tag:theconversation.com,2011:/uk/topics/face-value-42587/articlesFace Value – The Conversation2018-03-05T19:22:01Ztag:theconversation.com,2011:article/927372018-03-05T19:22:01Z2018-03-05T19:22:01ZFace Value: business leaders nervous about consumers spending less and regulation<figure><img src="https://images.theconversation.com/files/208853/original/file-20180305-65511-1h06svd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The glum business sentiment is in sectors related to consumer spending.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p><em>When Australian companies report results they typically include an outlook statement from the business’ leaders, giving investors some guidance about their expectations for the future. They issue these forward-looking statements with some caution as investors might rely on them, and the law requires that they be based on “reasonable grounds”.</em></p>
<p><em>The Conversation’s <a href="https://theconversation.com/face-value-sentiment-analysis-shows-business-leaders-are-positive-about-the-year-ahead-73904">Face Value</a> uses sentiment analysis to try and determine how Australian business leaders are feeling about the future. This gives us an idea of what might be in store for our economy.</em></p>
<hr>
<p>Business leaders in health and consumer discretionary sectors are feeling less positive about the year ahead because consumers are feeling the pain in the hip pocket, according to our analysis of the outlook of leaders of Australia’s ASX 200 companies. The threat of changes in regulation also features in business leaders’ fears.</p>
<p><a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6291.0.55.003Nov%202017?OpenDocument">Roughly four out of five</a> Australian workers earn their living from private businesses. So we should care about how Australian business leaders are feeling about the future of their businesses, because it’s our future.</p>
<p>The consumer discretionary sector encompasses industries that tend to be the most sensitive to economic cycles. They include businesses that produce goods like cars, clothes and leisure equipment but also services like hotels, restaurants and media.</p>
<p>Business sentiment in the consumer discretionary sector fell in March 2018 relative to the 2017 September business reporting season - from 0.19 to 0.13; and also compared with March 2017 but by a smaller magnitude. </p>
<p>Companies with lower than average sentiment for the year ahead included retailer Myer (0.05) – no surprise given the ongoing <a href="https://thenewdaily.com.au/money/finance-news/2018/02/14/is-this-the-end-for-myer/">weak performance</a> and takeover speculation; and Nine Entertainment (-0.03), <a href="https://www.sbs.com.au/news/tough-times-loom-for-tv-after-ad-sugar-hit">facing</a> ongoing cost pressures from digital media competition. Also less positive were Skycity Entertainment Group (0.01) and Webjet (-0.02).</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/208860/original/file-20180305-65541-t4bhgu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/208860/original/file-20180305-65541-t4bhgu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/208860/original/file-20180305-65541-t4bhgu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=965&fit=crop&dpr=1 600w, https://images.theconversation.com/files/208860/original/file-20180305-65541-t4bhgu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=965&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/208860/original/file-20180305-65541-t4bhgu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=965&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/208860/original/file-20180305-65541-t4bhgu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1213&fit=crop&dpr=1 754w, https://images.theconversation.com/files/208860/original/file-20180305-65541-t4bhgu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1213&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/208860/original/file-20180305-65541-t4bhgu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1213&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<hr>
<h2>Tighter household budgets bad for business</h2>
<p>The glum business sentiment is in sectors related to consumer spending. A decline in consumer spending could be because household finances are under pressure from <a href="https://www.rba.gov.au/publications/smp/2018/feb/domestic-economic-conditions.html">slow income growth and wealth</a>. </p>
<p>Slow household income growth is driven by slow wage growth. The wage price index grew by <a href="https://www.rba.gov.au/publications/smp/2018/feb/domestic-economic-conditions.html">2%</a> over the past year, and less on a per hour basis, which means it is barely keeping up with consumer prices. The second factor is the slowing growth in household net wealth due to a slow down in house prices and financial assets.</p>
<p>Similarly, another <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20180214BullConsumerSentiment.pdf">consumer sentiment index</a> in Australia declined 2.3% from January to February – the first decline in three months. Part of this may be due to the volatility in global share markets that occurred in the survey week in early February. </p>
