Will Australia be lucky again?
02 September, 2015
In 2011 Australia looked like its luck had finally run out. Both its economy and share market were stressed by fears of weaker prices for the commodities it sells. But in keeping with its long record of success, Australia defied sceptics and made its own luck, growing its economy and delivering positive share market returns. 2015 has seen a return of the same concerns of four years ago: softer commodity prices and fears of a weaker China. Is Australia as strong and adaptable this time around?
Resources companies are the most vulnerable because China is their major customer. Resources shares now comprise only 15% of the Australian share market as compared to more than double that in 2011. Globally competitive resource heavyweights, BHP Billiton and Rio Tinto, dominate today's resources sector. So exposure to the most vulnerable sector is lower than it was, and is in strong companies.
In many countries, low interest rates have tempted companies into taking on more debt. Australian management teams however have kept debt well below pre-GFC levels. Less debt leaves Aussie companies better positioned to weather difficult periods.
The Australian government is in a stronger position to support the economy than many of its global peers. Australia's government debt is five times lower than comparable countries, so Aussies can borrow and spend to stimulate their economy. With official interest rates at 2%, Australia's central bank also has more room to cut rates than any other large developed economy.
One development we like less is sensitivity to the housing market. Australians have borrowed heavily to buy ever more expensive houses, and the banking sector holds these same houses as collateral against huge loan books. A weaker housing market clearly presents risk.
So will Australia need to get lucky to face current challenges? Well, a little luck is always welcome, but Australia is better positioned to face these uncertainties than it was, and continues to prove its capacity to evolve and become stronger over the long term.