Should You Be Investing in Industrial Stocks In 2020?

  • Nov 28, 2019 AEDT
  • Team Kalkine
Should You Be Investing in Industrial Stocks In 2020?

As we are inching towards the end of 2019, investors and share market experts fathom about 2019 as a year of change in Australia and globally.

Be it industrial stocks, cannabis stocks or mining stocks, the Australian market witnessed highs and lows throughout the year. There have been integral events which directly or directly impacted the investor sentiments this year, with the Reserve Bank of Australia and other central banks across the globe slashing interest rates beyond already record lows, the protracted US–China trade war which continued in the second half of the year, the Australian Capital territory giving a green signal to possession of the tabooed recreational cannabis, and so on.

In today’s article, we would focus on the industrial sector of Australia, encompassing companies that produce capital goods for construction and manufacturing purposes. Businesses in the sector are ideally involved in making and selling machinery, equipment, and supplies used to produce other goods, and not directly sold to consumers.

ABS update on Construction Activity

Let us look at a few facts released by the Australian Bureau of Statistics, regarding the construction work done in Australia in the September 2019 quarter (as per trend estimates):

  • Total construction work done fell 1.6%;
  • Engineering work done fell 1.1%;
  • Total Building work done fell 1.8%;
  • Non-residential building work done rose 0.2% and residential building work fell 3.0%;

How did Australia’s Industrial Sector Perform in 2019?

Australia’s economy slackened in 2018–19, driven by a severe drought and a housing downturn. However, the intervention of the Royal Commission, the unexpected return of the conservative coalition government, monetary and fiscal stimuli were exercised to boost household income and consumer spending.

Discussing the industrial sector in particular, the substantial fall in housing prices in Sydney and Melbourne, two of the country’s largest markets, led to the overall fall in new-building construction, undermining housing sentiment across Australia. This was parallel to an extended period of weak household income growth, weighing on consumer spending.

However, in the latter part of 2019 a silver lining finally seemed evident, with signs of recovery. The housing market downturn has lost steam in recent months, driven by moves made by the Australian Prudential Regulation Authority to increase access to credit for both owner-occupiers and investors.

Moreover, the Central Bank’s interest rate cuts have made credit cheaper. The partial removal of negative gearing, reduction in the capital gains tax discount on properties and lower mortgage repayments has contributed to a slow but confident recovery of the industrial sector.

Will 2020 Be A Good Year for Australia’s Industrial Sector?

Experts believe that there is a positive outlook for business investment and consumer spending that will catalyze the Australian economic growth in 2020. However, growth is expected to remain comparatively subdued compared to the high rates of economic growth seen in the country in the past.

2020 is expected to be a testing time for the country, given that it might carry the consequences of 2019 wherein the market confidence is knocked down, growth is slow, productivity is stalling, trust is faltering, and geopolitical uncertainty shows no signs of a positive conclusion.

A research by PwC suggests that:

  • The economic growth prediction for 2020 in Australia is 2.3%;
  • The GDP could be $40 billion better off;
  • There are up to ~$1.35 billion in underpayments each year;
  • Currency volatility is likely in 2020, as the Australian dollar is extremely vulnerable to currency instabilities associated with the Chinese economy.

Discussing the industrial sector specifically, the construction industry generates more than $350 billion in revenue, producing around 8% of Australia’s GDP, with a projected annual growth rate of 2.5% in the next five years (as per Australian Industry and Skills Committee).

Employment in the sector reached nearly 1,118,000 in 2018 and is projected to exceed 1,300,000 by 2023.

Interestingly, the Labour Market Information Portal of the Australian Government suggests that over the past five years, employment in the construction industry has increased by 14.1%, and decreased by 4.7% in the manufacture sector.

It is evident that Australian cities and infrastructure are facing an increasing need to innovate and transform in an era of volatility and disruption. However, stern regulations and policies do seem to aid the sector.

Let us look at few reasons that build confidence in Australia’s industrial sector next year:

  • Property market analyst, CoreLogicreported a continued rise in auction clearance rates in its September 2019 report, wherein the clearance rate of auctions in capital cities has increased to 77%;
  • There was a rise of 1.2 per cent in Australian house prices in October, marking the largest increase since May 2015 and fourth straight monthly increase since July 2019. Experts believe that the country might see the house prices breaking their all-time high levels by early 2020, if property prices continue to grow;
  • Post the interest rate cuts, banks have been noticeably focussing on increasing customers’ borrowing capacity, as with low floor interest rates, it is easier for Australians to take out a loan for property.

How are Industrial Stocks Performing on the ASX?

Now that we understand the outlook of the industrial sector in 2020, which is subject to speculation given the aggravated economic dynamic, let us understand the way that the industrial stocks have been building investor sentiments:

The close of the share market on 28 November 2019 marked another historic achievement as the S&P/ASX 200 index inched up near its intraday-high of 6,875.5 points set in July 2019 to close at 6864 points, up by 0.2% relative to its last close. The industrial sector settled at 7,241.1 points, up by 22.3 basis points or 0.31%.

The below table demonstrates the performance of few industrial stocks, at market close on 28 November 2019:

With the stocks showing mixed performance in the year to date, and the stance of industrial sector improving at the back of government and monetary policies, it will be interesting to watch one of the largest sectors of the Australian economy unfolding its moves next year. However, one should be wary about the speculations hovering above us- trade wars and a fear of recession.

Let's have a "Look Through ASX Listed Industrial Stocks"

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There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.

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