This thread was also picked up by Lloyd-Hurwitz, who reminded the conference that there was still a level of post-lockdown demand flowing through the economy.
“There are so many decisions that corporates didn’t make over the last two years that will need to be made.”
For Mirvac, that manifests in the office sector, where demand for quality assets (read the latest and greatest) remains high.
Stokes presented another picture of broad economic strength. With strong iron ore, coal, nickel, copper and lithium activity expected to continue, the outlook for Seven’s WesTrac division – which sells Caterpillar heavy equipment and parts – looks sound.
In infrastructure, where Seven’s Coates equipment hire business is a major player, an estimated $1.1 trillion of infrastructure spending over the next five years is expected to underpin strong demand.
Stokes says that while Infrastructure Australia expects spending to peak in 2023, “our expectation is that this wave of infrastructure investment will run stronger for longer” due in no small part to shortages of specialist skills.
The challenge of labour was a constant refrain across the conference. It is clear that pressures are intense in nearly every sector and calls for immigration to open up to plug gaps are likely to grow louder.
As Reserve Bank governor Philip Lowe warned markets to prepare for the cash rate to rise from yesterday’s new level of 0.35 per cent to 2.5 per cent, ASX investors were given a little taste of the sectors likely to feel the most pressure from rising rates, with technology and real estate sold off.
No surprises there. But investors will need to watch carefully over the coming months to see what impact rate rises have on what ASX companies still believe is a pretty strong economy.
