Archive for the ‘MONEY AND MARKETS’ Category

Edition 51 – Making superannuation sexy

Sunday, May 1st, 2011

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Business21C Weekly is broadcast on Sydney’s 2SER 107.3 fm radio station at 9:00 am each Monday morning.

This week on Business21C Weekly we decipher superannuation, the compulsory tax contribution we make for our retirement. The fees, the investment options, equity, trusts and negative gearing all seem too complicated to understand; and when you’re young, there is nothing exciting about the thought of saving up for the future. It may be important in theory, but the idea of having money taken out of our pay seems nothing more than burdensome.

Kirsten Lees speaks to Susan Thorp, professor of finance and superannuation at UTS, and Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia (ASFA), about how to be more literate about our superannuation. What are the common mistakes people make? How is it best to work out what superannuation will mean to you in retirement? At the end of the day it’s not just about saving money, it’s also about having to spend it later in life.

Edition 49 – The business of carbon pricing

Sunday, April 10th, 2011

Business21C Weekly is available through the iTunes Podcast directory. To subscribe directly via iTunes, go to the Advanced menu in iTunes and select Subscribe to Podcast. Then paste in the following URL:

Business21C Weekly is broadcast on Sydney’s 2SER 107.3 fm radio station at 9:00 am each Monday morning.

This week’s edition of Business21C Weekly gets to grips with clean energy and carbon pricing.

Globally, the predicted value of the clean energy industry is $2.2 trillion US dollars within five years. That’s the size of the Brazilian economy – and twice the value of Australia’s GDP.

So, is clean energy investing the new gold rush, and is Australia doing enough to make sure it gets its slice of the action? Where does a carbon price fit? And can we ever hope to compete with the deep pockets and economies of scale of the likes of China?

We talk to two investment experts who specialise in the sector: Tim Buckley, Joint CEO of Arkx Investment Management and Martin Rushe, Managing Director of Moss Capital. Taking both a global and the local perspective, Tim and Martin outline the considerable opportunities they see, should Australia establish an appropriate regulatory framework. And to both, a carbon price is clearly a key part of the solution.

We are also joined by Lance Crocket, General Manager of Pacific Hydro Australia, operators of hydro electric and wind plants in Australia and internationally. Lane talks about what it is like to compete on the world energy market and how he sees the potential for Australia’s clean energy sector as the global industry explodes.

Interest rates: Where to from here?

Saturday, March 19th, 2011

In the 1 March Statement on Monetary Policy, the Reserve Bank board decided to maintain official interest rates at 4.75%, citing strong growth in Asia, rising commodity prices, moderate inflation levels and a flat housing market. Analysts had been expecting a rise in April or May, but after the natural disasters in New Zealand and Japan, all bets are off.

Reserve Bank Interest Rate Movements

View the Interactive Chart

Among the risk factors cited in the World Economic Forum’s 2011 Global Risks Report, earthquakes and volcanoes were considered a low to medium likelihood in the next ten years. But few could have predicted the suddenness or the severity of the natural disasters that have struck in recent months – from floods and cyclones in Australia to earthquakes and tsunamis overseas.

Markets across Asia responded quickly to the Japanese earthquake on 11 March, led down by an almost immediate 10.5% drop in the Nikkei index. Since the meltdown at the Fukushima power plant, fears of rising radiation levels around damaged reactors have led to panic selling on many markets. The Yen hit a high of US$0.0127 on Wednesday 16 March, before the Bank of Japan took measures to bring its value down.

Japan is the second biggest buyer of Australian commodities. If its economy stumbles, we’ll see reduced demand for Australian commodities – taking some of the heat out of the resources boom. We’ve already seen our uranium miners take a temporary hit, while banks and resource companies have also lost value. But as rebuilding gets underway, expect demand for steel and coal to increase again, perhaps beyond normal levels.

Meanwhile, uncertainty in the Middle East continues to put upward pressure on oil prices. With Libya in an undeclared civil war (it is the world’s 17th largest producer of oil), Egypt under army rule and increasing reports of civil unrest in the Gulf states, it seems unlikely that fuel prices will be dropping anytime soon.

So what impact will this have in Australia? It’s probably too soon to say, but economists are no longer expecting an interest rate rise in April.

Despite the November rate rise and the Queensland floods in December and January, Australia’s economy continued to grow in the fourth quarter of 2010. CPI inflation was at 2.7% for the year (December quarter underlying inflation at 2.25%), despite temporary price hikes in fruit and vegetables, and rising petrol prices.

