Australia Is The Lucky Country
Certainly when backed by the property market – but what of risk and the shadow of rumoured rate rises?
4 min
OPINION
The end of financial year normally marks an annual ritual of self-assessment.
Which really means a financial appraisal of one’s investment portfolio performance relative to the market, as well as creating financial goals for the next 12 months.
A key takeaway from living through the extraordinary circumstances due to Covid-19 is, of course, to expect the unexpected.
According to Credit Suisse, Australians have become financially the wealthiest people in the world. This has been driven by the ongoing performance of our two principal sources of wealth – housing and financial assets, underpinned by robust GDP growth.
With record-low interest rates, asset prices have essentially experienced a boom — house prices being the largest contributing factor by adding an extra 7 trillion dollars to Austraila’s net wealth.
Whilst still within the epicentre of the pandemic, Australia has performed remarkably well, notwithstanding international border closures and associated lack of tourism and international students.
Remarkably, the construction industry and certain property types, such as units, have not faltered despite limited international immigration and a substantial exodus of temporary residents from Australia.
In fact, due to record iron ore prices and an increase in demand for mining products in combination with an elevated Australian dollar, we are one of only three countries in the world with GDP now higher than pre-pandemic levels. Again, Australians have collectively fared much better compared to the rest of world.
As a result, the extraordinary V shape recovery is placing pressure on supply chain constraints and the combination of labour shortages resulting in ‘inflation bells’ sounding the alarm.
In line with my last article, inflation confidence, the current debate over inflation is becoming the number one “hot” economic topic, as the risk to the economy and its stability is based on interest rates remaining low in the medium term.
We are presently operating under the Reserve Bank’s proclamation that interest rates will remain unchanged until 2023. Ultimately, interest rates may need to rise earlier to combat inflation if required. This will inevitably deflate most asset classes modestly at best, or, at worst, will result in a crash and economic recession. As the market grapples with the two opposing views on whether inflation is transitionary or not, we should anticipate more volatility and heated debate on this topic.
It is Msquared’s view that inflation is indeed transitionary and that the government will intervene in the investment property market if or when required to ensure the market does not overheat.
We believe that if the government is unable to open international borders at the end of the year — and manage the vaccination rollout more effectively — there is a real risk and impact to both economic fundamentals and our overall business consumer confidence.
In considering the current economic environment and the uncertainty created by Covid-19. How can investors continue investing with confidence?
The collective wisdom of the greatest and most successful investor’s such as Warren Buffet, Jack Bogle, George Soros and Ray Dalio, just to name a few, put it down to a simple formula of the following:
- Understanding risk.
- Diversification across asset classes.
- Ensuring that you are constantly invested in the market irrespective of the current market cycles.
Put simply, the understanding of risk is the appreciation of the loss of capital relative to the reward. Most investors’ attention is drawn to the promises of return rather than an assessment of any downside risk, such as the possibility of losing capital.
Ultimately, once an investor experiences capital losses one of two behaviours emerges:
- The fear of investing
- Taking an even greater risk on future investments in an attempt to recoup the loss.
Either strategy is essentially a disaster long-term.
Understanding and appreciating risk is a learnt skill and you can now tap into the acquired knowledge which suggests:
- To pause the temptation of trying to predict the market.
- Not to follow fads and trends.
- Not be swept up in the emotion of the moment.
As a result, we are experiencing structural changes to the investment market, there is excess capital and higher asset prices result in yield compression across all the markets. Demand for mortgages and alternative investment has never been higher. Investors are seeking higher returns due to favourable economic market conditions with disregard to the higher risks, which is a clear danger to investors if not managed appropriately.
Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Competitive pressure and creativity have made Chinese-designed and -built electric cars formidable competitors
4 min
China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter of 2023 it dethroned Japan as the world’s largest auto exporter.
How is China in contention to lead the world’s most lucrative and prestigious consumer goods market, one long dominated by American, European, Japanese and South Korean nameplates? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism. Western policy makers and business leaders are better prepared for the first two than the third.
Start with industrial policy—the use of government resources to help favoured sectors. China has practiced industrial policy for decades. While it’s finding increased favour even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidising inferior and wasteful capacity, including in China.
But in the case of EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decade-long interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favour electric vehicles.
In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidised, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.
While industrial policy guaranteed a demand for EVs, protectionism ensured those EVs would be made in China, by Chinese companies. To qualify for subsidies, cars had to be domestically made, although foreign brands did qualify. They also had to have batteries made by Chinese companies, giving Chinese national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.
To sell in China, foreign automakers had to abide by conditions intended to upgrade the local industry’s skills. State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany’s Mercator Institute for China Studies.
Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specialising in the Chinese auto industry.
Back in 2011 Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart from its American counterpart. “In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said, according to Fast Company, a technology magazine. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”
Thanks to that competition and focus on execution, the EV industry went from a niche industrial-policy project to a sprawling ecosystem of predominantly private companies. Much of this happened below the Western radar while China was cut off from the world because of Covid-19 restrictions.
When Western auto executives flew in for April’s Shanghai auto show, “they saw a sea of green plates, a sea of Chinese brands,” said Le, referring to the green license plates assigned to clean-energy vehicles in China. “They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that’s the other holy s— moment—they’ve caught up to us.”
Manufacturers of gasoline cars are product-oriented, whereas EV manufacturers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke (quickly copied by Tesla). Meanwhile, Chinese suppliers such as CATL have gone from laggard to leader.
Chinese dominance of EVs isn’t preordained. The low barriers to entry exploited by Chinese brands also open the door to future non-Chinese competitors. Nor does China’s success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and deeply woven technological capability—such as software, cloud computing and semiconductors—matter more.
Still, the threat to Western auto market share posed by Chinese EVs is one for which Western policy makers have no obvious answer. “You can shut off your own market and to a certain extent that will shield production for your domestic needs,” said Sebastian. “The question really is, what are you going to do for the global south, countries that are still very happily trading with China?”
Western companies themselves are likely to respond by deepening their presence in China—not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jörg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a “fitness centre.” Even as conditions there become steadily more difficult, Western multinationals “have to be there. It keeps you fit.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
