Corporate expenditure likely to remain subdued for another year

In Australia, business confidence tends to be positively correlated to share price movements. Unfortunately, business confidence also tends to lead corporate investment expenditure. This is not the ideal feedback loop. By way of example, from the start of 2003 through to mid 2007 the ASX 200 Industrial index rose by 23%pa. Industrial related capital expenditure concurrently rose by nearly 60% and peaked just as the GFC emerged. Also recall that from early 2004 up until mid 2008 the ASX 200 Material index grew by 30%pa. Unsurprisingly, mining capital expenditure grew four fold over the corresponding period. Hence, over the past decade, a number of major Australian businesses expanded capacity at the peak of the demand cycle only to operate the new capacity at the bottom of the price cycle. Unless this cyclical behavior alters, we believe that business confidence will remain challenged until such time that the ASX 200 holds above 6200. Disappointingly this means that corporate investment will most likely remain subdued for at least another year.