What lies ahead for our major sectors, and related regulatory landscape, in 2017?
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BusinessDay reporters Madeleine Heffernan, Tim Biggs, Clancy Yeates, Georgia Wilkins, Sarah Danckert, Nassim Khadem, Carolyn Cummins, Simon Johanson and Brian Robins offer a preview.
Retail
Some retailers were feeling fine ahead of Christmas – more than 90 per cent expect consumer confidence to hold steady or rise in 2017, and almost two-thirds expect their earnings to increase by at least 5 per cent, according to one survey.
But for others, Christmas couldn't come fast enough, as high-profile chains Pumpkin Patch, Payless, and Howards Storage World collapsed around them and broker Macquarie tipped more casualties would come this year.
Retail veteran Solomon Lew lamented that the sector over the past five years had been as "difficult" as he had ever encountered, but was cautiously optimistic about 2017.
"We'll get an uptick once the GST comes in [on Australians' online purchases below $1000 made on foreign sites] and we'll get an uptick once the Fair Work Commission decide on penalty rates [for retail workers], and you know, we're expecting, if we get the weather we require, we're expecting a much stronger year," the Premier Investments chairman said in December.
Premier's retail boss Mark McInnes continued, saying consumers "should be relatively optimistic" heading into Christmas. "House prices are up, people are employed, the politicians have rested for the year."
But it's unclear how long the ingredients that have held together retail sales for so long – soaring property prices, strong employment, people dipping into their savings – can last.
As Citi has noted, cracks were appearing in retail sales in the second half of 2016 already, thanks to weak income growth and underemployment in some sectors.
And Christmas spending was "solid but not spectacular for Australian retailers", Citi's retail analysts said, with no alarm bells, discounting not too steep, but sales growth just "modest".
Myer and JB Hi-Fi traded strongly, Coles' sales were "very soft", Target cut prices more than expected, and Harvey Norman was "very promotional in some categories", Citi noted.
The Australian Retailers Association was upbeat about the pre- and post-Christmas sales. It has tipped shoppers to spend $48.1 billion from 14 November to 24 December (up 2.3 per cent year) and a further $17.2 billion from Boxing Day to 15 January (up 2.9 per cent year on year).
The Australian Restructuring Insolvency and Turnaround Association, as expected, was more downbeat, with its chief executive John Winter predicting "an increase in retail insolvencies in the new year" due to an increasing number of retailers under financial pressure, the steep levels of discounting ahead of Christmas, and general consumer caution.
All eyes are on the next official retail figures then.
Resources
It's been a challenging 12 months for investors in the resources sector, with the collapse in the oil price along with weak metals and base commodity prices weighing on sentiment as the year began. And when sentiment shifted, it was unclear if the strong rebound in prices was likely to be sustainable.
The surge in coking coal prices in the second quarter, due to product cuts in China, caught investors and producers alike by surprise, especially when prices spiked later in the year. Coking coal output lifted and prices declined by the end of the year That has continued into the new year with steaming coal prices also expected to ease on rising supplies in the coming months.
Prices for Australian thermal coal soared, thanks to a surprise rise in Chinese imports. Photo: Bloomberg
Similarly, gold miners were popular for a time, thanks to a spike in the gold price, which was bolstered by the decline of the Australian dollar in foreign exchange trading.
Gold fell late in the year over worries of an expansionary US economic policy under President-elect Donald Trump, and the gold bulls were pushed back into hibernation.
The prospect of stronger US economic growth gave other metals such as copper a lift, too. And for the speculators there was the ever present lithium theme, betting on rising demand for renewable energy and batteries to stoke prices.
Against this backdrop, the share prices of mining giants such as BHP and Rio gained strongly over 2016, with Rio rallying from its February low of $35 to end the year above $60. BHP surged from under $14 to end the year at about $25.
For 2017, several analysts reckon Rio will top $70 in the months ahead, with BHP seen reaching $30, although both have a number of issues to resolve in the months ahead. Rio is embroiled in corruption allegations in Africa, and BHP has yet to resolve the Samarco dam failure in Brazil.
For many investors, backing resources stocks means having a clear view of global economic growth.
With concerns over slowing growth in China hanging over prospects for much of Asia, even a resurgent US may not bolster sentiment for long.
