With the economy recovering, merger and acquisition activity picking up, investor sentiment reasonably strong and Australia’s superannuation pool ever expanding, another reasonable year looms for the financial services sector.
The range of predictions for how the sharemarket will perform vary greatly, with the most bullish (such as RBS’s Ava DeVoy) predicting growth of 20% and the most bearish (such as JP Morgan and Credit Suisse) expecting growth of just 5%.
CommSec’s Craig James expects the All Ordinaries to end the year at 5,400 by end 2011, up from 4,847 at the end of 2010.
“Last year we thought the resources sector would outperform and we haven’t changed that view for 2011,” he says.
“However we think that consumer-dependent sectors will lift from the cellar to the top shelf as consumers start to spend again – not freely, but with more confidence.”
The unknown – and it’s no small issue – is the regulatory landscape. Last year the sector faced Parliamentary reviews into superannuation, a number of reviews into various tax issues (including the over-hyped Henry Review) and a few reviews into the banking sector, most of which went nowhere.
There is a similar review agenda this year. We’ve got two reviews in the banking sector underway, further consultation on changes to super regulations (most notably the introduction of a low-cost default super account for super fund members who aren’t interested in their super), a review of some trust laws and a tax summit, which promises to take up where the Henry Review left off.
While Australia’s ageing population means the outlook for the health sector is set for steady growth, the outlook can change markedly from sub sector to sub sector.
While the outlook for the private hospital sector remains strong, the outlook for the embattled aged care sector is poor, with operators battling against low funding levels and regulations that prevent them from charging users enough to cover rising costs.
While the outlook for vitamins and other complementary medicines is good, pharmaceutical manufacturers face Government-mandated price cuts to some of their products (although some critics argue Australian drug prices are still extremely high compared with other nations).
Like so many sectors, the health and pharmaceuticals industry also faces the issue of skills shortages. A lack of qualified doctors, nurses and scientists will continue to put pressure on wages and costs in the sector – and there does not appear to be an easy solution to this problem in sight.
One sub-sector hoping for a brighter year will be the biotech sector, which ended 2010 on a high thanks to listed biotech Acrux. The company, which develops technology to deliver drugs through the skin (such as via roll-on devices) became one of the few Australian firms to get approval for its products from the US Food and Drug Administration. This major milestone is likely to go some way to restoring investor confidence and patience.
Technology research firm Gartner predicts IT spending in Australia will increase by just 2% in 2011, to just over $50 billion.
While that looks like something of a slowdown given last year’s spending growth of 2011, Australia can take comfort from the fact it is in the fastest-growing IT region in the world – Asia Pacific, where total spending is tipped to rise 7.6% in 2011 to $312 billion.
Gartner says software is likely to be the best performing part of the IT sector, with spending in this category tipped to increase 10%.
Against this slow-growth backdrop, it’s not surprising that Australia’s listed IT companies have quite different outlooks.
Brisbane’s Technology One, which posted a 15% increase in profit in 2009-10, is expecting sales to grow during the current financial year, but has described the operating environment as “challenging and uncertain”.
However, Perth-based IT service provider ASG is particularly bullish about the year ahead, having made a number of acquisitions in 2010. Those takeovers are expected to list revenue by 40% during the 2010-11 period, with the company saying it will be looking to chase aggressive growth in the 2012 and 2013 financial years.
On the other hand, health software company iSoft remains locked in a battle to restructure its operations as it battles against a large debt load caused by expansion into the patchy British market.
Australia’s manufacturing sector ended 2010 on a weak note, with the Australian Industry Group’s Performance of Manufacturing Index showing nine out of the 12 sub-sectors in the industry went backwards in December.
The sector is being hit by a triple-whammy – weak consumer confidence in Australia and in most major export markets, a strong Australian dollar and a rising interest rates.
Unfortunately, all three issues look set to continue well into 2011 and it is little surprise that the measure tracking new orders fell for the fourth consecutive month in December.
Those sectors seen to be under the most pressure including the textile, clothing and footwear sector (a victim of falling retail sales and competition from cheap imports), the basic metals sector (which is exposed to rising commodity prices) and the machinery and equipment sub-sector.
The construction materials sector should receive some boost from major projects underway in the resources and public infrastructure sectors, but will feel the pinch in an extremely sluggish residential commercial construction sector.
PwC’s Australian-based global head of industrial manufacturing, Graeme Billings, says companies will need to continue to look for ways to get costs out of their businesses.
“In the face of these declines in activity and the continuing slump in new orders, it is imperative that businesses continue to search for efficiencies, improvements and innovative approaches to their markets, products and business models.”
The media sector has encountered a few very tough years due to the financial crisis, but the next 12 months should be marked by a recovery in both print and internet advertising, along with further growth in mobiles.
PwC predicts the internet industry will grow by 8.7% over the next four years, with internet advertising set to grow by 15.4%.
And according to a recent forecast from Frost & Sullivan, 52% of 30 major publishing, advertising and media companies intend to increase their 2011 general advertising budgets. About 38% say they will increase search advertising this year, and the increased take-up of smartphones will lead to growth in mobile and video advertising.
On the other hand, traditional media players will continue to struggle. The free-to-air television sector is set to grow at a rate of 3.9% along with radio at 1.7%. Print will struggle as well – magazines will grow by 1% and newspapers by just 1.1%, but PwC also says the relatively strong online presences of major media outlets will ensure their survival.
PwC says it is not advertising that will drive the major growth in media, but instead subscription services and direct marketing to consumers through growing industries such as gaming.
Interactive gaming will increase by 9.4% this year, the company predicts, and online game sales will grow by 20.4% – a market ripe for advertising.
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