Hey, I’m confused. With the iron ore price taking a beating right now, surely this must mean bad news for Australia? Well, not if you ask the International Monetary Fund (IMF).
The IMF has just come out and put Australia’s growth rate for the next two years at over 3%. It also expects unemployment to go down.
Any extra jobs and cash is good news for Australian retailers. They need as much spending as they can get. Consumer confidence is apparently low, and income growth is definitely low.
Earnings aren’t hot in this sector overall. The market is currently downgrading many retailers too. Everyone’s spooked that Amazon is about to take a wrecking ball to the sector.
It’s going to…
This has been on the cards for some time. I remember reading about Amazon leasing office space last year. I fired my first warning flare then.
The official word from Amazon is now out on what it plans for Australia. The full retail offering is going to be rolled out.
Investors weren’t hanging around for the official word. JB Hi-Fi and Harvey Norman, by way of example, are well off their highs. It’s ambitious to think they’re going to reach those heights again anytime soon.
Lots of sales would definitely help with that. Maybe they can try and convince all the Japanese tourists coming here to buy something.
The Australian Financial Review reported yesterday that Japanese arrivals here are hotting up once again. Tourist numbers to Australia are up 24%, totalling 382,000 last year.
Previous to this, the Japanese hadn’t given Tourism Australia much to get excited about since the 1990s.
For all the perpetual doom around Japan, it’s interesting to note that the unemployment rate there is 2.2%. I find that an even more compelling statistic considering that Japan has a high penetration of robotics in its workforce. Robots don’t have to equal unemployment.
My view: There’s plenty of money that can come out of Japan and end up here in Australia. Tourists are one source.
The second is investment capital. Recently, I happened to see something on this that’s extremely important. It was the portfolio breakdown of Japan’s Government Pension Investment Fund (GPIF).
Don’t yawn — this fund controls over $US1 trillion in assets.
Here’s the deal: The zero interest rate policy from the Bank of Japan is forcing this fund to change its allocation mix. It’s shifted out of bonds and further into stocks.
In 2014, the GPIF held 48% of its assets in Japanese government bonds. As of December 2016, that was down to 33%. It’s split the difference between two sectors: Japanese shares and overseas shares.
Markets are never static. The bonds that GPIF holds have different time lengths. As some ‘mature’, the Japanese government pays them off and auctions new bonds with fresh maturities and payments.
The fund managers have to decide what to do. Do they reinvest the money back into the bond market or allocate it elsewhere? The GPIF set new limits in 2014 on their portfolio breakdown. They raised their exposure to shares.
They may need to do it again. The GPIF has to earn a certain return to pay out its obligations. The odds of them doing that by buying Japanese government bonds are not good.
They have a choice: Earn nothing in Japanese government bonds, or take on higher risk in either Japanese stocks or foreign assets. It appears the GPIF is directing new cash from bond redemptions into short-term assets.
These short-term asset holdings are now at the second highest level on record. That looks to me like the GPIF is waiting while it assesses what to do. You see, back in 2014, the ‘reflation’ trade in Japan was expecting to take Japanese yields higher. It hasn’t.
That’s left Japanese asset managers with a difficult choice. They can’t get the return they thought they could. But investing overseas means taking on currency risk. That can be hedged, but at further cost. Regardless, they may have no choice.
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GPIF head honcho Norihiro Takahashi has already expressed an interest in Donald Trump’s infrastructure plans. Infrastructure assets can give him what he needs — stable cash flows over the long term.
What’s true of the US is also true of Australia. Should the government decide to further invest in infrastructure, there’s plenty of Japanese investment capital around that can fund it.
Part of this money could — and I emphasise the ‘could’ here — flow into Australian stocks. The Australian stock market currently trades on a dividend yield of 4%.
That’s about average historically. See for yourself…
[Click to enlarge]
Notice how it has often gone much lower over the years. There’s certainly the potential for that to happen again.
What’s true of Japan is true of asset managers worldwide. Those in Europe and the UK are left with little choice but to look outside the bond market to generate the returns they need — unless government yields move up significantly.
Now, there’s no guarantee any of this money will come into Australia. Only that it could.
It may head into US, or European, or Chinese stocks. But, to my mind, there’s plenty of money that could still go into stock markets worldwide.
Don’t jump off the bull-market bandwagon yet.
Editor, Markets & Money