"Investors can still hope for gold stocks – they're profitable given the price of gold in Australian dollar terms," argues Duncan Hughes of Somers & Partners, who reckons the price of gold will hold up heading into the new year, underpinning the sector.
"Australia has low costs and a low exchange rate, which also relates to nickel, zinc and potentially copper."
Banking and insurance
Australia's major banks start the New Year under less of a cloud than some had feared several months ago, though regulatory pressure that is making lending less profitable will probably intensify in 2017.
A key debate among investors over the last year concerned the banks' "pricing power", and whether they could continue to make such high returns from mortgages under fierce political pressure.
Yet, in December, all the major and smaller banks raised interest rates for property investors by between 0.07 and 0.15 percentage points without triggering a political backlash.
Analysts expect these rate hikes to boost profits by 1 to 2 per cent, and there is a chance of further hikes like this in 2017, including for owner-occupiers.
Regulatory pressure on the big banks is likely to intensify. Photo: Paul Rovere
While it is not a case of profitability returning to the boom days, Bell Potter analyst TS Lim says various "headwinds" facing the country's banks are easing somewhat.
"Expectations had been brought down so much, but things are actually going pretty well for them," Lim says.
"Margins should actually strengthen a bit. They are still going to cut costs, and credit quality is still going to be stable," Lim says.
Macquarie analyst Victor German said the rate hikes for investors were a sign "the oligopoly is working", alongside signs that a price war in mortgages had also eased.
Another key influence on the sector will be the actions of regulators.
For much of the past two years, the share prices of National Australia Bank, ANZ Bank, Westpac and Commonwealth Bank have been affected by uncertainty over how much capital the lenders must set aside against their vast loan portfolios.
The amount of capital a bank must hold compared to its loans is crucial for bank shareholders. That is because reaching a higher capital ratio requires an equity raising or retaining a higher share of earnings, instead of paying them out as dividends.
Global regulators met in December to decide on the latest iteration of capital rules, which are expected to force the big four to bolster their loss-absorbing cushions without resorting to multibillion-dollar equity raisings, as they did in 2015.
Even though capital demands are expected to climb higher, greater clarity on this key question will likely be welcomed by investors.
In the final three months of 2016, there were also indications from the Australian Prudential Regulation Authority that the capital build would be gradual, and not take effect until 2018 at earliest.
In other words, big capital raisings are seen as unlikely in 2017, and, before Christmas, senior bankers were quietly confident of maintaining their dividends.
A report by KPMG in November said it was "inevitable" that the majors would continue to refine their business models and potentially exit some markets altogether as they looked to downsize their offerings.
The move has been accelerated by the tightening scrutiny banks are facing over their "vertical integration" models (whereby they own a growing share of the superannuation and insurance products their advisers sell to customers) following a series of bank scandals.
Looking at insurers, Morningstar analyst David Ellis says insurance companies will continue to strip out costs in 2017, with a focus on using technology to do more with less.
"Companies will continue to leverage off digitalisation and automation," he says. "We'll see a continued focus on productivity improvements, outsourcing, better procurement, simplification."
Analysts say insurance companies will also start to harden their prices – industry speak for raising premiums. "We are hoping to see improved pricing through premium increases," Ellis says.
Regulation and class actions
Calls for a royal commission into the banks are not likely to go away. Three parliamentary inquiries into the sector are scheduled for 2017 – one into whistleblowers, one into the life insurance industry and one into financial misconduct.
The inquiry into financial misconduct, moved by opposition financial services spokeswoman Katy Gallagher in the last week of Parliament, will examine culture, the chain of responsibility and remuneration at the banks – key issues that emerged throughout 2016.
In 2017 there will be much debate about the Australian Securities and Investments Commission's new mooted powers to stop products from being issued.
Greg Medcraft was granted an 18-month extension to his five-year term as chairman of ASIC on May 30 2016, meaning his term ends on November 30.
It's unclear whether he'll receive another extension, particularly after ASIC was lashed by separate judges in its failed cases against former AWB chairman Trevor Flugge and Peter Drake of LM Investment fame.
ASIC chairman Greg Medcraft takes three of the big four banks to court. Photo: Jessica Hromas
In the past, ASIC has had no real powers to stop products even if they had concerns about the quality of a product as long as all the risks associated with the product were disclosed in a product disclosure statement.