<p>This volatility is widely expected to continue and weakening sentiment in the consumer discretionary sector may reflect ongoing uncertainty in household financial wealth.</p>
<h2>Health and consumer spending sectors wary of regulation</h2>
<p>Our analysis shows business sentiment in the health care sector dropped from 0.18 to 0.07 September 2017 to March 2018 and by a smaller magnitude since March 2017. This could reflect business leaders’ ongoing concern about the sustainability of the current health system. </p>
<p>Health business with lower than average sentiment for the year ahead include generic drugs supplier Mayne Pharma (0.01), infection control company Nanosonics (-0.03) and private hospital group Healthscope (0.04).</p>
<p>Private health insurance premiums have increased at <a href="https://theconversation.com/labors-2-cap-on-private-health-insurance-premium-rises-wont-fix-affordability-91232">nearly twice</a> the growth rate of wages over the past. According to a recent <a href="https://www.privatehealthcareaustralia.org.au/wp-content/uploads/Private-Healthcare-Australia-Budget-Submission-2017-18.pdf">survey</a>, 44% of Australians believe the current mix of public and private health systems will not be around in 15 years, and 52% lack confidence that the current public hospital system will still be around in 15 years.</p>
<p>Government regulation is a recurrent theme in business leaders’ statements. For example, diagnostic imaging company Primary Health Care <a href="https://www.asx.com.au/asxpdf/20180216/pdf/43rmkh28vd7245.pdf">notes in its report</a>:</p>
<blockquote>
<p>“…funding pressures will remain for the industry…Australia is at an important juncture in the delivery of health-care services.” </p>
</blockquote>
<p>The private health care funding system is <a href="https://grattan.edu.au/wp-content/uploads/2017/11/MJLH-11.1-McDonald-2017-11-19.pdf">regulated</a> to within an inch of its life in the desperate attempt to shore up its viability. For example, the Private Health Insurance Rebate, Lifetime Health Cover and the Medicare Levy Surcharge are all measures designed to force healthy young people and high income earners to subsidise the health care of others. </p>
<p>But this regulation is not working, judging by <a href="https://www.theguardian.com/business/grogonomics/2018/feb/06/is-private-health-insurance-a-con-the-answer-is-in-the-graphs">declining proportion</a> of young people with private health insurance and the need to <a href="https://theconversation.com/labors-2-cap-on-private-health-insurance-premium-rises-wont-fix-affordability-91232">increase premiums</a> so dramatically. </p>
<hr>
<p><iframe id="JCIqP" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/JCIqP/1/" height="500" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>We also see regulation mentioned in the reports for the consumer discretionary sector. For example David Attenborough, the managing director and CEO of gambling entertainment <a href="https://www.tabcorp.com.au/TabCorp/media/TabCorp/Media%20Releases/1H18-Results.pdf">giant Tabcorp said</a>:</p>
<blockquote>
<p>“Tabcorp is well placed to compete in the evolving regulatory landscape. This includes the introduction of point of consumption taxes, and restrictions on credit betting, advertising, inducements and live betting.”</p>
</blockquote>
<p>The placement Attenborough refers to may have something to do with the proposed merger with lottery retailer Tatts Group, after <a href="http://www.afr.com/business/gambling/tatts-shareholders-in-big-vote-for-11b-tabcorp-merger-20171212-h030wd">shareholders</a> and the <a href="http://www.abc.net.au/news/2017-11-17/tabcorp-and-tatts-group-merger/9161062">Australian Competition Tribunal</a> approved the move.</p>
<p>However gambling regulation continues to be politically charged as we saw in the fight over pokies in pubs and clubs <a href="https://theconversation.com/factcheck-are-around-5-000-jobs-at-risk-if-pokies-are-removed-from-pubs-and-clubs-in-tasmania-91149">during the Tasmanian state election</a> and are seeing in South Australian <a href="https://theconversation.com/no-pokies-xenophon-goes-for-some-pokies-but-does-his-gambling-policy-go-far-enough-92038">state election race</a>.</p>
<h2>Overall business sentiment not looking bad</h2>
<p>Overall business sentiment is roughly the same as at March 2017 and 2016. Some sectors are higher, such as telecommunication services (up from 0.05 to 0.08), materials (up from 0.07 to 0.11) and information technology (up from 0.13 to 0.23). This is offsetting the weaker sentiment about the year ahead in consumer discretionary, health care and energy. </p>
<p>The overall sentiment level continues to be positive at 0.08. </p>
<hr>
