Reasons to be less worried about Australia

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From Goldman:

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Resource stocks are less relevant: Resource stocks are now only 14.7% of the ASX 200, less than half the weight they were preceding recent market falls (they were 33% of the ASX 200 before the last correction in 2011).

 Less balance sheet risk: While corporate gearing has been rising across a number of developed markets driven by both increased M&A and large volumes of share buy-backs, Australian firms have remained relatively conservative. The median gearing level of ASX 100 firms (net debt/equity) currently sits at 40%, well below the pre-crisis peak (55%).

 More room to move: Australia’s government debt sits at only 23% of GDP, well below the DM average (110%), leaving significantly more scope for fiscal stimulus if global growth continues to weaken. Similarly, with the cash rate at 2% Australia’s central bank has more room to ease than any other DM.

I’m sorry to say that none of these is a reason to be less worried about Australia:

  • the point about resource stocks is not market cap it is profits. As they are decimated then so will be national income, hammering the wider services economy;
  • low leverage? Christ, try the most levered households in the world which will be on the receiving end of the income shock;
  • 2% of rate cuts will do nothing in an environment of vicious headwinds, not least because bank interest rates will be rising meaningfully so they will keep 50bps for themselves and we are unlikely to be able to cut below 50bps owing to the CAD, so there is only 1% anyway;
  • fiscal policy has some room but nowhere near enough to offset the above as it is tied up in supporting the bank’s credit ratings that will be downgraded if net debt-to-GDP rises to 30%.

There are plenty of reasons to be much more worried about Australia than other developed markets.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.