Like Western Australia’s Fremantle Dockers this season, the performance of the state’s economy in recent years has been woeful.

However, the picture of doom and gloom painted by some commentators over recent years belies an improvement in economic conditions and the recent full-year reporting season has highlighted the potential upside for businesses exposed to Australia’s west coast for the first time in many years.

Resources and mining services drive growth

The rebound of the mining and mining services sectors was the standout story amid last month’s generally underwhelming company results announcements. In a trend that bodes well for WA’s mining-dominated economy, most companies leveraged to the resources industry exceeded market expectations and delivered strong earnings growth.

Recent rises in spot commodity prices have provided a strong tailwind for mining companies reflected by the S&P/ASX Small Ordinaries Resources Index which has surged more than 23 per cent over the last 16 weeks (at the time of writing). With higher levels of cash and their confidence bolstered, miners are accelerating the pace contracts are being awarded.

The recent mining downturn, which bottomed-out about 18 months ago, lasted significantly longer than average. Companies with excessive costs and debt struggled, and many ultimately failed. In contrast, businesses capable of withstanding the prolonged downturn emerged well-positioned to benefit from the upward cycle.

Despite their balance sheet strength and earnings growth, mining services companies remain undervalued and under-owned by institutional investors offering investors an opportunity to take contrarian positions. We expect companies leveraged to the resources sector will continue to benefit from the prevailing conditions and experience earnings growth over the medium to long-term. One such company is mining infrastructure service company Mineral Resources, which last month reported an 83 per cent increase in net profit after tax to $201 million.

Capex boom

The market reported its biggest upgrade to capital expenditure since the global financial crisis in the recent reporting season. This may suggest Australia is joining the global business investment recovery and has the potential to further drive company earnings growth. Among the businesses leading the capex trend are those in the mining sector.

During the recent resources downturn, many mining and mining-exposed companies pared back capital spending as they implemented cost-cutting initiatives, deleveraged their balance sheets and shelved new projects. This has created a lag effect in capex and many businesses are focused on developing new and replacement projects to meet current and forecast demand. In our view, the capital expenditure boom is set to continue with a new wave of infrastructure investment to be focused on the country’s west.

WA poised for recovery

The WA economy remains in a fragile condition after the sharp fall in business investment following the end of the mining boom. However, we believe the worst of the state’s fiscal woes are behind it with data pointing to the emergence of economic green shoots.

Pessimism appears to be giving way to optimism with the latest Chamber of Commerce and Industry (CCIWA) consumer survey revealing confidence is running at its highest level in almost three years. Unemployment has dropped from a high of 6.8 per cent in November 2016 to 5.4 per cent. Together with South Australia, WA posted the largest fall in unemployment, across all states in July according to latest official labour figures, and forecasting by CCIWA sees further falls in the state’s unemployment rate.

Supported by higher employment and an uptick in population growth, the outlook is also improving for WA’s property market, which has been in a cyclical decline since early 2013. Following significant falls, the government’s Housing Industry Forecasting Group estimates dwelling commencements will increase by 11 per cent this financial year. On the commercial property front, the outlook is also looking up with office vacancies declining for the first time in five years.

Outlook positive

Several macro-indicators show an uptick in economic activity suggesting WA is in the nascent stages of a new growth cycle. In our view, WA’s continued growth will be led by an improvement in the resources sector as higher commodity prices support corporate capital expenditure, including labour-intensive projects, and deliver a windfall for state government coffers. We anticipate consumer sentiment will continue to improve and household consumption will rise to create a positive impact on a range of stocks with exposure to WA, such as property developer Peet, media and equipment hire group Seven Group Holdings and Imdex, a mining, equipment, technology and services company.