(Bloomberg) -- Australia’s economy has grown faster than
its developed-world peers over the past decade, uniquely
avoiding a recession. That means its stock market has grown
handsomely too, right?
Wrong. It’s actually smaller today than it was on the eve
of the global financial crisis, in 2007. In that period, the
U.S. stock market’s capitalization has grown by more than $9
trillion. Closer to home, Australia’s market has been surpassed
by Asia-Pacific peers South Korea and India.
Not only is the contraction a disconnect with the economy,
it also stands against an expanding pool of pension-fund
capital, which has opted instead to invest abroad. Behind the
contrast lies a corporate structure that favors oligopolies in
retailing and finance in what ultimately is a nation with a
small population. Also helping explain the decline: an appetite
among foreign firms to buy Australian businesses, removing their
Sydney listings.
Chad Slater, who first traded stocks in Australia 14 years
ago and is now back in Sydney after investment-management jobs
in London and Boston, is amazed at how static things have been.
“They are all the same businesses -- nothing has changed,”
said Slater, co-founder of Morphic Asset Management Pty, which
invests in global equities. “There’s quite a cosy culture where
productivity is really low -- which breeds complacency -- and
there’s so little innovation.”
For a country that basks in its run of 26 years without a
recession, there are signs of trouble. The World Bank says
education standards are falling, and faults the levels of
innovation and effectiveness of the government -- criticisms
echoed by think tanks and private economists.
‘Not Working’
Another sign of concern: one recent success story to emerge
from Australia’s nascent technology sector was Sydney-based
Atlassian Corp. But it opted for a Nasdaq listing rather than
one on its home capital markets.
“The social and economic function of the stock market is to
provide equity capital to the Australian economy,” Hasan Tevfik,
Sydney-based strategist at Credit Suisse Group AG, wrote in a
report in August. “The stock market is not working.”
The office of Australia’s minister for financial services
didn’t respond to requests for comment on stagnation in the
nation’s financial markets, nor did ASX Ltd., which operates the
country’s stock exchange.
A smaller market hasn’t meant lower returns. The S&P/ASX
200 Index has handed investors a total return of 58 percent in
local dollars over the past 10 years. While that’s less than the
104 percent from the U.S. S&P 500 Index, it’s about par with the
MSCI All-Country World Index of global stocks.
‘Go Global’
But the lack of variety leaves investors looking elsewhere.
“If we got a billion dollars in tomorrow, it would all go
global,” said John Pearce, chief investment officer at UniSuper
Management Pty, one of Australia’s largest pension funds, where
he oversees A$60 billion. “Going offshore is the only answer.
We’ve reached our capacity in Australia.”
Australia’s stock market today appears a lot like it did 10
years ago, with resource companies and financial institutions
making up 54 percent of the index of the 200 biggest members,
and no other sector accounting for even 10 percent.
There’s also a clear contrast with more dynamic peers such
as the U.S. when looking at the five biggest companies in the
benchmark index. The Aussie group lacks any newcomers:
*T
|Biggest Weightings in Key|Biggest Weightings in
|Index, 2007 |Key Index, 2017
| |Commonwealth Bank of
|BHP Billiton |AustraliaWestpac
|Ltd.Commonwealth Bank of |Banking Corp.Australia &
|AustraliaNational |New Zealand Banking
|Australia BankAustralia &|Group National
|New Zealand Banking Group|Australia BankBHP
Australia |Westpac Banking Corp. |Billiton Ltd.
| |Apple
Inc.Microsoft
|Exxon Mobil Corp.General |Corp.Facebook
|Electric
Co.AT &T |
Inc.Amazon.com
|
Inc.Microsoft |Inc.Berkshire Hathaway
U.S. |Corp.Citigroup Inc. |Inc.
*T
“It will never be a high-tech market unless we get a
government with foresight and the will,” said Tracey McNaughton,
Sydney-based head of investment strategy at the Australian
division of UBS Asset Management. “That just doesn’t exist. Big
things are still holding it back,” she said in an interview in
Sydney this month. The money manager oversees about $730 billion
of assets worldwide.
And while the nation sits on the doorstep of the world’s
fastest-growing region, Australian engagement with Asia is
limited, as highlighted by shadow Treasurer Chris Bowen last
week. Some two-thirds of board members in companies that are
members of the benchmark S&P/ASX 200 stock index have no
extensive experience operating in Asia, a recent survey by
PricewaterhouseCoopers showed.
Australia’s bond market also showcases limitations. A
government inquiry into the functioning of the country’s capital
markets this year concluded that regulations and tax policies
have curbed the development of bonds as a vehicle for corporate
borrowing, with consequences as well for investors who otherwise
could benefit from greater diversification.
Despite government efforts to create a lengthened yield
curve and other moves to help provide benchmarks for pricing,
bond issuance by nonfinancial companies has been static:
The dominance of banks in Australia’s bond market contrasts
with the situation in Canada, where nonfinancial companies have
a greater presence. The two economies are often compared, given
their similar reliance on natural-resource exports, large
geographies and smaller populations.
Slater, the returnee from abroad, is doing his part to
boost the financial industry, hiring staff for his new business
to trade in securities. He says one potential contributor to
Australia’s relative lack of dynamism could ironically be its
very success in avoiding a recession -- something that might
have deprived it of a productivity-inducing shakeout and spurred
a reaction by policy makers.
“Everyone blames someone else,” he said. “But government
policy does contribute. All those years without a recession
proves that what you’re doing must be right. So why change it?
It’s worked.”
(20min delay)