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The Switzer Market Review

Private Matters Issue 8, September 2010

The Switzer Market ReviewDouble trouble fears for investors

The roller-coaster ride on the share market continued in August as a slew of companies reported in Australia and abroad, with mixed economic data suggesting the possibility of a United States double-dip recession.

With anxious investors maintaining their concern about the economic recovery in the US, double-dip fears have made the headlines. Despite these worries, Wall Street resisted gravity, suggesting other investors hold a far more positive market outlook.

While it is impossible to predict with certainty what will happen to the stock market and the global economy, the best course any business owner can take is to prepare for what may come.

When America sneezes …

Many business owners do not link Wall Street or the US to their business fortunes, but the global financial crisis should have changed that thinking.

After all, it was American sub-prime loans that rocked world financial markets, creating the credit crunch that resulted in a global recession and culminating in the Reserve Bank chopping interest rates from 7.25 per cent to three per cent from late 2008 to early 2009. It also forced unemployment up to 5.9 per cent and left the Federal Government with a net debt of $78.5 billion in 2010-11. This is expected to rise to about $90.8 billion in 2013-14.

So it is relevant to consider the likelihood of a US double-dip recession because of its potential impact on the Australian economy and business. Stock markets have been volatile and the Australian stock market generally follows what Wall Street does the night before, although this is not always the case. (On a side note, a US business television reporter actually claimed that “strong economic reports from Australia and China” could be behind the rise in commodity stocks, helping push Wall Street up on 1 September!).

One business forecaster who does not see a double-dip threat is Phil Ruthven from IBISWorld, who said on Peter Switzer’s Sky News Business Channel program, SWITZER, that he expects a 45 per cent rise on the Australian stock market in one of the next three years. Ruthven thinks the market’s hesitancy to buy at the moment is akin to a wound-up spring that will eventually open when the economy starts to promise real growth.
And Clifford Bennett from Herston Economics, a big-call merchant, expects the Dow Jones Index to hit 18,000 in the next three years. The Dow dipped below the 10,000 mark on 26 August, but was up to 10,014.72 by the end of the month.

As mentioned last month, there has been a battle between good corporate earnings and not-so-great economic data. Economic news this month has been mixed here and in the US. The US Federal Reserve has indicated it is prepared to inject extra stimulus into the American economy if necessary.

Anton Tagliaferro, founder of equities fund manager Investors Mutual, says the US is not out of the woods and will be in a “bit of strife for a while”. On whether there will be a double dip, however, he makes the memorable point that “a collapse usually comes when you don’t expect it, but right now there are a lot of people expecting it”.

On the home front, one of the major issues has been the indecision regarding the Australian federal election. Peter Switzer believes the fact there will be a minority government that is dependent on independents could lead to economic and business uncertainty for the next three years.

“This could make business life very challenging, especially when you consider the input we are likely to see from the controversial Greens,” he said.

The good and the bad

The data over August was mixed. In the negative Australian economic news department:

  • Unemployment rose to 5.3 per cent in July from 5.1 per cent in June, driven mainly by the increase in the participation rate, which increased 0.2 points to 65.5 per cent, according to the Australian Bureau of Statistics. Employment rose by 23,500 courtesy of 27,700 part-time jobs and 4200 fewer full-time jobs
  • According to the NAB’s monthly business survey, business confidence fell to two points in July from four points in June. “While the expected boost to mining post the mining tax agreement eventuated, it was more than offset by declining confidence in manufacturing, retail and construction,” the survey reported. It also attributed a fall in business conditions – from eight points in June to five points in July – to “retail and lower business activity (as the effect of the Government stimulus passes)”
  • Australia’s trade surplus fell to $1.89 billion in July from $3.44 billion a month ago, according to Australian Bureau of Statistics data
  • The Australian Industry Group (Ai Group) – PricewaterhouseCoopers Australian Performance of Manufacturers Index (Australian PMI) dropped 2.7 points to 51.7 in August. This was partly due to slower growth in new orders and production. A reading under 50 points to contraction while anything over 50 represents points indicates expansion. “The Australian PMI recorded its eighth consecutive month of expansion, in part due to manufacturers’ links with the construction and mining sectors,” said Ai Group’s chief executive Heather Ridout. “Nevertheless, election uncertainty, together with intense import competition and other ongoing impacts of a strong Australian dollar, is generating headwinds for manufacturers.”

On a more positive note:

  • The Westpac-Melbourne Institute Index of Consumer Confidence rose 5.4 per cent to 119.2 in August, after gaining 11.1 per cent the month before
  • Retail spending was up 0.7 per cent in July after gaining 0.2 per cent the previous month
  • The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index rose from 46.6 in July to 47.5 in August.

As the data shows, uncertainty and volatility is hindering the economy and the stock market, underlining why it is so important to ensure your business is prepared for what lies ahead. If times do become increasingly tough, search for opportunities among the challenges that your competitors may not have found. It is also important to embrace innovation and listen to what your market wants.

This story could be food for thought for anyone pondering the uncertainty of a minority government and the new world of independents. Whether you are a climate change supporter or sceptic, the reality is that the world is moving towards a greener future in which consumers will be more conscious of the environmental effects of any product they buy. This may prove to be a challenge for some business owners, but in reality it is important to see this shift in focus as an opportunity to make your business stand out from the crowd. As US marketing guru Seth Godin says, you have to be a purple cow in a field of brown cows if you want to be noticed.

Greener pastures

Michael Crouch, chairman and CEO of Zip Industries, believes the greener future will be good for his company. Zip was the first company in the world to develop small instant-boiling water heaters. He explains that his products are keeping up with the changes.

“The amount of electricity they use today is less than what they’ve used in the past,” he told Peter Switzer on SWITZER. “They have a sleep mode function on them so they can go to sleep if they’re not being used, so they’re not consuming electricity. They’re extremely economical.”

This energy-saving feature is also important for the export market. About 60 to 80 per cent of Zip’s business earnings come from overseas. Crouch believes energy consciousness in Europe is much higher than in Australia.

“You’ve got to meet the market demands and the market expectations,” he said.
Crouch acquired Zip from a New Zealander in 1962 and today the business has about 500 employees. In the early days there were many businesses making water heaters – at the time there were 44 water heater manufacturers in New South Wales alone. He learned over a period of 15 years that he could not be a “‘me too’ in life”.

“That’s why I’m so wrapped up in innovation today because you have to do something differently and you have to do it better.”

Crouch explains that with exports today, the company has to be “equal to the world’s best to survive”.
A lot of companies have moved their manufacturing overseas, but Crouch says Australia is a “good base for manufacturing” because of its reputation for innovation.

“I’m very keen on innovation, and innovation is at the heart of everything Australian,” he said. It took Crouch 15 to 20 years to realise the importance of innovation – “I was taught at an early age, you always have to be better than your competitors.”

Crouch also says businesses have to invest in success – “That’s what it’s all about – doing it better than anyone else.”

In challenging times, creative thinking legend Edward de Bono recommends that the competitive need to think outside the square. Only the foolhardy would ignore such good advice.

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