Australia retains excellent assets for the future, but only if it accepts the risks mainly related to the financial sector.
The country is not celebrating. In the first three quarters of 2023, the lucky country grew by 2%. For 2024, it will slow down again to no longer exceed 1.5%. These are honourable figures, but they are hardly a dream in a country accustomed to outstanding economic performance. Should we still invest in it? We think so, provided we are prepared to tolerate high-risk exposure.
Expensive credit weighs on domestic demand
The underperformance of the Australian economy can be explained first by a domestic demand strongly impacted by the increase in credit. Still close to 0% until the first months of 2022, Australian rates soared rapidly, reaching 4.3% after the last rise in key rates, agreed in November. Australians are among the most indebted households in the world – private sector debt is close to 180% of GDP.
Decades of low interest rates and soaring house prices pushed households to take on more and more debt to acquire the property of their dreams and invest in this market, whose prices kept rising. Therefore, they are particularly exposed to high-interest rates, which make the debt charges explode. And at this stage, their consumption is affected.
This is especially the case since, at the same time, inflation remains high in the country (still at 4.3% in November), which erodes purchasing power. The Australian consumer is struggling and will still be in 2024.
Investment is also slow to take off. At the beginning of 2022, on the eve of the first interest rate hikes, the Australian Treasury announced that the construction sector was directly or indirectly weighing 13% of the country’s GDP and generating ¼ of employment. If it is true that the gradual decline in interest rates will gradually revive the sector, the latter will only have to resume its shape from 2025, which will not fail to slow the recovery.
Finally, if the Australian government has let go of public debt during the pandemic to exceed 60% of GDP, it is determined to control it better. Public spending will, therefore, be limited to put public debt on a good path. That is not where we will have to wait for a significant economic boost.
Exports are performing better
Given that China is Australia’s largest customer and Chinese demand remains anaemic and is slow to recover its dynamism of yesteryear, one might think that Australian foreign trade would also be struggling. This is not the case.
By once again focusing on heavy infrastructure investment, Beijing has failed to get its economy back on track but has helped Australian exports. At the same time, energy supply difficulties have prompted renewed interest in Australian coal.
These factors contribute to a gain of more than 9% for Australian exports in 2023, and they still look dynamic for years to come. Foreign trade will, therefore, be one of the engines of Australian growth in the coming years.
If the country is currently experiencing a vacuum, it must be recognised that it still has many things for the future first because it is a country with good governance and relatively sound finances (AAA rating), which is inserted in an Asia-Pacific region with immense potential.
In terms of the domestic market, its demographics are still very promising due to its ability to attract talent from Asia and elsewhere, which keeps its workforce growing. By mid-2023, the population had grown by 624,000 compared to 2022, a 2.4% year-on-year growth.
Most of this gain (more than half a million people) comes from selected immigration. This helps to establish the potential for Australian growth at a high level and will eventually restart the real estate and construction market.
The outlook is also suitable for exports from the lucky country, which is rich in raw materials and especially mineral resources. If some point to Australia for its coal exports, it must be recognised that the country is a power of mineral resources necessary for the energy transition.
The country has substantial reserves of lithium, copper, and nickel and will, therefore, continue to attract investment in this sector. In the medium and long term, Australia seems to have a bright future.
With a gain of less than 11% in 2023 (price and profits, in €), the Australian stock exchange experienced a relatively disappointing year. The composition of this market is essential. The financial sector accounts for nearly one-third of MSCI Australia.
As interest rates rise, an increasing number of households face increasing difficulties in coping with debt charges and the default rate increases, complicating the outlook for this sector.
As for the mining sector (1/4 of the index), it may be essential to the energy transition, but it remains unloved by investors. Health and pharma (11% of the index) are also not fashionable, nor are real estate (6%). So that’s more than ¾ of the Australian stock exchange, which comprises sectors that are not very popular with investors. On the other hand, information technology does not even represent 2% of the index.
This market does not excite investors at this stage but still has excellent assets. The high weight of the financial sector is a significant risk at a time when defaults remain on the rise.
Nevertheless, cheaper than the global index and offering dividend levels twice as high as the latter, the Australian stock exchange is certainly not without interest.
It, therefore, remains present in our dynamic portfolio as a diversification.