Published on 24 June 2022
By Tui Eruera, CEO and Founder of Jaaims
One of the questions the Jaaims’ team has been asked a fair bit lately, is “Should I invest in the construction sector?” Our response is that there’s no love in construction this time around.
Right now, we are seeing the building sector experience a profitless boom. There is plenty of demand for construction. No issues there. The catch is that the sector is beset with significant challenges including shortages of labour, supply chain hold-ups for materials, and rapidly escalating material costs.
In the last 12 months alone, the price of steel has soared 42%. Timber prices are up 21%, and electrical products cost 14% more than 12 months ago.
There are various reasons behind the price hikes. But the salient point for the construction sector is that most building projects are based on fixed price contracts. It’s a no brainer that as the price of materials rise, builders’ profit margins are being eroded.
Already we’re seeing media reports that as many as one in two construction companies are trading insolvent.
You know the situation is serious when the owners of Australia’s biggest home builder – Metricon, pledged to inject $30 million of additional capital into the business. The company also announced that CommBank has approved a 100% increase in Metricon’s existing working capital facility.
But this is not just a Metricon story.
The fact is, spending on construction peaked in 2015 and has been declining ever since.
Yet construction is a major player within the Australian economy, employing 13% of the nation’s workforce. This highlights why, over the years, we have seen so much government support for the sector. This includes, most recently, the Federal Governments Home Builder Scheme, which arguably has contributed to the profitless boom.
Some pundits are tipping that we are heading into an era of stagflation. This means an economy where high inflation and high unemployment are accompanied by low economic growth. The Jaaims team doesn’t have a crystal ball to know exactly how the economy will move in the future. However, as we have noted previously, today’s low unemployment will likely start to head north when immigration returns to normal levels.
The bottom line is that despite plenty of support, the construction industry has failed to fire since 2015. When stagflation arrives – as it may do, the sector will definitely need a financial helping hand. Will it be forthcoming or could a recession be the event that resets this industry? Only time will tell.
It is worth stressing that many of Australia’s well-established construction companies will navigate the current challenges, just as they have survived – and learned from, tough times in the past.
The upshot for investors however is that it pays to think carefully before putting money into the construction sector. Don’t assume there is money to made in an industry beleaguered with serious issues that don’t appear likely to be resolved any time soon.
Jaaims has exited construction stocks altogether, and for us that speaks volumes. It highlights how the Jaaims algorithm is free from human biases – in this instance, the common perception among retail investors that when demand is high, profits are to be made. The reality is that record levels of demand don’t always correlate to healthy profits.
*Any advice provided is general in nature and does not take into account the viewer’s specific needs and circumstances. You should consider your own financial position, objectives and requirements to determine the type of advice and products to best suit your needs. Jaaims Australia is an Authorised Representative of Jaaims Technologies, AFSL 519985.