Why we need to look at America’s productivity revival: Gottliebsen

Although a Wall Street correction is probably overdue, the cult of equity is returning to the United States with a vengeance as the US market moves to within 10% of its 2007 peak. And that return to American equity highlights the big differences between Australia and the US.

Last night in New York, Goldman Sachs’ chief global equity strategist, Peter Oppenheimer, declared: “The prospects for future returns in equities relative to bonds are as good as they’ve been in a generation.”

The Bespoke Investment Group says that over the last four weeks, the revisions ratio which measures the number of stock investment upgrades to downgrades has turned positive for the first time since early August.

The 2012 year started with a volley of investment downgrades. Now, even though the American market is some 30% higher, there has been a rush to upgrade stocks.

And the equity resurgence has spread to the most depressed asset class in the US – houses.

Reuters reports that Fannie Mae and Freddie Mac own more than 200,000 foreclosed homes while American banks own another 600,000 homes. And a lot more foreclosures are in the pipeline. But instead of driving a further decline in house prices investors are rushing to buy and the market has turned upwards.

There is no doubt the liquidity in the American system and low interest rates have been a major factor in the move back to equity. Similarly, houses in the US are available well below replacement cost so there is clearly a long-term undervaluation.

But something far more fundamental is occurring. American companies understand that if you measure and improve productivity you can go into a growth path. And that’s what they have been doing over the last four years – it’s now showing up in results and triggering those investment upgrades.

Earlier this week we saw that Australian company boards and managers simply do not understand what the Americans have been doing over the last four years.

The dramatic 2012 Telstra Productivity Survey showed that only 20% of Australian companies follow the US pattern and measure productivity and do something about it. Yet a majority of those companies who measure productivity and do something about it are experiencing the same benefits that American companies are seeing – sales growth and higher market share

Nothing illustrates the poor management of Australian companies better than the retail sector. Americans have been adapting to the rise of internet trading for a decade. We buried our head in the sand and said it would never come here. We allowed ourselves to be ripped off by overseas suppliers who charged Australian retailers more than American retailers.

Now the Americans are selling in our market via the net so it’s wake-up time. We should have woken up a long time ago.

But with only 20% of Australian companies following the US pattern and enjoying the fruits of higher growth that come from understanding what productivity is all about, it’s unfair to simply pick on retailers.

And it’s also unfair not to register that the Howard, Rudd and Gillard governments all made decisions that contributed to lower corporate productivity. But I must say that the combination of the industrial relations laws and a carbon tax at a time of much higher power costs plus a high Australian dollar, has enabled the Gillard government to top Rudd and Howard.

But bad decisions in Canberra simply multiply the effect of bad decisions by Australian boards.

This article first appeared on Business Spectator


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