The Warning Signs for Australia’s Economy

Reddit

Now’s not the time to buy, but it’s certainly a time to do your research and work out who will continue to perform well in a more subdued spending environment. The question is though, just how subdued will the spending environment become as the China rebalancing story plays out over the next few years?

Well, Ross Garnaut, Australia’s well-known China watcher, is vying with your editor to be the biggest China bear. He reckons mining investment as a percentage of GDP in Australia’s economy will fall from the current 8% all the way back to 2%. And if that happens without consumption or housing or business investment taking up the slack, come 2014 Australia could be looking at its first recession in 23 years…

We’ve been making the same argument. We’ve been saying this recent rally in shares and house prices is a trap…a trap to make you think everything is as it’s always been.

But the point of our (and Garnaut’s) warnings is that Australia’s economic future will be very much unlike its past. Our largest trading partner is undergoing a dangerous economic rebalancing which will mean much less demand for our raw materials.

The profit warnings from all the mining services companies are simply a warning for Australia’s economy. Times are changing!

But if the action from the mining services sector portends a different, more austere future for Australia’s economy, no one is telling Commonwealth Bank investors. Yesterday, the stock hit an all-time high. On a price-to-book value basis, it’s the most expensive bank stock in the world, according to analysis from UBS. 

‘Price-to-book’ simply tells you how much of a premium a company’s share price has to its equity, or ‘book’ value. According to UBS, Comm Bank trades at 3.6x its tangible equity value. That’s high, and reflects the banks’ very strong competitive positioning and high return on equity.

But you would have to question how long Comm Bank, and Australian banks in general, can maintain world-beating levels of return on equity as the economy faces a mining induced slowdown. Don’t forget, banks are highly leveraged entities. They do very well in good times due to this leverage. But as the Australian economy slows and unemployment picks up, the leverage works the other way.

The recent reporting period for the banks showed profit growth on the back of cost cutting and lower bad debt levels. Top line growth was flat at best. And as the Australian economy slows, you would expect to see bad debt levels pick up again. This is not an environment that appears to justify record high share prices for the sector.

If Australia’s outlook is changing, then the banks are yet to admit it…  

Regards,
Greg Canavan
for The Daily Reckoning Australia

Join me on Google+

From the Archives…

Multinationals vs. the Nation State
17-05-13 – Sam Volkering

The Federal Reserve Will Panic and Climb Even Higher
16-05-13 – Bill Bonner

Survival of the Most Capital Efficient
15-05-13 ­– Dan Denning

New Australian Home Buyers Aren’t Convinced
14-05-13 – Dan Denning

What Happens When Everyone in the World has Zero Interest Rates?
13-05-13 – Dan Denning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
Reddit

Leave a Reply

4 Comments on "The Warning Signs for Australia’s Economy"

Notify of
avatar
Sort by:   newest | oldest | most voted
Ross
Guest

Vying with Garnault … there you have it. you’ve never been there and your opinions can be as ridiculous as Australia’s number 1 ticket holding corporatist. big achievement. he couldn’t even keep it real in Port Moresby after having made fools of us in Fiji time after time. kicked out of PNG, some distinguished loser that.

truth and integrity
Guest

Spot on Ross
On top of that he is collecting 3 govt commissions on climate change so that we can go into depression more quickly and he collects a fat check for all the worst advice!
We already have high debt levels and as our dollar declines 20% our debt increases 50% to $600b (govt) + $1t (private). $80,000 per person
Our GDP is currently $1.4t and debt 110%
How will the banks and govt handle that when property can not be sold and values decrease up to 30%?
Print just like the US

grant
Guest

For me this is all old news,WE WILL BE IN A GLOBAL “DEPRESSION” around our federal election. My guess is August sep this year. The RBA is and will be caught between a rock and a hard place, slowing encomony,and rising inflation due to au $ droping. interest rates will have to go up they might go down short term but won’t last. “hold on to your hats” my moneys on gold and silver not stocks actual.

John
Guest

Greg has been making these predictions for years and none of them have come true yet. Its no good even if they do but the timing is wrong.

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au