[Mb-civic] On top down under

Michael Butler michael at michaelbutler.com
Wed Sep 29 16:42:48 PDT 2004



On top down under

Sep 28th 2004 
>From The Economist Global Agenda

Australia¹s stockmarket, unlike those of other rich countries, has been
hitting new heights this year‹a case of the Old Economy striking back. But
it might yet be undone by Chinese wobbles or a house-price collapse

CAST your mind back, if you will, to the late 1990s. Having decided that
technology was the only business worth punting on, investors the world over
poured billions of dollars into companies that, by way of example, thought
it sensible to spend $200 billion on 3G mobile-phone licences. Those were
the days when companies with even the most tangential connection to the New
Economy (capitals obligatory) sucked in punters¹ cash at a prodigious rate.
Those, in contrast, which sold things that you could drop on your foot,
or‹horror!‹stuff dug out of the ground, were about as popular as last year¹s
Nokia at a rave.

Nowhere, perhaps, was perceived as being more Old Economy than Australia, a
country, after all, that seemed to exist merely to grow wheat, breed sheep
and mine minerals. To anyone of a Luddite disposition, the weighting of
information technology in the country¹s All Ordinaries stockmarket index was
pleasingly low. Australian shares rose in the late 1990s, but their
performance was flaccid compared with the more virile show on Wall Street.
Until, that is, the technology bubble popped, dragging broader markets down
around the world, and exposing the greed of many corporate bosses and the
shaky finances of the companies they ran‹and not just those in the vanguard
of the information revolution.

 Though shares in most rich countries have risen strongly over the past
couple of years as profits and confidence have returned, almost all of the
big markets are still some way from their highs‹in Japan¹s case, a long way.
The S&P 500 is still 27% below its peak, the FTSE 100 is down by a third,
and the Eurotop 300 is off 42%. Japan¹s Nikkei is almost three-quarters off
its high in December 1989. Australia¹s All Ordinaries index, by contrast,
has been bouncing from one record high to another this year, during which it
has risen by 10%, largely because of the soaring price of energy and metals.
Unlike most other rich countries, Australia is a net exporter not just of
metals and coal but of energy too: although it might depress consumption,
the $50 a barrel that oil reached this week should therefore not trouble the
economy too much.

A resurgent Japan, Australia¹s biggest export market, is part of the
explanation for bumper export prices. But the destination of choice for
Australia¹s exports is China, which has a scarcity of the very commodities
that Australia has in abundance. Commodity exports to Japan have risen by 7%
since 2001, but to China they have gone up by 45%. Australia is supplying
much of the iron ore, non-ferrous metals and coal that China needs.

There has also been a more subtle reason for the rise in commodity prices
and, by extension, the comparatively stellar performance of the Australian
stockmarket. Following the Asian financial crisis of 1997, and with the
world¹s attention focused firmly on technology, investment by energy and
mining companies dropped precipitously. With capacity thus constrained, a
pick-up in demand from the likes of China could only lead to one result:
higher prices. Thus has The Economist metals index risen from 69 at the
beginning of 2003, to 107.5 now (the index was rebased to 100 in 1995). Thus
do Australia¹s ports, like those elsewhere in Asia, operate at full
capacity. And thus, too, after two decades of under-investment, is oil at
$50 a barrel.

The fall in investment by Australian mining firms in the late 1990s
illustrates the point. From investing some 20% of sales in 1996, their
capital expenditure dropped to almost nothing, and this year, despite high
prices, will still be less than 10% of sales. Companies merged, too, to cut
costs: in 2001, for instance, BHP, a big mining firm, tied the knot with
Billiton, another one; in 2003, MIM was taken over by Xstrata, a mining
company with a name presumably designed to hoodwink investors into thinking
it did something new-fangled. Management of these companies often went from
geologists to bean-counters, who were far more concerned with squeezing out
profits. For all these reasons, it is perhaps unsurprising that profits at,
for example, BHP Billiton grew by 40% last year and will probably go up even
more this year.

 Nor is that the end of the happy tale, for such companies negotiate
long-term contracts, and many of the ones that mining and energy firms have
in place now do not take account of today¹s higher prices. They will next
year, assuming prices stay at their present lofty levels. Small wonder that
corporate profits in Australia grew by 15% last year and are expected to
grow by 16% this year.

But the tale also has a twist or two. Australia¹s good fortune relies on
China avoiding a stumble. But that is not the stockmarket¹s only
vulnerability. The economy seems to have been growing at about 4% a year for
ever. Brisk domestic demand is the main driver, which is why cyclical
stocks, such as retailers, have done well. But strong exports of commodities
have not been enough to boost overall exports‹which, oddly, have been flat
for the past few years‹let alone offset Australians¹ insatiable appetite for
imports. That is why the country is likely to have a current-account deficit
of 5.5% or so of GDP this year.

Worried that the country is overheating, the central bank has put up
interest rates, and may again. That may not be wonderful news for the
country¹s banks, which account for a quarter of the stockmarket¹s
capitalisation. That is because higher interest rates are likely further to
depress house prices, which had risen to giddy heights before suffering a
reverse this year. And a collapsing housing market is generally not
wonderful news for the financial firms that lent money to people to buy
overvalued property. Largely unaffected by the technology bubble, it remains
to be seen whether Australia can weather a property bubble.

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