Geld Zug: UNDERWEIGHTING THE POOR WHITE TRASH

UNDERWEIGHTING THE POOR WHITE TRASH

The death of Lee Kuan Yew brought to mind his warning in 1980 that Australians were in danger of becoming the “poor white trash of Asia”. As things turned out, we didn’t: in terms of the World Bank’s inflation adjusted data, Australia’s GDP per head rose from USD 10,187 in 1980 to USD 67,458 in 2013, a six-fold increase. That’s pretty good compared to the US, which only managed a four-fold increase in the same period, to USD 53,042 in 2013. But let’s not get too cocky – over this period, Singapore’s GDP rose eleven-fold from USD 5,003 to USD 55,182. In short, Singapore has overtaken the US and is hard on our heels.

Real GDP per capita 1980 2013 multiple
Australia 10,187 67,458 6.6x
Singapore 5,003 55,182 11.0x
USA 12,597 53,042 4.2x

Source: World Bank GDP per capita in current USD

The point of these figures is to show that, although Australia has been a pretty good place to invest, there are other places which have been a lot better. In particular, we think that for the next five years Australian investors will do better outside Australia.

Many commentators have pointed out that the Australian share market has underperformed the US share market since the GFC. This has nothing to do with the innate genius of Americans or the laziness of Australians. It is the inevitable consequence of the end of the resources boom. From 2002 to 2012 rapid economic growth in many countries (especially China) pushed up commodity prices to record levels; but these high prices eventually encouraged producers to build new mines, and now the over-supply is pushing commodity prices down. The last decade favored resource-producing countries like Australia, Brazil and Canada, but the next decade is going to favor resource-consuming countries, particularly the US, Europe and Singapore.

Australia has enjoyed the benefits of rapid Chinese growth since 1990, and now its export dependence on China is causing the Australian economy to slow as the Chinese economy slows. China’s 2014 GDP growth rate of 7.4% was the lowest since 1990, and 2015 is forecast to reduce to around 7.0%. The long term factors behind slower growth include:

  • An ageing population and a shrinking workforce.
  • Rising real wages, as regional and sectoral labour shortages enhance employees’ bargaining power.
  • Over-capacity in many industries, as a long term consequence of policies that have favoured investment ahead of consumption.
  • Visible pollution of air, water, soil, food: resistance from consumers and residents increases, and pollution control will mean higher costs for many companies.

What should the Australian investor do? In order to minimize the effect of the fall in the AUD and the coming recession in Australia, investors should look at ways to reduce exposure to AUD-denominated assets and increase exposure to resource-consuming economies which will benefit from lower commodity prices. The cheapest methods are ETFs based on a US, European or Singaporean index, or ASX listed companies with substantial US or European operations.

 

Neill Colledge

Q.E.D.

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