Is Australia's investment tide running out?

by David Taylor

Have you ever been caught in a rip? It’s an extremely unpleasant experience. It’s the same feeling you get when you find yourself briefly lost in the bushes. It’s a feeling of not being in control, coupled with the sense of being in danger. While, thankfully, investing is not a life or death pursuit, the evidence is stacking up that Australia’s investment tide is running out. What does that mean? Simply that there are more Australians choosing to invest overseas, than there are foreigners investors choosing to invest here. How does that affect you? I think it’s helpful to know where the investment tide is flowing so you can swim with it. It sure beats swimming against it. Now, even if you’re still not entirely sure where I’m going with this, stay with me.

First let me briefly explain how important money flows are. Last year, the head of the European Central Bank said the bank would do ‘whatever it takes’ in order to save the euro zone from disintegration . That meant offering to open the debt garbage bag. He promised to buy up as much debt as was needed to keep interest rates in the euro down to sustainable levels. He was mainly referring to the interest rates of countries like Greece, Italy and Spain.

No surprises, it worked. It worked very well in fact. The rising yields (or cost of debt for the euro zone’s periphery countries) stopped rising, and in fact fell. That’s because the debt market saw a wall of money coming at it should it decide to ‘bet against’ the euro zone, and therefore it shied away.

The reason for illustrating what happened in the euro zone bond markets last year is to highlight how difficult investing can be if you are moving against the general flow of money.

An obvious example would be if you bought a portfolio of blue chip shares in a bear market. No matter how carefully you selected your portfolio, the returns you receive would not be as attractive as if you invested during a bull market.

So where am I going with all this? Last week I attended a private equity forum. Leading figures in private equity from around the world gathered to share ideas on how to attract new investment and promote Australia as an investment destination. So far their efforts have been quite fruitful. One Hong Kong-based private equity deal maker said Australia has become quite skilled at attracting mid-sized funds – so deals starting at around $300 million. He also said deal sizes can be as large as $1 billion. And the attendees at the forum were hopeful the good times would continue. In fact they pointed to the fact that investors had been turning away from previous financial hubs like India and China and choosing to invest in Australia instead.

No if you’re waiting for the “but”, here it comes… the official data from Canberra show the investment flows into Australia have actually peaked. It’s just past high tide, and the water is receding.

Let me briefly explain a few reasons for this.

Firstly, Australia’s bond market has been relatively popular in recent years, given Australia’s relative stability, and the Commonwealth Government’s AAA credit rating. Global banking giant UBS, however, says there’s now evidence some of that money is leaving.

Secondly, as money has flooded to Australian shores, the Australian dollar has risen in value. Investors have been selling their foreign currency and buying Aussie dollars in order to invest in Australian assets. Naturally, as the Australian dollar has become more and more expensive, investing in Australia has started to lose its appeal.

Finally, it seems Australia has met some stiff competition from some of the emerging economies in the Asia Pacific region. Namely countries like Indonesia. That’s because Indonesia is a coal producer, located closer to China than Australia, and its economic growth record in recent years has been more robust and consistent than Australia’s.

The reality is that money chases yield (return/reward). The higher the yield, the more money will come running. Now don’t get me wrong, Australia’s economy is relatively robust, but there’s more evidence the emerging economies of south east Asia may provide more attractive investment opportunities. According to Reuters, Capital flows to emerging markets were $1.5 trillion last year, close to the pre-crisis peak.

The result of all this is that, now, more money is leaving Australian shores than is coming in. The latest figures from the Bureau of Statistics confirm this.

If you add to that the recent data showing the Australian economy is now growing below trend, with evidence Australia’s services and manufacturing sectors remain in contraction, you don’t need to be a genius to work out Australia’s economic superiority may be slipping. I should add that capital flows aren’t necessarily correlated to GDP growth, but much of the capital inflows into Australia were related to the mining boom, and that now appears to be near its peak.

So if you’re serious about investing, or even looking to do be more than just a ‘mum and dad’ investor, consider what’s happening on a global level. I’m not suggesting avoiding the Australian market altogether, just be aware that the big money is looking more and more offshore, and emerging economies in South East Asia may be providing the new premium returns or ‘alpha’ – there’s a new bit of jargon for you.

What this also means is that Australia may not be considered a ‘safe haven’ economy any more. In fact investment banking giant UBS says calls of Australia being a safe haven investment destination last year were “premature”.

Australia has some strong investment opportunities, and, at least in the short term, is proving resilient at a macroeconomic level, but you never make money from looking in the rear view mirror. If you have the time, and the interest, explore the wider world of investing. It seems quite a few people are already.

David Taylor


The content in my blog is non advisory, please do not interpret this as advice in any way shape or form. These are just my thoughts and nothing I say should be acted upon.

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