Why investors are losing faith in Australia

The US, UK and New Zealand are surging ahead while we in Australia continue to obsess over the perpetual downturn.

That the Australian sharemarket has decoupled from global markets should be a point of concern -- especially Monday’s disappointing performance. Following strong gains on Wall Street on Friday, our market was one of the few that had a strong offer: this should set alarm bells ringing.

The price action is a clear warning to the government. Investors are nervous over what they see as the intensifying risks to Australia. It was only earlier this month that the All Ordinaries had pushed to post-GFC highs. Corporate earnings were better than expected and quite robust. Economic growth more broadly surprised everyone to the upside and jobs growth blitzed expectations. So what happened?

It would be too simplistic to put this change in fortunes down to concerns over iron ore or even China, although they are not helping. That’s because they were both presented as problems even as our market pushed to new highs. And in any case, the selloff isn’t confined to resources. Consumer stocks are being smashed; so are industrials and telecoms etc -- and especially our banks. Confidence was only just starting to recover!

Given the country’s current strong metrics and the consistent upside surprises on growth, inflation and jobs, I can’t help but wonder whether this anxiety can be put down to the random and inconsistent conduct of our policymakers. It would make sense, since there is an established pattern.

Every time they’ve interfered in the market -- largely to jawbone the currency -- our equity market gets hurt. Indeed it has underperformed global benchmarks consistently since the GFC. Recall the damage this easing cycle initially caused, how confidence would plunge as they slashed rates. This cutting cycle was driven by the desire to get the Australian dollar down -- and it crushed household and business confidence in the process, as it confused and alarmed the public.

Now the Reserve Bank and Treasury are pushing the need for even further meddling with macroprudential regulation, again alarming markets. The RBA is expected to front a Senate Economics Committee this Thursday to explain why it has back-flipped so suddenly on the issue of macroprudential controls -- seemingly now embracing them when every utterance ( at least from the RBA) in the lead up to last week’s Financial Stability Review (and even parts of the review itself) was firmly against it. Such scrutiny is to be welcomed. The Committee chairman Sam Dastyari rightly noted that: “The danger is unintended consequences whereby you kill off the only people that are investing in new housing stock". I previously wrote that this was indeed a risk if punitive measures against investors were going to be considered and that this would be a grave mistake. 

It is at least comforting that some in parliament also see the need to take the bureaucracy to task, especially in an environment where many of the nation’s business commentators have instead adopted the role of apologist: often writing commentary that would be better suited to the public relations departments of those institutions.

Comparisons with New Zealand are appropriate at this point. The New Zealand policy establishment introduced modest macroprudential regulation last year, realised it wasn’t working and promptly hiked rates -- by 100 basis points. Despite that move, the New Zealand dollar has slumped about 7 cents, 11 cents from a peak. All the while, New Zealand stocks have been bid, and are currently up 10 per cent for the year. As an added bonus, the Kiwi government is running a budget surplus. More generally, the New Zealand equity market has joined those of the US, Europe and Britain to be at or near record highs.

In contrast, the Aussie equity market is being sold, as is the Australian dollar, in a generalised re-rating of the country. Interest rates remain at record lows, and despite this, the official line is that the economy is fragile -- three years after the easing cycle began. Meanwhile, policymakers caught unawares are now expressing growing alarm about the property sector, having only a short while ago whinnied about the need for a rebalancing. Now in the early stages of that rebalancing, they complain of excess.

This is an absurd situation -- and it reflects the failure of Glenn Stevens and Martin Parkinson to deliver, under two successive governments, sustainable growth, stable inflation (currently at the top of the band), a budget surplus or even just a generalised sense of hope in our economic future. This level of mismanagement is unforgivable. It would be an enormous mistake to then allow these same policymakers more scope to meddle in a market -- an economy – of which they clearly have very little understanding. 

It’s not so much that the initial macroprudential measures themselves will prove harmful to property investors. They will most surely fail, at least in the early stages. Yet that begs the question: To what lengths will policymakers then go and how spiteful will they become when the initial tools they employ flop? Regulatory risk is extreme at the moment and there is enormous scope for policy error. Markets are right to be concerned, then, over what is in reality an inconsistent and arbitrary approach to Australia‘s macro management.

On that note, the Prime Minister and Treasurer should not be fooled. They simply cannot absolve themselves of the responsibility for Australia’s macro performance -- and it isn’t lost on everyone that we seem to be lagging quite a bit. The US, UK and New Zealand are surging ahead while we languish, obsessed about the perpetual downturn. Citizens and investors need hope -- they need confidence that decisions are being made in the long-term interest of the nation. Our equity market is showing that they currently don’t have this.