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Australia’s economy has grown faster than its developed-world peers over the past decade, uniquely avoiding a recession. That means its stock market has grown handsomely too, right?
Wrong. It’s actually smaller today than it was on the eve of the global financial crisis, in 2007. In that period, the U.S. stock market’s capitalization has grown by more than $9 trillion. Closer to home, Australia’s market has been surpassed by Asia-Pacific peers South Korea and India.
Not only is the contraction a disconnect with the economy, it also stands against an expanding pool of pension-fund capital, which has opted instead to invest abroad. Behind the contrast lies a corporate structure that favors oligopolies in retailing and finance in what ultimately is a nation with a small population. Also helping explain the decline: an appetite among foreign firms to buy Australian businesses, removing their Sydney listings.
Chad Slater, who first traded stocks in Australia 14 years ago and is now back in Sydney after investment-management jobs in London and Boston, is amazed at how static things have been.
“They are all the same businesses — nothing has changed,” said Slater, co-founder of Morphic Asset Management Pty, which invests in global equities. “There’s quite a cosy culture where productivity is really low — which breeds complacency — and there’s so little innovation.”
For a country that basks in its run of 26 years without a recession, there are signs of trouble. The World Bank says education standards are falling, and faults the levels of innovation and effectiveness of the government — criticisms echoed by think tanks and private economists.
Another sign of concern: one recent success story to emerge from Australia’s nascent technology sector was Sydney-based Atlassian Corp. But it opted for a Nasdaq listing rather than one on its home capital markets.
“The social and economic function of the stock market is to provide equity capital to the Australian economy,” Hasan Tevfik, Sydney-based strategist at Credit Suisse Group AG, wrote in a report in August. “The stock market is not working.”
The office of Australia’s minister for financial services didn’t respond to requests for comment on stagnation in the nation’s financial markets, nor did ASX Ltd., which operates the country’s stock exchange.
A smaller market hasn’t meant lower returns. The S&P/ASX 200 Index has handed investors a total return of 58 percent in local dollars over the past 10 years. While that’s less than the 104 percent from the U.S. S&P 500 Index, it’s about par with the MSCI All-Country World Index of global stocks.
But the lack of variety leaves investors looking elsewhere.
“If we got a billion dollars in tomorrow, it would all go global,” said John Pearce, chief investment officer at UniSuper Management Pty, one of Australia’s largest pension funds, where he oversees A$60 billion. “Going offshore is the only answer. We’ve reached our capacity in Australia.”
Australia’s stock market today appears a lot like it did 10 years ago, with resource companies and financial institutions making up 54 percent of the index of the 200 biggest members, and no other sector accounting for even 10 percent.
There’s also a clear contrast with more dynamic peers such as the U.S. when looking at the five biggest companies in the benchmark index. The Aussie group lacks any newcomers:
|Biggest Weightings in Key Index, 2007||Biggest Weightings in Key Index, 2017|
“It will never be a high-tech market unless we get a government with foresight and the will,” said Tracey McNaughton, Sydney-based head of investment strategy at the Australian division of UBS Asset Management. “That just doesn’t exist. Big things are still holding it back,” she said in an interview in Sydney this month. The money manager oversees about $730 billion of assets worldwide.
And while the nation sits on the doorstep of the world’s fastest-growing region, Australian engagement with Asia is limited, as highlighted by shadow Treasurer Chris Bowen last week. Some two-thirds of board members in companies that are members of the benchmark S&P/ASX 200 stock index have no extensive experience operating in Asia, a recent survey by PricewaterhouseCoopers showed.
Australia’s bond market also showcases limitations. A government inquiry into the functioning of the country’s capital markets this year concluded that regulations and tax policies have curbed the development of bonds as a vehicle for corporate borrowing, with consequences as well for investors who otherwise could benefit from greater diversification.
Despite government efforts to create a lengthened yield curve and other moves to help provide benchmarks for pricing, bond issuance by nonfinancial companies has been static:
The dominance of banks in Australia’s bond market contrasts with the situation in Canada, where nonfinancial companies have a greater presence. The two economies are often compared, given their similar reliance on natural-resource exports, large geographies and smaller populations.
Slater, the returnee from abroad, is doing his part to boost the financial industry, hiring staff for his new business to trade in securities. He says one potential contributor to Australia’s relative lack of dynamism could ironically be its very success in avoiding a recession — something that might have deprived it of a productivity-inducing shakeout and spurred a reaction by policy makers.
“Everyone blames someone else,” he said. “But government policy does contribute. All those years without a recession proves that what you’re doing must be right. So why change it? It’s worked.”
— With assistance by Garfield Clinton Reynolds