Summary: Local commentators have been dour on the outlook for Australia for some time, with their view seemingly supported by weakening official economic figures. But this data has too many inconsistencies and puzzles. Moreover, from an international perspective Australia still compares favourably to other advanced economies – it’s just that several factors including this incessant pessimism, the push to lower the dollar and slumping commodities have dampened investors’ appetite.
Key take-out: At some point commodities will settle, as will the Australian dollar. At that point global investors will be ready to act on our relatively attractive metrics – and the market should rally further.
Key beneficiaries: General investors. Category: Shares.
Most of Australia’s economic, policy and commentary fraternity are very bearish on Australia. Gross domestic product (GDP) itself has softened to an annual pace of just 2.5 per cent, although that isn’t too far below trend (which is 2.8-3.0 per cent according to the Intergenerational Report).
I wish I could say it was a conspiracy, but the sad truth is bureaucrats aren’t that smart. A lot of them are economists after all and, being an economist myself, suffice to say I know my own (and myself!).
Jokes aside though, there are simply too many inconsistencies, or puzzles as central banks like to call them, to genuinely believe the economy is weak. One is the discrepancy between public spending according to state and federal budgets (which shows spending is solid) and then the national accounts which instead shows public spending is very weak. They should match.
Then the Australian Bureau of Statistics (ABS) is having all sorts of seasonal problems and have, bizarrely, opted not to seasonally adjust jobs data that comes in on the strong side – with the effect that jobs growth is weaker and the unemployment rate much higher than they otherwise would be.
These are very serious problems. To my mind, then, if statistical anomalies and puzzles are the main sources of economic weakness, then it makes no sense to state that the economy is truly weak.
In any case, for the investment community there is another, bigger issue to consider. And that is the issue of relativity: How does Australia compare to other investment alternatives? It’s all very fine and well to say Australia is weak and gripped by a downturn or what have you, but given that investors have to put their money somewhere, how does this downturn actually stack up?
Well, even on Australia’s faulty statistics, the overall picture doesn’t appear too bad at all – on a comparative basis. Take a look at chart 1.
Chart 1: Australia’s weak economy compares well
What’s interesting about our growth statistics is that they actually compare quite well to the other major advanced economies. They are much stronger than Japan or Europe – and even stronger than the US. That’s saying something as the US economy is widely regarded as the sole engine of global growth, and yet our growth rate is stronger – if only just. Otherwise, we’re just a little behind Canada and the UK.
Think about that. If you’re a global investor looking at earnings potential in an otherwise expensive market, there would be nothing in our figures that would alarm you. The fact is they’d probably find them encouraging – the Aussie economy is the third fastest.
Chart 2: Australia’s inflation rate is better than everywhere
The other positive attribute is that our country has inflation! I realise this may sound like an odd thing to say – especially when we’ve got one of the highest rates in the developed world. But it is true because a modest amount of inflation is a very positive thing for the equity market.
We’ve all been brought up to believe that inflation is bad and that’s true when inflation is too high. But a modest amount of inflation indicates a measure of pricing power which helps enormously with growing revenues and earnings.
Chart 3: Australia’s unemployment rate is at a 12 year high, but compared to elsewhere?
On the unemployment front it’s a similar story. The headlines tell us the domestic unemployment rate is the highest in twelve years. Yet when you look around, it’s only just above that in the US and UK and below rates seen in Canada and the Euro Area. The unemployment rate, if you take it literally, is certainly no reason to gloat internationally, but it’s not a millstone either. It’s in the same ball park as other major investments destinations in the US, UK and Canada and still much better than in Europe.
When a global investor casts their gaze at all of their investment opportunities, the one thing that would stand out is that Australia’s industrial production growth is one of the best in the advanced world. Up there with the US and Canada and well above what is being seen in the UK, Europe and Japan. For all the country’s economic weakness, when you take a look at the whole canvas, Australia is in pretty good shape. This is not something that is well understood in Australia – we’re simply too isolated and far too many commentators are blissfully unaware.
But if you’re an investor with a global mandate you’d be more than aware of Australia’s relative attractiveness on key metrics. That’s why you’ll occasionally see a newspaper interview with a visiting foreign banker or company executive noting that Australians are far too dour on their own prospects (there have been several over the last year or so).
Chart 4: Australia has one of the strongest industrial production figures in the advanced world
The bottom line, then, is that for a global investor Australia shapes up well. This is important because the Aussie market is still around 12-13 per cent below its pre-GFC peaks and has clearly underperformed other major global markets. The S&P500, the DAX and the FTSE100 are all at record highs.
If this is the case, why hasn’t our market rallied harder? I think there are a few reasons including the incessant pessimism here, the push to lower the dollar (which exposes investors to downside currency risk) and the fact that commodities have slumped.
Yet at some point commodities will settle, as will the AUD. I suspect as soon as we see some stability on that front then global investors will be more than ready to act on Australia’s comparatively attractive metrics.