Although the economic effects of cyclone Yasi are yet to be fully seen, analysts anticipate that production losses will be offset by increased capital investment as rebuilding gets underway. ‘Looking through’ the temporary effects of the floods and cyclone, inflation is expected to remain within the 2-3% target range.

According to the latest RBA Statement on Monetary Policy, Australia’s terms of trade are at their highest since the 1950s, and national income is growing strongly, thanks partly to China’s 10.3% growth. However, there continues to be spending caution in the household sector, and a higher rate of saving out of current income. With all this uncertainty around, that isn’t likely to change.

The labour market is tight, with unemployment dropping to 5% on the back of strong jobs growth during 2010. And although there have been price increases in utilities and some commodities, the continuing strength of the dollar – which has gained 13% against the US dollar in the past six months – has lessened the impact.

To avoid the risk of an early rate rise dampening growth, the RBA board chose to maintain a rate of 4.75% in March. How will they respond to these new crises? We’ll have to wait until April to find out.

Australia’s water market

Tuesday, January 11th, 2011

Despite the recent floods, Australia is still the driest continent on earth. If a long term investment is what you’re looking for, it might be worth taking a closer look at water. Business21C Weekly’s Gabby Greyem spoke to Richard Lourey, Tom Wilks and Andrew Gregson about the risks and opportunities in the world’s most advanced water market.

Edition 32: Water rights

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While retail reticulation (or city water use) is government owned in Australia, the 2007 Water Act triggered a watershed of investment in water assets in the Murray-Darling Basin.

Introduced by the Howard Government, the Water Act came with a financial commitment of $3.1 billion to buy back permanent water licenses from agricultural holders, to secure environmental flows and flush out the 1.5 million tonnes of salt the Basin exports every year.

The Act allows for the commercial trade of water licenses in the Murray-Darling Basin, effectively transforming agricultural water allocations into tradeable shares, where any investor can own and speculate on the value of water. But how do you set a fair price for water rights? And should we treat a non-renewable environmental resource as a market commodity?

The Murray-Darling Basin crosses three states and covers approximately 14 per cent of Australia. Its agricultural output is worth $9 billion a year to the Australian economy, employing 40 per cent of Australia’s farmers, directly affecting 3 million people and feeding 20 million.

According to Richard Lourey, Managing Director of Causeway Water Limited, the conservative value of water entitlements in the Murray-Darling Basin is $A20 billion, making it one of the most significant water trading markets in the world. But it’s a market that, until now, Australian interests have been slower to invest in.

“Themes of food security and soft commodity price inflation are influencing offshore investors more than they currently influence Australian investors.” While landholders, agricultural companies and the Government are still the largest owners of water in the Basin, international interests are investing sizeable sums, far outweighing investment from Australian funds.

In September 2010, the Sydney Morning Herald reported that Olam International, Guinness Peat Group and Summit Water Holdings together hold just under $200 million in permanent water rights in the Murray-Darling Basin. While this might seem a lot, it’s a very small fraction of the total, and for Lourey, the more participants in the market, the better it will operate.

Richard Lourey said the Murray-Darling Basin’s water trading scheme has seen 15 per cent compound annual growth in the last ten years. The price of water jumped dramatically after the introduction of the government buy-back scheme, from around $900 a megalitre for permanent water, to over $1,200 a megalitre.

This has been great for the vendors of water licenses, like Twynam Cotton, which sold 240 gigalitres of permanent water licenses to the Federal Government in 2009, for $303 million.

But recent rain and flood events, combined with the drying up of Government buy-back reserves, have seen returns on water reduced to a tenth of their value just two years ago.

Tom Wilks has been a water broker for over ten years. He said changing rules and a lack of clarity around how allocations are worked out leaves a lot of uncertainty in the market.

“They can change rules with the stroke of a pen … things are too uncertain for anyone to invest with any degree of confidence.”

And according to Richard Lourey, to create true price discovery for water, more investors are needed. “International investment in Australian water will increase the liquidity of the market.”

The investors he works with have styled their entire business around the water theme and see the Australian water market as a long-term opportunity.

“Australia is a dry continent, with an expanding population, [and] it has a very important role to play in terms of food security in the Asian region.

“The assumption we’re making is that we can generate a solid cash flow yield out of the investment on an annual basis; that there will be increasing demand for water, against supply, [and that] the static price of water will go up.” He said.

Chair of the NSW Irrigators’ Council, Andrew Gregson said one of the key aims of the Council was to establish water as a recognised property right.

“While this has mostly been achieved, the Council has some concerns about the potential for the water market to be cornered by single large players.”

