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'ANIMAL SPIRITS': Australia's big companies may finally be ready to invest

Photo: Rob Elliott/AFP/Getty Images

Reporting season on the ASX200 is about halfway through, and results have been steady if not spectacular.

That’s the view of Credit Suisse analysts Hasan Tevfik and Peter Liu, whose halftime scorecard echoed the lukewarm assessment of the UBS equities team last week.

The pair said that of the companies that had reported, analysts have downgraded their earnings per share forecasts by a weighted average of 0.3%.

Since 2004, the average downgrade in a reporting period month since has been 0.9%. So in that context, the title of their research note — “Not great but good enough, so far” — seems apt.

But Tefvik and Liu picked out another trend from the results so far — ASX listed companies may just be getting ready to spend some money.

They cited the fact that as at the halfway point of reporting season, forward guidance by ASX200 companies for capital expenditure commitments had increased.

Noting that this is something of a rare occurrence, the two analysts described the change as “the aroma of animal spirits” – an echo of the 2014 call by former RBA governor Glenn Stevens for Australian businesses to embrace their “animal spirits” to get the economy moving.

For just the second time since February 2013, capital expenditure (capex) forecasts have moved into positive territory.

Here’s Tefvik and Liu on the promising trend:

“Capex forecasts have pushed higher so far during the current reporting period. Companies are guiding to stronger investment in the year ahead. While capex upgrades were common before 2012, they have been since been scarce as investors have preferred distributions instead. However, this could now be changing. There were also small capex upgrades in the Aug-16 reporting period. Perhaps Australia Inc. is beginning to realise that the demands of income seeking investors, like Selfies, could be unsustainable. There comes a time when investment is required.”

“Selfies” refers to Australia’s huge self-managed super fund (SMSF) industry.

SMSFs had $654 billion in assets under management as at December 2016, and their investment strategy typically skews towards a hunt for yield. In other words, stocks that pay a reliable dividend.

If companies are indeed getting ready to spend some cash, it may signal a shift in strategy around what’s traditionally been a dominant theme in Australian stocks; paying out a high dividend.

Last week, Business Insider’s Paul Colgan analysed the market reaction when Telstra announced it would dividends.

That decision saw the stock plunge by 10%, which raised questions about whether the Australian investment landscape is too focused on dividends, as opposed to value-building capex.

Led by dividend downgrades from Telstra and other big defensive stocks such as CSL, dividend forecasts have so far fallen by 0.4% this earnings season — above the long-term average of 0.3%.

If the forward guidance for increased capex continues this reporting season it could lead to what for some has been a long time coming – Australian companies taking risks and reinvesting profits for growth.

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