Global volatility – are we immune in Australia?
Most of us remember all too well, the Global Financial Crisis (GFC). Signalled by the collapse of US Investment Banking Firm, Lehman Brothers in September 2008, the GFC produced a global repercussion not seen since the Great Depression. The GFC was an accident waiting to happen, and it did.
Countries around the world (particularly Europe) were living beyond their means and delivering poor productivity. The USA was issuing residentially backed mortgage securities for housing that was grossly overvalued. The capital markets were allowing the mirage to persist as institutions were self- insuring and the rating agencies were masking the fact that the underwriters were dangerously undercapitalised. The rating agencies had blindfolds on. Innocent investors had no idea what was about to happen.
In 2008, the dominoes started to fall and still remain in the horizontal position. The world realised that the paper value was well in excess of the underlying value. Here we are now at the closing stages of 2015 (7 years later) and the global scenario still presents us with a sobering picture. Global interest rates offer dismal returns for cash investors, Europe is still sitting around board tables trying to band-aid the Euro collapse and the USA is trying in vain to promise a rise in interest rates off zero (which would implicate a growing economy). In the mean time the Chinese economy is showing us that they partied hard for a number of years, built cities that they didn’t need and are now are in the hangover period.
Where to now?
Is it any wonder that the global share markets are yet again bearish? The global scenario doesn’t offer much comfort to the equity markets. The ASX all ordinaries peaked at 6,800 in 2008 and then tanked to 3,500 during the GFC. They recovered to 5,900 recently only to retreat to 5,100. This is profound volatility.
The recent strong increase in housing markets in Australia (mostly Sydney and Melbourne) appears to be investor driven. Given that wages growth has been slow and affordability stretched, it would indicate that prices have gone above true value. A correction or flattening is now likely for some time to enable yields to improve.
Deloitte Access Economics in its recent September briefing pointed to the improved sentiment following Malcolm Turnbull’s rise to Prime Minister. This has brought with it renewed hope amongst business and community groups that Australia will embark down a path of economic reform. The mining boom is over and with it the globe’s willingness to provide us with our growing prosperity on a silver platter. Indeed, the best single measure of Australian living standards (real disposable income per capita) peaked in 2011, and it has been steadily falling since.
The challenge for Australia’s short to medium term future is therefore whether we can adapt to the changing global dynamics, particularly the Chinese slowdown. That is we have to build a more diversified economy that is less reliant on the resources sector.
In the near term our challenge will be to maintain economic growth and to avoid a recessionary environment (two quarters of negative growth). Australia’s average quarterly growth in GDP between 1959 and 2015 has been 0.87% or 3.48% pa (Trading Economics). In the quarter to June 2015 our quarterly growth was only 0.20% (0.80% annualised). With a further knock on effect from the Chinese slowdown yet to materialise, this shows how delicately poised we are.
Please note that the above is a discussion paper only and merely represents our thoughts and opinions on the topic. It is not a research paper and some of the metrics are of a general nature.
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