<p><iframe id="KoxDs" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/KoxDs/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><iframe id="tc-infographic-246" class="tc-infographic" height="600" src="https://cdn.theconversation.com/infographics/246/0ff52323d6e03ef898550b2849b8d178b78ec639/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Ongoing strong employment growth over the past two years is a likely indicator of this positive sentiment. Overall employment growth of <a href="https://www.rba.gov.au/publications/smp/2018/feb/domestic-economic-conditions.html">3.3%</a> in the past 12 months is about double the growth in the working age population, and the <a href="https://www.rba.gov.au/publications/smp/2017/nov/economic-outlook.html">Reserve Bank</a> expects it to continue to grow faster than the working age population to the end of 2019. </p>
<p>Our analysis also looks at the subjectivity in the statements these businesses make. There’s no significant change in the subjectivity scores compared with last year. This means no increase or decrease in confidence or uncertainty around the sentiment levels.</p>
<p>It will be interesting to see whether sentiment changes over the next six months to the September business results, given the destabilising effects of a range of factors just starting to play out. These factors include stock market volatility, the announcement of US tariff increases, company tax cuts and the probably interest rate rises.</p><img src="https://counter.theconversation.com/content/92737/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has previously received funding from the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Ben Hachey is an employee of Red Marker. Ben has received funding from the Australian Research Council, the Capital Markets CRC and Google. He is Secretary of the Australasian Language Technology Association.</span></em></p><p class="fine-print"><em><span>Leonardo dos Santos Pinheiro is an employee of Servian. Leonardo has previously received research funding from Capital Markets CRC. </span></em></p>Business leaders some sectors are feeling less positive about the year ahead because consumers are spending less, according to our analysis of the outlook of leaders of Australia’s ASX 200 companies.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityBen Hachey, Honorary Associate, School of Information Technologies, University of SydneyLeonardo dos Santos Pinheiro, PhD candidate, Artificial Intelligence, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/832112017-08-31T20:28:36Z2017-08-31T20:28:36ZFace Value: business leaders are betting we will spend more<p><em>When Australian companies report results they typically include an outlook statement from the business’ leaders, giving investors some guidance about their expectations for the future. They issue these forward-looking statements with some caution as investors might rely on them, and the law requires that they be based on “reasonable grounds”.</em></p>
<p><em>The Conversation’s <a href="https://theconversation.com/face-value-sentiment-analysis-shows-business-leaders-are-positive-about-the-year-ahead-73904">Face Value</a> uses sentiment analysis to try and determine how Australian business leaders are feeling about the future.</em></p>
<hr>
<p>A contradiction is emerging between how consumers should be feeling and what the heads of companies expect them to do. What we know about <a href="https://theconversation.com/vital-signs-it-will-take-more-than-asking-for-a-pay-rise-to-fix-australias-wages-problem-79748">low wages growth</a> and <a href="https://theconversation.com/vital-signs-that-feeling-you-get-when-the-economy-cant-be-explained-by-economic-models-82255">underemployment</a> seems to suggest households would be tightening the purse strings but the sentiment of business leaders is very positive in sectors relying on consumer spending.</p>
<p>Wages are struggling to <a href="http://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.23.html">keep pace</a> with the prices of the things we buy and average hours worked (per worker) have also been <a href="http://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.17.html">trending down</a> or flat at best. This is not a picture of robust consumer finances. </p>
<p>On top of this retailers are facing the threat of competition <a href="https://theconversation.com/amazon-poses-a-double-threat-to-australian-retailers-78534">from US giant Amazon</a>. Yet according to our analysis of the outlook of leaders of Australia’s ASX 200 companies, positivity has increased.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=567&fit=crop&dpr=1 600w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=567&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=567&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=713&fit=crop&dpr=1 754w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=713&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=713&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span></span>
</figcaption>
</figure>
