The Weekly Kick Off: Is Australia THAT expensive?
My Thoughts from the weekend:
A year ago we felt like Churchill – a voice in the wilderness – when we said Iron Ore prices could get ugly. On Friday they did….again. But more on that another time.
The number of overseas visitors we are meeting that tell us Sydney and Australia are “expensive” has got me thinking that Australians and Australia really needs to take advantage of the high Aussie dollar while it lasts.
Feeding ten people in Thailand at a local restaurant and ordering entree, mains and dessert for everyone as well as cocktails, beers, wine and mocktails for the kids amounts to 2000 baht or A$65.00. Thats a main course, a glass of water and a side of fries in Sydney. Its not surprising then to see so many Chinese, Russian and British tourists taking advantage of Thai hospitality.
Thinking about British investors; some have, over their lifetime, amassed, a million pounds. You would think that anyone in this position would be thinking “I’ve made it!” But they can now look forward to retirement with their next egg earning…wait for it… £7,500 per year! No wonder the UK student one of my colleagues is billeting here in Sydney has complained about how expensive Sydney is. The same might be said by Japanese tourists who are likewise earning less than 1% interest on their lifetime savings.
And last week I entertained two Singaporean investment professionals that couldn’t believe how expensive our harbour city had become for them. Coming from Singaporeans and Londoners, that’s really saying something.
These examples may only be anecdotes but my experience as an unconventional investor has taught me that aggregated anecdotes equals the whole.
Australia is uncompetitive.
I just bought a pair of italian shoes online and initially baulked before handing over my credit card details because the price was presented in Euros. But after doing the conversion I realised the depression in Spain (and it IS a depression) had opened another door for Australian shoppers looking for bargains (they have long enjoyed the bargains offered by the US). Additionally another nail has been driven into the coffins of Australia’s department stores.
It’s not often I can clearly see the headline many years in advance but unless our Australian dollar falls back to US70 cents the headlines will read: DJ’s and MYER are now in Run Off!!!!! Even a merger of the two wouldn’t help.
But hope for Australian retailers may be on the horizon. In the last week a consulting exploration geologist and an asset management consultant – both consulting to BHP, RIO, and others – have told me that projects are being shelved and deferred at a rapid pace. In some cases only from Q3 and Q4 to 2013 initially. In other cases, where the miners were shouting only six months ago (when we were writing our bearish opinions on Iron Ore and China); “get as many drills and people as you can, just get it done”, they are now saying “we may look at it again in a couple of years.”
Meantime American banks have been aggressive in cleaning up their banking system. The Economist notes that “the five biggest banks wrote off more almost $500 billion in the aftermath of the financial crisis and raised $318 billion in fresh capital.” No eurozone bank has yet set aside more than $30 billion.
In short I don’t believe a high Aussie dollar can be sustained – at least against the US (unless Agriculture can meet the slack from lower materials prices). And lest you want to be a tourist that complains of high prices when travelling abroad in the future, you need to think about how the above influences will impact your buying power.
The other thing that has caught my attention is the massive growth that will occur in superannuation. Currently there is $1.3 trillion and assuming certain growth rates, expect it to hit $4 trillion in fifteen years. The demographics will ensure that from 2028 (perhaps a couple of years later because of the change from 9% to 12% contributions) we will start seeing outflows putting pressure on inflows. But in the meantime the impact of this? Not enough high quality listed companies, prices of high quality listed companies being the only ones to sustain high price earnings multiples and lots of business for underwriters and Equity Capital Markets execs as a flood of baby boomers float their businesses to meet the tidal wave of superannuation money. Oh and expect a lot more investment into offshore stock markets and international fund managers like Magellan.
That latter point could be another reason to take advantage of a strong Aussie dollar now.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
