The credit crisis laid bare several longstanding tenets of the investment business, including that market prices are largely efficient, established markets are better regulated, and the biggest economies offer less risk. While elements of these issues remain true, we still face disjointed financial markets, generating incoherent answers to routine questions. One of the latest manifestations of this trend may have been the Dubai fiasco. Uncertainty and confusion abound.
There are few unified stories across the world today; Australia stands among them. Certainly the dimensions of its investment substance may surprise those distant to the story. Consider these points of uncommon knowledge:
- The four largest Australian banks are all rated AA (stable) by S&P, placing them within the top 3% of banks globally on a credit-quality basis.
- Australia’s largest trading partner is China, with the rest of Asia, including India, Korea, and Japan, amounting to some 50% of exports.
- Australians have the largest pool of investment fund assets in Asia, more than 45% greater than Japan.
From an investor’s standpoint, we identify themes that suggest the relevance of Australia to a prudent, risk-adjusted portfolio strategy.
Negligible Impact from the Credit Crisis
During the first months of 2009 when other major economies saw economic downturn, Australia actually grew, albeit slowly. Real GDP growth was up some 0.4% in the quarter ending March, compared to declines of 3.6% in Germany and 1.5% in the United States. Credit can go to policy makers, whose stimulus efforts did not have to fill a “black hole” created by overextended banks.
Non-Performing Loan Rate in 2007
(percentage of total bank loans)
Source: International Monetary Fund, Global Financial Stability Report, April 2008.
Australian lending practices have historically been more conservative than among the nation’s Anglo-Celtic peers, thanks to a banking culture of intermediation rather than securitization. As a result, loan activity has been tied to the real economy, as banks had to balance risk and reward directly.
No Australian bank had to be rescued in the thick of the credit crisis, suggesting that the casual analyst may misread relatively weak bank stock price trends. The run-down in share prices during the credit crisis was largely a result of global sentiment working against financials, as well as general concern about economic buoyancy in the Australian economy.
Emerging Economic Recovery
Relatively buoyant economic activity and a strong banking sector have meant that Australian business and consumer confidence was not pummeled as dramatically as elsewhere. This has lead to a better-than-expected economic growth trajectory, with the Reserve Bank raising interest rates at three consecutive meetings in 2009.
Australian Cash Rate (monthly)
Source: Reserve Bank of Australia. Real cash rate calculated using quarterly weighted-median inflation rate.
Indicative of underlying economic strength, housing prices appreciated by some 10% in 2009. Widespread economic gains mean that the margins and sales volumes of domestic companies are relatively resilient, supporting profitability. We contrast the ongoing restructuring seen elsewhere in the developed world.
Ties to Asian Growth Story
Australia has an impressive trade profile with Asia, where there is strong recurring demand for its exports, especially in the minerals and fuels area. Over the past 25 years, Australia has been aggressive in building its “power of proximity.” About half of its exports are now sent to China, India, Japan, and Korea, with China being its most important trading partner.
Macroeconomic fundamentals have also favored export momentum to Asia. Competitive exchange-rate policies have been complemented by fiscal stimulus in key export markets. The combination has turbo-charged this element of economic activity, offering both a “push” and a “pull” to export growth across both extractive and services industries. As a result, Australia was the only major economy not to see a drop when global trade volume declined by about one-fifth in the year following the Lehman bankruptcy.
Market Size and Depth
The Australian Stock Exchange has a market capitalization of about US$1.2 trillion, ranking eighth in the world. Its weighting in developed-markets world indices is roughly in line with the Netherlands. The mature nature of the country’s pension scheme provides underlying support to the market. In 2008, when the credit crisis started, Australia was ranked fifth in the world in share capital raised by private companies, ahead of both India and China.
Importantly, the market is relatively deep with over 2000 listed companies on the Australian Stock Exchange. Included are some major international names, with the top 10 stocks by market capitalization representing about half of the total market. The largest stock is BHP Billiton Limited.
Diverse Sector Composition
Despite common wisdom, the market is more than just resources. Basic materials may represent some 25% of the stock market by capitalization, but this is balanced by a diversified assortment of groupings including health care, consumer goods, and telecom.
Australian Stock Market Capitalization by Industry Sector
Data as of 30 June 2009. Source: Bloomberg. S&P/ASX 200 Index; Austrade.
Shariah-compliant investors, of course, would exclude from their opportunity set the financial stocks representing just over one-third of stock-market capitalization.
Australia Islamica
Australia is not an equity market driven by Shariah-sensitive investors. Less than 2% of the total population of 22 million claims Islam as their religion, with large proportions of these Muslims having ties to Lebanon or Turkey.
Conventional wisdom notwithstanding, Muslims were likely among the first settlers in the country, whether fishermen arriving from what is now Indonesia or navigators from the coasts of North Africa. The religion was formally established in the late 1800s in relation to the import of camels from Muslim lands to help explore the Australian interior. One of the oldest mosques in the country, in Adelaide, dates to the 1890s.
In Australia today, Islam involves a diverse community of believers, especially given the influx of Muslim students from Southeast Asia. In addition to the dominant Lebanese and Turkish Muslims, the country is home to a contingent of Bosnian and Albanian Muslims, tracing their local heritage to the “White Australian” era in the first half of the 1900s. Australia, as an immigrant country, has more recently welcomed groups from Iraq, Afghanistan, and Somalia.
Real Economy at Work
At a time when “de-risking” has become industry jargon, Australia may provide one of the few opportunities globally where financial and economic trends complement a mature and well-diversified investment market. Certainly in 2009, it was a major market that offered emerging-market scale returns.
2009 MSCI Index Price Returns (US dollars)
Source: MSCI Barra.
Other points of opportunity in a global portfolio have their downside. Canada’s banking sector may be as well-founded as Australia’s, but its economy is too heavily tied to a potentially weak US recovery. China’s equity market is increasingly robust, but its lack of institutional support suggests ongoing volatility. European markets offer diversification potential, but the strong currency dampens earnings upside.
We likely are on the verge of investment focus away from bubble-induced stories and their dark underbelly, in favor of long-term sustainability. We believe there is strength to underlying Australian economic and financial-market trends—especially given the health of the banking system—not found elsewhere. The ties to Asia are a key factor in support of real economic activity.
Amid the worldwide opportunity set, the Islamic investor may find an unexpected harmony between Australian values and a Shariah-biased view of the world.
This research commentary was prepared under the sponsorship of Hyperion Asset Management Ltd. of Brisbane, Australia. Codexa Capital received compensation for the preparation of this article, in relation to its role as structuring agent for the Shariah-compliant Hyperion Australian Equity Fund.
Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment advisor either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted soley for informational purposes.
The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.
