Australia: The Best Place For You Money For The Next Decade?
Australia has long been touted as the perfect way to play a Chinese economic boom (or collapse) thanks to the region’s dependence on its much larger Asian neighbor. However, even though hedge fund managers and analysts have been betting against Australia and its booming housing market for years, Australia’s economy has remained resilient and economic growth has continued at a steady pace with 25 years of no recession.
On May 2, Australia’s central bank announced that it is leaving the country’s cash rate at a record low 1.5% despite the fact that inflation has returned to the bottom end of its 2% to 3% target rate. The bank says it is leaving this rate as it is to allow regulatory rules targeting riskier property loans to take effect amid hot housing markets in Sydney and Melbourne. And despite China’s economic wobbles, policymakers believe Australia’s economic growth will increase gradually over the next coupe of years to a little above 3% and the country’s already low jobless rate of 5.9%, is expected to decline further as underemployment declines and the labor market tightens.
As well as the central bank, business owners are also optimistic about the prospects for Australia’s economy. The latest Australian Institute of Company Directors biannual Director Sentiment Index found that the confidence of directors was at its highest level ever with 57% of the directors surveyed expecting their business to grow over the next 12 months. Confidence on investment levels and staff hires were at their highest point since 2011.
Australia’s economy to support stock gains?
Analysts at Australian investment bank Macquarie believes this backdrop makes Australia a great place to invest over the coming years. As well as an optimistic business community, Macquarie notes that the region is well insulated from geopolitical and terrorist threats, has positive demographics compared to other developed economies, has a well-regulated and respected corporate sector and the country is asset rich with a large natural resource endowment. Over the past 25 years, Australia’s real GDP growth has outstripped the average for the advanced economies by 0.7% p.a. and if IMF, as well as central bank forecasts, are to be believed, this will continue.
The one argument against Australian equities is that the country is highly dependent on foreign capital. Equity portfolio inflows have so far been supported by interest rate differentials and an attractive and sustainable dividend yield. It is argued that Australia is an expensive, ex-growth market. This is something Macquarie does not agree with. Over the past two-and-a-half decades, annual earnings growth has been in line with world equities and only slightly below that of Asia. What’s more, the region has one huge trump card; its super retirement scheme. Assets in this scheme are projected to grow to $6.6 trillion over the next 25 years, from $1.7 trillion today. As Macquarie points out, this is a “powerful backstop for equities, a source of natural demand for new issues and a strong tailwind for unlisted domestic assets.” Compared to US equities, Australian equities only trade at a cyclically adjusted 16 times earnings, compared to the long run average of 19 and US equities’ average of 29.
Additionally, Australian stocks have had among the best returns world-wide over the past century or so. That said, past performance is not indicative of future returns and if China blows up it, Australia’s economy will likely be hit hard.
Caveat emptor
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Source: valuewalk