<p>The sentiment of business leaders has remained positive and improved over the past 12 months according to our analysis. <a href="https://www.cs.uic.edu/%7Eliub/FBS/NLP-handbook-sentiment-analysis.pdf">The “polarity” score</a>, which measures whether the sentiment is positive or negative, has increased from 0.11 to 0.15 (a statistically significant improvement). </p>
<p>We also looked at how subjective these statements were and found there’s been no significant increase in how opinionated these statements are. </p>
<p>Our findings also mirror other business confidence surveys and even the Reserve Bank of Australia’s own outlook, which also paints a buoyant picture. The RBA <a href="http://www.rba.gov.au/publications/smp/2017/aug/pdf/06-economic-outlook.pdf">expects</a> growth in the economy to strengthen gradually to be around 3% in the first half of 2018. The RBA expects wage growth to gradually pick up over the next year or two and for average hours worked to increase somewhat.</p>
<p>Similarly, the <a href="https://10-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2017q2_0.pdf">Westpac-AusChamber</a> Actual Composite index strengthened in June 2017, rising 1.8 points to 65.0. This factored in a strengthening in the labour market, as manufacturing firms plan to hire more workers and manufacturing wages rise. And the <a href="http://business.nab.com.au/nab-monthly-business-survey-july-2017-25783/">NAB business confidence survey</a> also reveals that business conditions and confidence are improving. </p>
<p>The positive outlook for economic growth according to the <a href="http://www.rba.gov.au/publications/smp/2017/aug/pdf/06-economic-outlook.pdf">RBA</a> is driven by resource exports notably iron ore and liquid natural gas (LNG) production, household consumption including retail sales, and non-mining business investment. The RBA also expects wage growth to soon pick up.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1561&fit=crop&dpr=1 600w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1561&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1561&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1962&fit=crop&dpr=1 754w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1962&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1962&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>These drivers are reflected in our sentiment analysis. Business leaders in ASX categories relying on household spending, have stronger than average positive outlook on the future, with an average score of 0.18.</p>
<p>This was led by businesses like JB HiFi (0.41), TabCorp (0.23) and Flight Centre (0.18); and also consumer staples led by Ardent Leisure (0.50), Treasury Wine Estates (0.38) and Coca-Cola Amatil (0.18).</p>
<p>The outlook for manufacturing is also positive due to a range of factors such as infrastructure spending by governments, stronger world growth, and improved international competitiveness due to a lower currency, commercial construction and home building, according to the <a href="https://10-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2017q2_0.pdf">Westpac-AusChamber</a> index. This is supported by our analysis which found stronger than average sentiment from business leaders in the materials sector (0.17), through companies such as Amcor (0.26).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=788&fit=crop&dpr=1 600w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=788&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=788&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=990&fit=crop&dpr=1 754w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=990&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=990&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>But the outlook isn’t all positive among our business leaders. Sentiment was weaker than average in utilities (0.07) led by AGL (-0.03). This is hardly surprising given the high uncertainty around energy policy – AGL for example owns coal-fired power plants. Also sentiment was somewhat weaker (0.13) than average among industrial company leaders, the sentiment in Qantas’ outlook was negative (-0.03) and property/real estate company Lend Lease (0.09) was also weak.</p>
<p>Perhaps the gloomy slow wage growth and underemployment will catch up to the more positive sentiment on consumer goods and services in company reports. Or this contradiction might simply reflect the high uncertainty in the global environment. </p>
