International opportunities for Australian investors in 2014

11 February 2014

There is a world of opportunities now awaiting Australian investors with the energy and nous to look overseas, writes Zurich’s James Holt.  

Recently Australia has been host to a procession of people telling us that things “really aren’t that bad”, even though we think they are. Lloyd Blankfein, the chief executive officer of Goldman Sachs even described us as being “overwrought” and that Australia was in a place that the US could only hope to be. 

While consumer confidence has suffered in recent times, in reality Australia’s growth rate has been well ahead of the rest of the developed world.

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It is true that considerable change across industries has occurred, with the headline growth rates hiding the upheaval we’ve seen in industries from manufacturing to our own financial services. 

Nevertheless as evidenced by numerous factors, Australia has been doing just fine. Perhaps we have the “grass is greener” mentality, as is often the case when people living in an economy don’t recognise the dangers and opportunities as much as an outsider looking in. 

How the tables have turned for the US 

In the United States very few saw the crash of 2007 coming – even despite the fact that in hindsight it seems obvious that if you leverage the economy across all sectors to the highest levels in history, something has to give. 

Yet the average consumer seemed to think it was like one of Gatsby’s great parties, with someone else able to collect the bill forever. Even the Federal Reserve, normally the one to “take away the punch bowl” when the economic times get too good, seemed too often instead to refill the punch-bowl in the years preceding the global financial crisis (GFC).  

But six years later, the tables have turned. Now, the US consumer has the lowest debt ratios in nearly 20 years. Low interest rates and a bottoming housing market have combined to make home ownership the most affordable in decades. 

Despite talk of America’s decline, which company dominates global online search? Google. Which is the world’s biggest ecommerce firm? Amazon. What about online auctions? eBay. The world’s most valuable brand? Apple. 

Activists recently noted that the overwhelming majority of consumer brands are now owned by a handful of corporations including Coca Cola, Pepsico, Kraft, Proctor & Gamble, Kelloggs and Johnson & Johnson. Guess where these companies are listed? 

If the US had an Achilles heel, it was its dependence on foreign energy.

But this is no longer the case with an American breakthrough in mining technology (horizontal drilling) combining with American legislation to bring about an oil and gas boom that has seen US energy production recently surpass Russia. 

While this energy boom looks to transform America’s industrial dynamics, Americans seem to have only half bought into their own renaissance as their psyche remains anchored in the worst recession since the 1930s. We on the outside however, see a staggering giant reinventing itself. 

Japan – reaching for escape velocity 

Even Japan, lost in the economic wilderness for 23 years, although cleverly hiding it from most outsiders by maintaining false levels of full employment, is managing to convince a public that long ago gave up on its leaders that change in that nation is possible. 

A groaning public debt, poor demographics and grinding deflation had eaten away at Japanese consumer confidence, despite outside appearances. At last, however, Japan appears to have grasped the nettle and is making a no-holds-barred attempt at escaping its genteel decline.  

China continues to fight for growth 

China, where ironically the domestic citizenry has developed a nearly bullet-proof self-confidence (and emerging nationalism) after 35 years of reform and growth, sees visitors continue to marvel at the transformation that takes place. 

A noisy group of naysayers continues to be disappointed that China has not yet hit the wall.

Fears that SHIBOR (the Shanghai Interbank Offered Rate) would be the final nail in the coffin have once again been misplaced. China’s growth story maybe unbalanced and messy and complicated, but so too are many others.

Indeed the United States was faced with a civil war, corruption and misallocation of resources on a grand scale – not to mention multiple recessions – yet still managed to emerge in the early twentieth century as an undisputed economic giant.  

Is the outlook brighter outside of Europe? 

The one exception to the rule of “grass is greener” among the big regions is Europe. Both the average European and the average visitor to Europe know that that continent is facing extreme difficulties.

Ironically it is just a small cosseted political class that think Europe is heading in the right direction. 

While the Americans identified the dangers early and opted for unconventional policies to prevent economic meltdown, Europe has, in its fear of repeating the 1920s and 30s, effectively begun to repeat that era. 

Much of the problem lies in the fact that Germany, alone amongst the big nations of Europe, is doing relatively well.

The reasons for this are several; in 2003 the then Government took important steps to liberalise the economy, cutting tax and welfare that helped to spur economic growth.  

But also as the Euro came into its own it was soon clear that as a currency it was too low for an increasingly competitive Germany, bristling with technological leadership through its famed ‘mittelstand’.

While countries like Australia boomed as a result of the emergence of China due to demand for commodities, countries like Germany also boomed as China demanded the best machinery and equipment to convert these commodities into consumer goods. 

But for most of Europe, not only are its nations yet to undertake the reforms that Germany did, but for them the Euro remains too high. Once upon a time a deep recession would have sent the currencies of struggling countries downward and allowed them an export-led recovery.  

In Italy the continued distraction of Berlusconi and bunga bunga parties takes precedence over reform and in France, Hollande seems to be embracing the very opposite of what helped return Germany to growth.

Not even Hemingway or Fitzgerald would get any joy from today’s Europe; the American literati were attracted by a cheap currency as well as a post-war slump.  

Despite the staunching of the most acute phase of the financial crisis, as Europe slides towards deflation it remains the biggest source of consternation going forward.  

The Australian investor?  

Australians investing globally still have a very powerful advantage in the form of a strong Australian dollar.

And for as much trouble as Europe is in, it still offers up cheap equity markets which can deliver for investors.

Finally, despite the very real challenges ahead and jittery confidence, markets take their cue from real economic activity.

One of the best guides remains the so-called Purchasing Manager Indices for manufacturing which provides a good lead for economic growth. In July 2013 these turned positive for every major region, even Europe, for the first time since August 2011.  

Plenty will happen in 2014 to throw investors off their game, but synchronised global growth for every region for the first time in two years is a pretty good starting point.

James Holt is an investment specialist at Zurich Financial Services Australia.

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