ANZ Bank has recently hired outgoing Commonwealth Ombudsman Colin Neave as its customer fairness adviser.
A key lobby group for the banks, the Financial Services Council says the changes are unnecessary. At the same time the Turnbull government has cleared the way for finance businesses to set up and operate without a licence for 12 months. This has been welcomed by bank lobby groups.
ASIC's major litigation for 2017 is shaping up to be the 12-week trial against three of the country's big banks.
ASIC has alleged NAB, Westpac and ANZ separately rigged the bank bill swap rate – a key rate for helping banks set interest rates for its business customers – in three separate court actions.
The matters are expected to be heard together in a trial that starts on September 25. All three banks are defending the action and deny any wrongdoing.
At the same time, big time US investor Richard Dennis and two US funds are suing the same three banks as well as CBA and Macquarie and the Australian arms of a host of US banks in New York for the alleged rigging of the BBSW.
A The new year will see the running of a series of high-profile legal cases such as the class action against Volkswagen over its allegedly misleading claims about their vehicles fuel efficiency, which is set to go to trial in the fourth quarter of 2017.
It will be a busy time for the German auto group which will also be defending action by the Australian Competition and Consumer Commission for misleading conduct in the final quarter of 2017.
Meanwhile, legal firms are investigating class actions against Murray Goulburn, Bellamy's, the financial planning arms of the banks and several other actions and some of these might end up being filed in court. We'll keep an eye out for you.
The Turnbull government is also considering changing insolvency laws to reduce the default period for personal bankruptcies from three years to one year.
Both the Australian Bankers Association and the Australian Shareholders Association have warned in separate submissions to Treasury of the risks involved in having a blanket rule for anyone – including shady business people and good honest folk who made a bad business decision.
Taxation
If 2016 was the year that governments finally introduced new laws aiming to ensure multinationals pay taxes on where actual profits are earned, 2017 will be the year those laws will be tested.
It will be the start of tax revenue wars.
Governments – who have long enabled and assisted multinational corporations with special deals that allow them to legally pay less taxes – are now changing tune and battling each other about which nation has the right to tax.
Multinationals such as Apple may no longer be able to minimise taxes like they used to. Photo: Rob Griffith
This was made clear when Apple was ordered to pay up to €13 billion ($19 billion) in back taxes, plus interest, to Ireland after the European Commission found the software giant had received "illegal state aid".
The EC's investigation concluded that two tax rulings issued by Ireland to Apple have "substantially and artificially" lowered the tax paid by Apple in Ireland since 1991 and did not "correspond to economic reality".
But the move angered Washington. The Obama administration expressed concerned that "American taxpayers will ultimately bear the brunt of the European Union's decision".
At issue is where companies should be attributing profits. As Apple's Tim Cook said in an open letter when the EC decision was announced: "At its root, the Commission's case is not about how much Apple pays in taxes. It is about which government collects the money."
Apple is just the first of many cases to follow. While the Organisation for Economic Co-operation and Development plan – known as Base Erosion and Profit Shifting (BEPS) – aims to end non-taxation, the question now becomes who pays the tax?
There's still no clear guidance on where or how much profit should be taxed. That will mean governments – which around the world are facing budget deficits – must battle it out for revenue.
The OECD says there will be a process for looking at revenue disputes, but how fast and effective that process will be, no one knows. We're in for a long fight.
Consumer technology
The past year has been one of much-hyped technologies that didn't quite deliver, but we can expect to see some of them become more prevalent in our lives in 2017.
The idea of virtual assistants took off last year, with Google integrating its own with its Pixel phone and the US-only Home.
A gamechanger? Google's new Pixel smartphone. Photo: Bloomberg
This assistant, and others like Amazon's Alexa, differs from older versions like Siri in that it sits between us and our entire digital lives, providing a natural language interface.
The success of assistants is tied to that of augmented reality (AR).
A cousin of VR – which was set to take off in 2016 but remains very much an enthusiast product – AR uses a display to insert graphics and data into your regular view of the world, letting you interact with your eyes, voice and hands in a natural way. The beginning stages of consumer-level AR are upon us.
