Gonski and ANZ's risky re-education experiment
All the publicity about David Gonski focuses on his role in the new government education policies.
Inevitably education will be a difficult mission, but not nearly as challenging as his role as the chairman of the ANZ Bank where he is embarking on a mission that carries considerable risk.
Already the share market has shown great nervousness about ANZ shares, marking them down sharply. The ANZ is attempting a management experiment in Australia that has never been attempted by a major company – at least in recent times. The ANZ will embark on a management journey whereby almost all of its current executive positions will be changed and the company will embrace a totally different culture and methodology– a so called agility based system.
I can understand the frustration CEO Shayne Elliott must have felt when he arrived at the ANZ in 2015 preparing to take the reins on January 1, 2016. The ANZ is a company that is a bureaucratic morass of committees, where decision-making can be difficult and cumbersome. But the ANZ system is not that different to other large companies in Australia, including most of its bank rivals.
Now it is set to be radically different and, have no doubt, if it succeeds ANZ will surge in the banking ratings. But if it fails the ANZ will slip back a long way and almost certainly be taken over. The greatest risk in this exercise is not that it can't work, but the ANZ executives who have succeeded in past decades have usually been those who have been able to manage the bureaucratic management systems. They will find it very difficult in the new environment, which could mean the bank will be dominated by people with little experience. Let me quote some of the press commentaries made by Elliott on what the ANZ is proposing.
- The agility system radically changes the way you assign work, fund work, manage things, what you measure, what you reward and what kind of capabilities people need in order to succeed.
- The system is much more collaborative. It is more of a generalist world than a specialist world. Hierarchies in a sense disappear.
- At the highest level you still have divisions, you still have an Australian and a New Zealand business, but very quickly the way of work changes. So instead of having departments that are heavily specialised with head functions you organise yourself around customer outcomes. Those outcomes might be about being the best bank for people who buy and own a home.
- Once the hierarchy disappears it has big implications of how the ANZ pay people and how they are rewarded.
I could go on, but as you can see it is a very different system of management and Elliott says that the current system will simply not work in the new internet world.
He was inspired by ING in Holland. Although six or seven months has been allocated for the transfer I would have preferred it if the bank tried out this culture in, say, New Zealand where there is less at stake than doing both Australia and New Zealand together.
It is true that the branches will not be involved, but they will have to alter their communications when they deal with the so-called tribes that have invaded the head office.
By undertaking this sort of change in a relatively small area you discover the difficulties. And, if it starts to go wrong, there is no easy way back, particularly as the chairman David Gonski is fully supportive of the change.
Watch out for the hubris
We saw in the Woolworths situation that the board and management found it extremely difficult to reverse the Masters mistake until they were in very deeply. So the ANZ Bank shares become a punt on whether you think Elliott can pull off this coup. Having said that, as I pointed out earlier – if he fails the ANZ will be a great takeover target.
And, while on the subject of Woolworths, it is worth underlining the dangers of hubris created by high profits and success over your opposition. Before the Wesfarmers takeover of Coles, Woolworths absolutely took Coles to the cleaners year-in, year-out and its management came to the belief that they were totally invincible. There was nothing they could not do better than anyone else. So they embarked on the Masters adventure without running a trial, in the total confidence that they were right.
The Masters debacle smashed Woolworths' hubris and made it a far more dynamic company. Indeed, you have to go back to the days of Paul Simons to see a similar Woolworths' dynamism. Interestingly, Coles had all its hubris taken out by the thrashing it received from Woolworths. But when it began beating Woolworths each quarter it too began to be just a little overconfident.
So now, Woolworths is fighting back and taking market share from Coles, which is reducing its prices to stop the erosion. Both companies face an Amazon that will introduce customer data marketing, the likes of which no one else in Australia has attempted. In looking at your investments, watch for hubris.
In some ways all four banks have this embedded in their culture, because they have become the four-biggest listed companies in Australia. So far they are being challenged on the edge, but nobody has been able to dint their dominance. Indeed, all four now are concentrating on the same markets given that the ANZ has retreated from Asia. The difference between the banks becomes the ANZ management style.
And before we leave hubris, never forget Microsoft, which in the 1990s dominated the emerging internet business. But it became too bureaucratic and too confident. Others moved into the spaces it should have grabbed. Google and Facebook are the best examples. Longer term I worry about Apple, because its products are so much more expensive than its rivals and those high margins may not be sustainable longer term.
Trump and North Korea
Finally, to mark Donald Trump's first 100 days, I want to underline again the very strange situation we have where Trump originally planned to hammer China and cosy up to Russia. The hammering of China would be via a tariff or similar tax system that would raise substantial sums of money, which would in turn partly fund the US corporate tax cuts.
But if we are to avoid a war with North Korea Trump needs China, so now is not a good time to attack them on a trade front.
So, in a very strange way, North Korea is at least delaying the tariffs that would have caused so much disruption to world trade. It is a strange world.