Gregson said the Council supports a free water market with a range of market participants, but “we are asking for the Foreign Investment Review Board to be given the same powers over water as a property right, as they do over land.”

Lourey said FIRB guidelines requiring the Australian Government to consider acquisitions in excess of $231 million are appropriate and he sees no need for changes to the protocols as they relate to the water market.

“Whether that capital is coming from offshore or from onshore is not the issue.” What is more important is that the market is allowed to function properly. When water is undervalued, there can be negative consequences – overuse being one of them. But when prices are set by supply and demand, and there are enough participants in the market, both the environment and investors benefit.

Lourey said that while food security and soft commodity price inflation don’t get a lot of attention in Australia, they “get an enormous amount of attention offshore.

“I think it’s important for Australians, both institutional investors and down to the man in the street to understand that water is one way of playing those themes.”

A fraction too much friction

Saturday, December 18th, 2010

Despite the ongoing effects of the global financial crisis on major economies, Richard Gibbs, Global Head of Economics at Macquarie Research, believes that Australia will remain a relatively high growth economy for the foreseeable future.

It is patently obvious that the global economy and financial markets continue to undergo profound change in the aftermath of the global financial crisis. Notwithstanding the best intentions of legislators and macro policymakers, there is a growing sense of tension and unease as the balance of power in the global economy continues to shift from the traditional powerhouse economies of the North Atlantic to the brash rising stars of the Asia-Pacific region.

The combination of this unrelenting shift in the sphere of economic influence and the overhang of the global financial crisis (GFC), particularly in the major advanced economies, is producing a more changeable and widely diverse set of dynamics for the global business cycle. Put simply, we are now residing in a global economy that is much more polarised with the key emerging economies clustered towards the high growth and inflation end of the spectrum, while the major advanced economies languish at the low growth and deflation end of the spectrum.

Fortunately for Australia, our economy is now regarded as one of the pre-eminent ‘linker’ economies, enabling it to straddle the excesses of both the advanced and emerging economies. Other economies in this position include Brazil, Chile, Canada, Indonesia and Russia.

The return of shorter, sharper investment cycles has certainly been in evidence during the past six months as investors, traders and speculators alike have struggled to establish a clear framework for assessing the prospects for key assets. Rapid changes in perceptions of risk have also added to the uncertainty confronting value-driven investors.

Significant divergence in the outlook for global economic conditions and in particular the fortunes of the US, UK, Euro area and Japan have prompted global investors to seek out assets that are perceived to be less risky. As a result, the past six months has witnessed a surge in buying support for sovereign and corporate debt.

The frenetic activity in debt markets has resulted in a significant narrowing in credit spreads and of course has dramatically lowered the cost of raising debt capital. In late September 2010, Microsoft Corporation set a new record low for a US$4.75 billion debt offering.

According to the International Financing Review (IFR), Microsoft’s three-year bond sold at a quarter of one percent above comparable US Treasury Bonds. This implies a coupon of just 1 percent, making it the lowest on records that date back to 1970. Like many corporate borrowers in the US and elsewhere, Microsoft has a strong balance sheet with almost US$37 billion in cash holdings.

Needless to say, many analysts and investors are now focussed on the risks associated with the seemingly insatiable demand for debt securities, particularly the emergence of asset bubbles in specific segments of global debt capital markets.

Looking forward, there are several forces now at work in the global economy and financial markets that are likely to provoke a reappraisal by investors and traders of the relative merits of equity capital markets. This reappraisal is expected to steadily gain momentum in the early months of 2011.

First, the recent announcement by the US Federal Reserve of a further round of quantitative easing will substantially boost global liquidity, acting as a stimulus for global economy. In particular, the emerging economies and their commodity-based trading partners, such as Australia, Brazil and Canada are likely to experience further strong growth in income and domestic demand.

Second, the effective global stimulus is expected to propel cost and price pressures in the higher growth economies. This prospect of higher inflation will support stronger revenue and earnings growth, particularly for those firms that have little debt on their balance sheets and a capacity to raise selling prices.

Third, the opportunity cost of concentrating investments in debt capital markets has widened considerably as the cost of debt issuance has fallen along with effective yields. Increasingly, investors must choose between running yields of 1 to 2 per cent in prime-rated corporate debt, compared to a dividend yield of 3 to 4 per cent in major listed companies.

Fourth, the prospect of capital management initiatives and an upsurge in merger and acquisition activity can be expected to boost earnings per share assessments, reinforcing the need to return the investment focus to growth assets.