<p>Consumers certainly seem a little confused: the weekly ANZ-Roy Morgan Consumer confidence Index <a href="http://www.theaustralian.com.au/news/latest-news/consumer-confidence-bounces-but-still-weak/news-story/2fd06c35ac402ece43723cd00ce48538">ticked up</a> slightly last week but has <a href="http://www.roymorgan.com/morganpoll/consumer-confidence/consumer-confidence">jumped around</a> in recent months. Certainly the positive sentiment from business leaders about consumer spending we see in company reports seems optimistic.</p><img src="https://counter.theconversation.com/content/83211/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has previously received funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Ben Hachey is an employee of Red Marker. Ben has received funding from the Australian Research Council, the Capital Markets CRC and Google. He is Secretary of the Australasian Language Technology Association.</span></em></p>The sentiment of business leaders has remained positive and improved over the past 12 months according to our analysis.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityBen Hachey, Honorary Associate, School of Information Technologies, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/739042017-03-08T19:27:10Z2017-03-08T19:27:10ZFace Value: sentiment analysis shows business leaders are positive about the year ahead<p><em>When Australian companies report results they typically include an outlook statement from the business’ leaders, giving investors some guidance about their expectations for the future. They issue these forward-looking statements with some caution as investors might rely on them, and the law requires that they be based on “reasonable grounds”.</em> </p>
<p><em>The Conversation’s Face Value uses sentiment analysis to try and determine how Australian business leaders are feeling about the future.</em></p>
<hr>
<p>Heads of Australian companies are reasonably positive in their outlook for the rest of the year, according to our analysis of outlook statements of ASX top 100 companies, reporting results in the past month.</p>
<p>We used <a href="https://www.cs.uic.edu/%7Eliub/FBS/NLP-handbook-sentiment-analysis.pdf">sentiment analysis</a> to identify whether these statements were subjective and, if so, whether the opinions expressed are positive or negative. For the analysis here, we used a manually-crafted dictionary of sentiment keywords. Each keyword had a score for subjectivity and positive or negative sentiment. </p>
<p>So in terms of subjectivity score, numbers near zero indicate factual text and larger numbers indicate opinionated text. Sentiment ranges from -1 to 1 with smaller numbers indicating negative sentiment and larger numbers indicating positive. </p>
<p>We compared the outlook statements from February 2017 to those of the same month in 2016 and the sentiment was stronger in retailing than any other sector (chart below) and had doubled in strength since 2016 when it was not the strongest sector. </p>
<iframe width="100%" height="950" scrolling="no" frameborder="yes" src="https://public.tableau.com/views/SentimentAnalysis2017/Dashboard3?:embed=y&:display_count=no&:showVizHome=no"></iframe>
<p>Strong retailing sentiment reflects households spending more due to low interest rates and some additional wealth generated from rising house prices. The job market has been steady, with unemployment <a href="http://www.abc.net.au/news/2017-02-16/unemployment-jobs-abs-data-january/8276040">falling slightly</a> in January to 5.7%, although this was due to a rise in part-time rather than full-time jobs. </p>
<p>It seems that sluggish wage growth has apparently not hurt retailing sentiment – the wage price index, a measurement of wages, has struggled to keep pace with inflation, <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbyTopic/955FBDF6A933C1FDCA2568A900136286?OpenDocument">growing at 1.9%</a> during calendar 2016 and likely to remain soft in 2017. Yet consumers have maintained their retail spending by <a href="https://www.rba.gov.au/speeches/2017/sp-gov-2017-02-22.html">cutting back their saving</a>.</p>
<p>Leaders of companies in the pharmaceuticals, biotech, telecommunication and software sectors were positive again in 2017 with their outlook statements. This could be driven by <a href="http://www.pwc.com/gx/en/pharma-life-sciences/pharma2020/assets/pwc-pharma-success-strategies.pdf">long-term factors</a> such as Australia’s ageing population and associated demand for medicines. </p>
<p>Those in the real estate sector were also positive this year and sentiment improved from 2016, this is likely to be driven partly by buoyant residential and commercial property markets. This is characterised by declining vacancy rates, rising demand for properties and supply constraints.</p>
<p>Sentiment was weakest in the utilities and energy sectors in 2017, this could be because of the market prospects for electricity, gas and oil. Difficulties in the electricity sector in terms of price and reliability of supply have become almost daily news, and policy uncertainty would contribute to the negative sentiment on what the year might bring.</p>
<p>Sentiment in the energy sector deteriorated from 2016 to 2017 reflecting the <a href="https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-er-2017-oil-and-gas-industry-outlook.pdf">ongoing downturn in the oil and gas sector</a>. Weak oil and gas prices are driven by long-term factors such as the boost in supply from the shale oil production and the growth in renewable energy supported by governments around the world. These factors are not going away any time soon.</p>