Machine learning and the internet of things, two prevalent 2016 buzz phrases, will also bear fruit in the coming year. Progress in data efficiency and neural networks should lead to apps and systems that don't need a lot of set-up or fiddling to connect you directly to your services and appliances.
On the gaming front, Sony will continue to justify its 2016 launches of a more powerful PlayStation 4 as well as its own VR system, two devices that have failed so far to make a case for mainstream adoption.
Microsoft may look to learn from Sony's weaknesses in 2017, as it is expected to release a new addition to its Xbox One line touted as the most powerful gaming console ever created.
In an unlikely twist it's Nintendo which may drive much of the 2017 gaming discussion.
The Japanese company hopes to capture a broad audience with its Switch device, a machine that can output high-fidelity gaming to a TV when at home but can also be played on the go thanks to an inbuilt screen and compact form factor.
Trends a long time coming, like eSports, seem sure to land in the mainstream during 2017 while others like autonomous cars are still a long way off.
In many ways, 2017 promises to be much like 2016: the biggest technological advances will be fraught with privacy and security concerns, the iPhone (now in its 10th year) will barely change yet it and other smartphones will become even more integral to our lives, and we'll continue gradually offloading human tasks to software on our way to the eventual robo apocalypse.
Construction and office property
Rising rents and lower vacancies are the new norm for the office property sector. Office landlords along the eastern seaboard are predicting a bumper year ahead with rental demand to be driven by the age-old equation of rising demand from a range of tenants boosted by falling supply.
Sydney and Melbourne are benefiting from the withdrawal of properties via the compulsory acquisition from state governments for new transport systems and the conversion of offices into residential developments.
The increased flow of new tenants from the tech industry is also creating competition with the traditional city dwellers from the banking, insurance and financial sector.
According to Cameron Williams, national director, office leasing, Sydney CBD at Colliers International, 2016 was the turning point for the Sydney CBD, with the market tipping in favour of the landlord as hundreds of tenants are displaced by redevelopment, conversion to another use or the Sydney metro project.
Williams expects the market to tighten further in 2017 as tenants from major office towers 71 Macquarie Street, 5 Elizabeth Street and 50 Bridge Street are forced into the market.
2016 was a turning point for the Sydney CBD, with the market tipping in favour of the landlord. Photo: James Alcock
Investa Office Fund is one real estate investment trust that has benefited from the recent uplift in valuation for its office portfolio by between $150 million and $160 million reflecting the continued strength of the Sydney office leasing market.
"Investa's Sydney portfolio is experiencing strong, effective market rental growth driven by improving tenant demand and declining market vacancy in both the A and B-grade office markets," Penny Ransom, Investa's fund manager, said.
According to Dan Walker, director in charge, Sydney North at Colliers International, there is an increase in demand for strata sales stock as self-managed super funds continue to look for locations to park their wealth in the low interest-rate environment. In addition, tenants will be displaced as those funds and small and medium-sized companies seek to take control and ownership of their operational offices and warehouses.
"In 2017 we will continue to see increasing demand from office tenants who cannot find space in the CBD due to very low vacancy, being forced to 'cross the bridge' to the north shore and then on flow into suburban markets like Macquarie Park. North Sydney is seeing the start of a retail revival with an increase in amenity – bars, restaurants and CBD-like food offerings through 2017 and into 2018," Walker said.
Melbourne's CBD office market started 2015 with a vacancy rate of about 8 per cent but would start the new year with a vacancies close to 5 per cent as the economy picked up and tenants expanded their space, Savills Australia's office leasing director Mark Rasmussen said.
Telstra, state and federal governments and the big banks NAB and ANZ – who make up about one-fifth of the office market – were all expanding at the same time for the first time in several years, he said.
"Tenants now also have expectations that their business will grow and so when renewing their leases they are taking additional space," Rasmussen said.
The shift to activity-based working (ABW), or hot desking, had placed a drag on business expansion during the past five years.
"ABW has now worked its way through the market and those businesses are now expanding again and that is driving down vacancy levels," he said.
Large infrastructure projects like the $11 billion Melbourne Metro Rail tunnel which employed sizeable project teams have increased demand.
"But perhaps the most important change has been the explosion of co-working and serviced office tenancies. We now have 90 per cent of premium and A-grade buildings offering co-working and serviced office space. Two years ago that was 20 per cent," Rasmussen said.