For Australian investors, there is a need to focus attention on the risk of higher inflation, rather than the contrasting risk of deflation. It is true that many of the major economies are continuing in their attempts to reflate economic activity, but this is not the case in Australia, where the economy is struggling with supply and capacity constraints, against a background of still robust income and demand growth.

Moreover, there are increasing signs that the ongoing robust demand for bulk commodities is about to be bolstered by surging demand for agricultural commodities with markets facing supply squeezes in the grains and soft commodities segments. This suggests that Australia’s terms-of-trade, which is the most appropriate measure of the rate of growth in external income, is set to again accelerate in 2011.

Not surprisingly, investors should refocus on the tried and tested axiom that argues that to share in the benefits of economic growth you must be invested in growth assets. Australia is and will remain a relatively high growth economy for the foreseeable future and it follows that the next chapter in the short sharp investment cycle will feature equity capital markets.

Still too big to fail?

Monday, November 1st, 2010

When Lehman Brothers failed on September 15th 2008, governments and central banks went into crisis mode, swinging into action with bail out packages for the likes of Bank of America and Citigroup. Financial institutions had to be saved. Too many were too big to fail, at least without disastrous impact on the US and by default, the global economy.

Two years on, Business21C interviewed internationally renowned econometrician Professor John Geweke, and asked ‘what’s changed?’ His answer is clear, not enough.

‘Ironically’ explains Geweke, the banks that were too big to fail in 2008 ‘have got bigger. Bank of America, for example, absorbed Merrill Lynch and became even larger.’ There are other examples of this kind of mid-crisis consolidation: JP Morgan Chase bought Bear Stern, Wells Fargo bought Wachovia to name but two.

‘These banks are also too large to fail. The US economy and probably the world economy cannot withstand the failure of one or more.’ Geweke believes that the regulation and market discipline that could change behaviour and mitigate risk, has not materialised.

‘Banks in the US are not as regulated as they are in Australia’, explains Professor Geweke. Indeed, he observes, even Alan Greenspan, Chair of the Federal Reserve for 19 of 20 years leading up to the crisis, and leading endorser of the free market philosophy, now sees that many of these banks are too big to fail, adding too big to fail, means too big. ‘As a consequence, there has been a move by many economists to regulate the size of financial institutions.’ These economists believe, Geweke among them, that the size of financial institutions ought to be limited, and that they need to be allowed to fail. This would allow market discipline to occur, simply put, there would be a consequence for excessive risk that is simply not there when a bank – or any business – believes it will be bailed out in times of crisis.

Greenspan himself has admitted that his trust in the market has had been misplaced, with too much faith in their self-correcting power.

The problem is compounded, argues Geweke, but the fact that money moves more globally much more than it ever has, and legislation on a national scale will be less than effective.

‘If the problem is ever going to be fully addressed, it’s going to have to happen at the international level, and we certainly have no precedent for that as of yet’ he argues.

To date, he believes, global regulation has made little progress. The problem is that when things go well, financial memories tend to be short. ‘Unless we address the incentives of institutions to take risks, the crash is a problem that is likely to arise again.’

In the US, Geweke explains, ‘the policy focus at the moment is macro economic: on unemployment, on lack of domestic demand for domestic output, but the root of the problem is at a smaller level.

‘If you are a trader making decisions at a major bank it s a bit like flipping a coin. Heads you take home $50 million dollars. Tails, you lose your job – and find another one within a few months.

‘Another feature of risk that I have encountered with decisions makers at major companies, is that they will say, “Yes I recognise the risk. Yes, this is a bubble, it’s going to go bust but until it does there are vast amounts of money to be made. If I pull back from this now, I will be replaced with someone who will go ahead.” That’s the psychology of this environment.

The only way to address it is imposing greater responsibility through regulation on those who make decisions with other peoples money.

Geweke sees the Australian regulatory environment as more conducive to discipline and responsibility.

‘Australia has a more traditional banking sector than the US, and indeed, than other parts of the developed world’ explained Professor Geweke. ‘The four major banks are very large compared to size of economy, comparatively larger, in fact, than the big financial institutions in the US’. If any of one these banks failed it would be a disaster for the economy. Consequently Australian banks are subject to tighter regulations compared to equivalent institutions in the US.’ The legislative policy, known as ‘the four pillars’ was enacted to ensure the four Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation could not consolidate by merger or acquisition by any one of the other four. It’s a policy conceived by Treasurer Paul Keating in 1990 and modified by Treasurer Peter Costello in 1997.

The four pillars – though often struggled against by the banks – that has been credited by many sources including the IMF this week with helping Australia’s financial institutions withstand the worst impacts of the crisis.