Shane Oliver, AMP Capital
Investment markets and key developments over the past week
- While US, European and Japanese shares rose over the last week helped by good economic and earnings news, anticipation of a good outcome from the French election and a weaker Yen, Chinese and Australian shares fell on the back of signs of softer growth in China. A fall in the iron ore price particularly weighed on Australian resources stocks. Bond yields mostly rose, but commodity prices fell and this weighed on the $A which looks to breaking down again.
- In the US, the Fed provided no real surprises describing the March quarter growth slowdown as transitory, remaining confident on the economic outlook and still foreshadowing gradual rate hikes contingent on the economy evolving as it expects. Our view remains that it's on track to hike rates again at its June meeting (with the money market factoring in a 94 per cent probability), again in September and will then start allowing its balance sheet to decline later this year.
- Continuing in the US, while President Trump indicated he was thinking about raising gasoline tax to fund infrastructure and break up the banks into banking and trading arms, both are unlikely with little support in Congress. Elsewhere there was good news on the policy progress front with a government shutdown avoided (out until September at least) and the House of Representatives passing an Obamacare reform bill. The latter still must pass the Senate but it augurs well for tax reform being passed later this year or early next.
- The final round of the French presidential election is now upon us this Sunday. After an initial rocky start after his first-round victory centrist pro-Euro reformer Emmanuel Macron's opinion poll lead over far right National Front rival Marine Le Pen has stabilised and edged up a bit to around 22 per cent. While Le Pen initially attempted to boost her support by appearing to soften her policies she has since reiterated her plans to exit the Euro and a poor performance in the presidential debate does not appear to have helped her. A Le Pen victory is still possible and would see a negative financial market reaction as French citizens and investors would fear she will find a way out of the Euro (even though there are immense barriers to such a move) and this would likely see runs on French banks, a surge in French bond yields and a renewed bout of Eurozone break up fears weighing particularly on the Euro and Eurozone shares but also on global shares as was the case at the height of the Eurozone crisis in 2011-13. However, given his wide poll lead our base case remains that Macron will win. This would be very positive for French assets, the Euro and global shares generally – albeit this has already been partly factored in by markets. After the election, the focus will then shift to June 11 and 18 parliamentary elections where polls point to a poor showing by the National Front but Macron's En Marche doing well and able to form a reformist government probably with support from centre right Republicans.
Major global economic events and implications
- US economic data over the last week remained consistent with reasonable growth ahead. While auto sales in April were softer than expected and manufacturing conditions slowed a bit according to the ISM index, the non-manufacturing conditions ISM index rose, the trade deficit was better than expected and jobs data was solid. March quarter profits continue to impress with 77 per cent beating on earnings, 64 per cent beating on sales and profits up around 14 per cent year on year.
- Eurozone GDP growth was solid in the March quarter and December quarter growth was revised up with business conditions indicators pointing to a further improvement ahead. Unemployment was unchanged at 9.5 per cent in March, which is well down from its 2013 high of 12.1 per cent. Eurozone March quarter profits are running at up 24 per cent year on year.
- China's official and Caixin business conditions PMIs slipped in April consistent with the view that recent policy tightening has impacted, that the upswing in growth momentum is likely over and that growth this year will be constrained around 6.5 per cent.
Australian economic events and implications
- In Australia, the RBA left interest rates on hold and its Statement on Monetary Policy made no significant changes to its economic forecasts, but it's more confident that its forecasts for stronger growth and inflation are on track. With the economy growing, headline inflation back within the RBA's 2-3 per cent target zone and concerns remaining around the Sydney and Melbourne property markets the pressure to cut rates again has declined. But by the same token it's too early for the RBA to think about raising rates given continuing low underlying inflation pressure, very high underemployment, record low wages growth, risks to growth from weaker than expected trade volumes and a still too high $A. Signs that Sydney and Melbourne property markets may be starting to cool – thanks to bank rate hikes, tightening lending conditions, all the talk about a property bubble and rising unit supply – will if continued add to the RBA's flexibility on rates. While RBA Governor Lowe has stated that “over time we could expect interest rates to rise” this is really just a statement of the obvious. Our base case remains that the RBA will be on hold out to the second half of 2018 when rates will start to rise.
- On household debt and house prices Governor Lowe provided a good analysis of the RBA's concerns about why high household debt to income ratios leave the economy vulnerable – the risk being that at some point households decide that they have borrowed too much and that they should reduce their debt levels which would adversely affect spending and hence magnify any economic impact from a shock to income or house prices. This is a valid concern and our view remains that the intersection of high house prices and household debt are Australia's Achilles heel. As always it's hard to see the trigger for such a shock but the ideal outcome remains an extended period of flat/range bound home prices allowing incomes to catch up. Governor Lowe also pointed out that the RBA will take account of the likely greater responsiveness of consumer spending to interest rate hikes – expect the next interest rate tightening cycle to be even more gradual and modest than those of the past.
