Australia: Should We Be Lumped In Again With Them?

Our market has lurched downwards in sympathy for the rest of the world on Thursday as local investors large and small (and the hedge funds and other short term players) reckoned the bad news from Greece and the US economy was bad news for us.

Another nasty fall yesterday left us on the edge of a correction with the main ASX 200 off 9.8% since the peak in April.

Every sector has slumped to varying degrees; there have been few bolt holes for investors to escape the sell-off.

There's a hint of 2008 in the air now more than 2010.

And while the news isn't welcome, especially the growing fear of another GFC is Greece goes broke and threatens the eurozone and its banks, it has to be underlined that Australia won't be impacted as much as many nervous nellies think.

In fact many investors have forgotten the lessons of the GFC: Australia was roughed up, but we escaped the mauling that the US, Europe and the UK received.

The slump in the global economy didn't hit as hard as it could have because we were hitched to China.

That could be repeated this time around because the only outstanding point from the last month's data flow around the world is that the Chinese economy, though slowing and suffering from inflationary strains, is far stronger than the US or European economies.

Many local investors seem to be forgetting that, as do local commentators and analysts.

Reserve Bank Governor Glenn Stevens in his Brisbane speech on Wednesday certainly went out of his way to try and get Australians to understand that we are not doing as badly as we feel.

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"The impact of the resources sector expansion does get spread around, in more ways than might immediately be apparent.

"Obviously mining employs only a small share of the workforce directly - less than 2 per cent.

"But to produce a dollar of revenue, companies spend about 40 cents on acquiring non-labour intermediate inputs, primarily from the domestic sector.

"Apart from the direct physical inputs, there are effects on utilities, transport, business services such as engineering, accounting, legal, exploration and other industries. It is noteworthy that a number of these areas are growing quickly at present.

"Once the costs of producing the output and other factors - such as taxes - are taken into account, the remaining revenue is distributed to shareholders or retained.

"While a significant proportion of the earnings distributed goes offshore, local shareholders also benefit. In fact, most of us are shareholders in the mining industry through our superannuation schemes. We don't get this income directly to spend now - it is in our superannuation.

"Nonetheless, it is genuine income and a genuine increase in wealth.

"A good proportion of the earnings retained by companies is used to fund a further build up of physical investment, which imparts demand to construction and manufacturing.

"Based on the industry liaison the Bank has done, around half - give or take - of the demand generated by these projects is typically filled locally, though, of course, this amount varies with the nature and details of any specific project.

"So there are effects that spill over, even though it is not always easy to spot them. In the end the combination of the resources sector strength and all the other factors at work in the economy has, to date, produced a national rate of unemployment of around 5 per cent."

But he did have a warning that investors should heed: the outlook for retailers isn't good, as we can see from the collapses of Borders, Angus and Robertson and the Colorado Group of chains (Jag, diana Ferrari, Mathers, Williams and Colorado stores).

That's down to a combination of two factors: the high dollar and the cutback in spending made by cautious consumers who are saving rather than spending heavily as they did before the GFC.

Mr Stevens said in his speech:

"For as well as conveying a rise in purchasing power to consumers, the high exchange rate is exerting a powerful force for structural change. I think we are seeing this in the retail sector.

"The rapid growth of internet commerce - from a very small base - has been the topic of considerable discussion.

"This was bound to happen anyway with technology.

"But with the higher Australian dollar, the component of the retail 'product' that is added in Australia - the local distribution and retailing overheads that are required to provide the retail 'experience' - has become both much more visible, and much higher relative to the production cost of the good itself.

"So the incentive for the consumer to avoid those overhead costs has increased quite noticeably.

"The retail sector is therefore under pressure to reduce those costs."

And Wednesday saw the release of the May consumer sentiment survey from Westpac and Melbourne Institute.

And buried were these findings:

"The attitudes of respondents to the wisest place for savings are consistent with the concerns about their finances which are apparent in the main survey. Consumer caution dominates savings decisions in this survey.

"There has been another significant shift in preferences towards low risk investments.

"The proportion of respondents who nominated bank deposits as the wisest form of savings increased from 27.1% in March to 32% in June. Since 1979 this proportion has only been exceeded in December 2008 and March 2009.

"The proportion of respondents nominating "pay down debt" as the wisest place for savings rose from 22.6 to 23.9 - exceeded only in September 2009 and March 2010 since 1997.

"In contrast, the proportion of respondents nominating equities as the wisest place fell from 12.2% in March to 8.4% in June - the lowest proportion since the early 1990's recession (excluding the GFC period in 2008-09), while "real estate" did not fare much better falling from 16.3% in March to 14.6% in June, down from 21.7% a year ago and the lowest proportion in the history of the series back to 1974 (excluding the GFC)."

That's bad news for retailers and shares and good and bad news for banks.

The good news is that consumers think banks are good places where to invest their money, meaning the banks will be able to harvest more local deposits and reduce their offshore borrowings.

But as senior Reserve Bank officials and some analysts have pointed out, that's also bad news for the banks because it means they face a period of taking in more money than they can lend out for housing, business, share buying and consumption.

These two points are probably large longer term threats to local shares and retailers and banks in particular, than the gyrations on markets offshore, for the moment at least.