<p>In the outlook of banking and financial companies the sentiment has declined in 2017 relative to 2016, as the industry continues to be <a href="http://www.pwc.com.au/publications/assets/major-banks-analysis-11-nov-2016.pdf">pressured</a> by slowing credit growth, falling net interest margins and rising bad debts, as well as regulatory uncertainty.</p>
<iframe width="100%" height="950" scrolling="no" frameborder="yes" src="https://public.tableau.com/views/SentimentAnalysis2017/Dashboard1?:embed=y&:display_count=no&:showVizHome=no"></iframe>
<p>It’s important to note the subjectivity of these outlook statements, whether they might represent opinions rather than objectively verifiable evidence. This could be an issue, for example, in the retail sector. </p>
<p>Some retail companies such as Harvey Norman and JB Hi-Fi scored the highest for subjectivity, indicating a lot of opinion in the outlook statements, despite the positive sentiment. Also a few oil and gas companies, with quite negative sentiment, also scored highly for subjectivity. One of the highest subjectivity scores was for Caltex.</p>
<iframe width="100%" height="950" scrolling="no" frameborder="yes" src="https://public.tableau.com/views/SentimentAnalysis2017/Dashboard6?:embed=y&:display_count=no&:showVizHome=no"></iframe>
<p>Overall however, the positive sentiment in the recent company reporting season is consistent with a range of favourable macroeconomic drivers. The Australian economy is <a href="http://www.rba.gov.au/speeches/2017/sp-gov-2017-02-24.html">expected</a> to grow by around 3% over the next two years. </p>
<p>Mining investment is expected to stop declining, at least if not rise, in the near future. The rise in commodity prices over the past six to 12 months is expected to hold up. </p>
<p>The election of US President Donald Trump and the British exit from the European Union (Brexit) inspired a <a href="http://www.marketindex.com.au/all-ordinaries">bounce in stock markets</a>, this reflects an optimism about the forecast economic impact of these events. In the case of Trump, an infrastructure and tax cut inspired boost to investment spending; and in the case of Brexit, more due to popular optimism about reclaimed sovereignty than rational evidence <a href="https://woodfordfunds.com/economic-impact-brexit-report/">about real economic effects</a>.</p>
<p>Other drivers <a href="https://19-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2016q4.pdf">include</a> the low Australian dollar, at least lower by 28% from the highest level in 2013. This helps make export and import competing sectors more competitive, which is reflected in a boost in exports and a rise in building and renovation activity. This is also driven by the prospect of ever-increasing real estate prices in our two largest capital cities.</p>
<p>The positive sentiment outlook here also resonates with a range of other positive business confidence analyses over recent months. The <a href="https://au.investing.com/economic-calendar/nab-business-confidence-217">NAB business confidence survey</a> in February reports positive and strongly improving business conditions. The <a href="http://www.roymorgan.com/findings/7138-roy-morgan-australian-business-confidence-january-2017-201702081623">Roy Morgan monthly business confidence</a> index rose 2.4% in January. </p>
<p>The most recent <a href="https://www.aigroup.com.au/policy-and-research/economics/economicindicators/">Ai Group Indices for Services and Construction</a> were both strong and indicate expansion of these sectors. And the <a href="https://19-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2016q4.pdf">Australian Chamber-Westpac survey of industrial trends</a> strengthened at end 2016 by almost 5% from the previous quarter.</p>
<p>The above analysis is perhaps a glass half-full viewpoint. Yet we can also point to the ultimate forward looking indicator of the Australian economy – the Australian stock market – as further evidence of good times ahead. The All Ordinaries index of Australian shares was 5811 points on 8 March, an increase of 12% at the same date in 2016. That points to a positive outlook for Australian companies and therefore ultimately for all Australians through their wages, dividends earned by their superannuation funds, and taxes collected by the Australian government on behalf of all households.</p><img src="https://counter.theconversation.com/content/73904/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Hachey is an employee of and has been granted stock options in Hugo.ai. Ben has received funding from the Australian Research Council, the Capital Markets CRC and Google. He is Secretary of the Australasian Language Technology Association.</span></em></p><p class="fine-print"><em><span>Ross Guest does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Face Value analyses the sentiment of business leaders in ASX top 100 companies and for 2017 it seems positive, although sometimes highly opinionated.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityBen Hachey, Honorary Associate, School of Information Technologies, University of SydneyLicensed as Creative Commons – attribution, no derivatives.