- In terms of the housing market while auction clearance rates remains very strong, CoreLogic home price data showed a slowing in Sydney and Melbourne in April with falling prices for units suggesting that these two property markets may be starting to cool. It's too early to get too excited though given the impact of school holidays, Easter and Anzac in April. Meanwhile the AIG's manufacturing and services conditions PMIs for April were strong pointing to solid economic growth but the trade surplus fell in March thanks to stronger imports and the impact of Cyclone Debbie on coal exports which will be more noticeable in April. Expect another growth detraction from net exports in the March quarter resulting in a weak GDP growth outcome.
Shane Oliver is head of investment strategy and chief economist at AMP Capital.
Craig James, CommSec
Federal Budget in focus
- It generally only dominates attention for one day of the year, but the Federal Budget will be in focus in the coming week. But there are also plenty of ‘top shelf' indicators to watch including retail trade.
- The week kicks off on Monday with the release of building approvals data from the Australian Bureau of Statistics (ABS) as well as the job advertisements data from ANZ. The approvals data – council approvals to build new homes – is volatile. But overall it appears that the building cycle has peaked. In February new approvals rose by 8.3 per cent and we expect that they eased 5 per cent in March.
- Job ads have followed a zig-zag course over the past four months, lifting 0.3 per cent in the latest month of March. Business surveys suggest that hiring is starting to lift again.
- On Tuesday there is a raft of data during the day to be followed by the release of the Federal Budget at 7.30pm. The National Australia Bank business survey is released with weekly consumer confidence and retail trade.
- In March the NAB business conditions index rose from 9.3 points to 14.2 points (long-term average 5.0 points), a 9-year high. The business confidence index eased from 6.7 points to 6.1 points. The latest Performance of Manufacturing survey suggests businesses continue to do well.
- Retail trade may have lifted by 0.3 per cent in March after a 0.1 per cent gain in February. Certainly the Business Sales index from Commonwealth Bank pointed to an uptick in spending in the month. Consumers are generally cautious about spending with low nominal wage growth dominating focus rather than the modest growth of consumer prices.
- The Federal Budget will get the usual attention from the media on Tuesday night and Wednesday. The key point being that budget announcements are just the start of a long process of securing agreement from the Senate. The global and domestic economies continue to improve and this will hopefully translate to firmer growth of revenues.
- After the raft of economic events on Tuesday there is then a gap to the next data offerings on Friday. The ABS releases the Overseas Arrivals and Departures publication that has information on both tourism and migration flows. And on the same day the Reserve Bank releases the monthly credit and debit card statistics that include data on the use of automatic teller machines (ATMs)
- Tourist arrivals rose by 0.4 per cent in February. And departures fell by 2.3 per cent. Arrivals are up 10.5 per cent on the year with departures up 4.7 per cent. Tourists from China and Hong Kong rose to a record 1,483,400 over the past year, up 13.5 per cent over the year.
- Consumers continue to cut back of credit card debt. In smoothed terms (12-month average) the average balance was down by 1.1 per cent in February.
Overseas: US inflation; China trade and inflation
- Overseas, inflation data will be released in both China and the US. Retail sales data will also of interest in the US. And in China, trade figures will attract attention.
- The week begins on Monday with trade data (exports and imports) slated for release in China. And in the US the employment trends index is issued.
- On Tuesday in the US a number of indicators are released that would be best described as “second tier”. The National Federation of Independent Businesses (NFIB) release the business optimism survey. Revised data on wholesale sales and inventories is also released. A forward-looking gauge on the job market is also scheduled – the JOLTS survey of job openings. And the usual weekly figures on chain store sales are issued.
- In China on Wednesday, the April data on producer prices and consumer prices is released. Producer prices are up 7.6 per cent on a year ago – just off the fastest rate in eight years. But consumer prices are only 0.9 per cent higher than a year ago.
- In the US on Wednesday, the usual weekly data on mortgage applications is released together with data on import and export prices and monthly figures for the Federal Budget.
- On Thursday in the US data on producer prices is issued with the usual weekly data on claims for unemployment insurance.
- And on Friday, the consumer price index is issued with retail sales and consumer sentiment. The core measure of prices (excludes food and energy) may have lifted 0.2 per cent in April, leaving the annual rate at 2 per cent. And just like in Australia, US consumers are spending only cautiously with non-auto (car) sales largely flat in March. Interestingly the softness of spending stands in contrast to healthy consumer sentiment.
- There are approximately five speeches by US Federal Reserve presidents over the week.
- The Australian sharemarket has generally done well during the month of May – not great, but not badly either. Over the past 70 years the sharemarket has lifted 46 times for an average monthly gain of 0.5 per cent. The extra piece of good news is that the sharemarket has lifted in May over the past three years.
Craig James is chief economist at CommSec.
Readings & Viewings
Australian house prices slowed in April, but CoreLogic reckons we need more data to confirm a cooling off period. UBS analysts are calling it though, and say we've already peaked. Meanwhile, the RBA thinks high household debt is the biggest threat to the economy, and it falls on the consumer, not the banks, which have been a bit of a mixed bag this week on the ASX. Let's look elsewhere for answers.
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