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The next Australian moment

by Colin Chapman

Could we be about to enter a new Australian moment? Not, The Australian Moment, the 2013 book by journalist George Megalogenis who described, as the sub-title suggests, how Australians ‘were made for these times’.  Economic historians are still arguing about his thesis that Australians were really smart to avoid recession after the GFC – the Great Financial Crisis – or whether ‘the Lucky Country’ was just cashing in on the China-led resources boom.

We are in different times now.  The boom is over, at least for the foreseeable future, as world growth slows, and China, Australia’s main export market, is in a bruising trade war with our strategic ally, the United States, under the erratic, trynsaction-driven administration of Donald Trump.

Australia faces strategic and economic challenges but at least it has seen off four of the worst prime ministers of the last century. Scott Morrison’s government now gives the impression it knows what it is doing, albeit at far too slow a pace. 

The new Australian moment I hope and believe is coming involves a revival of global interest in our country. Investment had been flatlining during the erratic days of Rudd-Gillard-Rudd-Abbott-Turnbull. It has recently picked up, with the United States by far the biggest investor in 2018 at $939.5 billion dollars, followed by Britain and Belgium. Among Asian countries, Japan led the field with $229.3 billion, well ahead of Hong Kong (SAR) and Singapore, and far ahead of China’s $63.6 billion. These figures include both direct investment in corporations and projects, as well as portfolio investment. 

Compared with global stock markets, the Australian share market has been slow to regain its mojo.  But in recent weeks Australian stocks have hit record highs after struggling for about a decade to reach levels achieved during the mining boom. The ASX All Ordinaries  index, which comprises Australia’s 500 largest companies by market capitalisation, reached 6862.4, breaching its previous closing high of almost 12 years ago at 6853.6.  

Australian shares have retreated from these peaks in recent days, reflecting rising concerns over escalating tensions in Hong Kong and the Trump administration’s decision to pull out from talks aimed at ending the trade war with China. This has inevitably led some commentators to suggest the ASX has peaked.

I think they are wrong. I suspect the Australian market will reach new highs before the end of the year, for several reasons. 

  1. Australia now has the first stable government since the days of John Howard. The share market compares well with many others. In the Anglosphere the ASX-S&P 200 looks cheap with a price earnings ratio of 19.4 at the end of last week compared with 21.72 for the US S&P 500. The FTSE 100 in London is cheaper with a PE of 17.55, but the pound is destined for further falls as the Brexit date of October 31 draws nearer and no-deal looks an increasingly likely option. And we should remember the Footsie is only being held up by big exporters, who are likely to face new high tariffs on exports to the EU from November 1. British stocks may benefit in the fullness of time, but the chaos that will accompany Brexit will be a disincentive to all but those who believe in miracles.
  2. My friend Scott Marcellos, who runs the appropriately named The Super Group serving self-managed super fund trustees, tells me that with 9.5 per cent of wages in Australia going into compulsory savings, much of it through industry funds. Scott tells me one trust is investing $900 million a month into its asset allocations, “multiply that across all the industry funds and there is a fair whack of money going into the market”. . Recent tax cuts, two reductions in interest rates, are also providing a stimulus. It is a mistake, says Scott, to under-estimate the relief felt by investors when Labor lost the election, ending the prospect of new capital gains tax rules and a hit to dividends. 
  3.  The October federal budget will likely provide further stimulus. Most probably will be capital expenditure to fix broken or ageing infrastructure, and new investment in energy related projects in renewables and battery storage. The latter will offer opportunities for well-chosen stocks.
  4. Another important influence on the market is the recovery in property prices following the relaxation by regulators of the tight lending criteria that made it difficult for many Australians to get a mortgage. The restrictions had been introduced to stop spiralling house prices in Melbourne and Sydney. Borrowers had to show they could afford repayments even if mortgage rates climbed as high as 7.5 per cent. With this condition gone, prices have begun to rise, though new high-rise apartment prices continue to lag. Poor quality construction by some developers has created a perception that high rise blocks are to be avoided, with the result that the shares of even reputable builders are vulnerable.

Of course, the Australian market is not immune from the host of issues that currently are unsettling the world and forcing the IMF to trim growth forecasts.  Assuming it happens, Brexit will damage the British, Irish, French and German economies in that order of magnitude.  The Iran crisis may lead to more serious conflict, though its impact on the oil trade will not be as bad as anticipated. There is a glut of oil and OPEC is working hard to try and persuade its members to tighten supply but, even if successful, this will surely not be enough to cause a spike. 

The most immediate problem for Australia is the ongoing trade war between Beijing and Washington.  We don’t expect a quick fix. It is likely to follow the familiar Trump approach: threaten, threaten more, take action, offer talks, withdraw talks, take further action, and then negotiate an agreement. As the US presidential election approaches, Trump will settle and claim credit for solving the problem that he himself created. It’s all part of getting re-elected.