What a country!
That’s what good old Yakov Smirnoff, the Russian comedian, always used to say when he was at a loss for words. He said it about the amazing things he saw in America as an immigrant. We say it about the amazing things we see in our new homeland, Australia, and its amazing share market.
“Booming markets across virtually all asset classes in April mean Australian super funds are heading for their best return in a decade,” reports Alex Tilbury in today’s Courier Mail. “About 80 per cent of workers’ retirement savings – which are locked away in default funds that are usually balanced – returned 13.5 per cent on average in April, according to SuperRatings.”
We have worked hard to explain why these returns are anomalous. Why a country without a recession for 15 years should be on guard. And why the proximity to China’s boom is great on the upside, but risky on the downside. But we are reminded of another comedian with an accent. “I know nuttink!,” said Sergeant Schultz on Hogan’s Heroes. And here at the Old Hat Factory, we like to say that just to stay humble.
Veee know nuttink!
Still, we have a calculated forecast of just how high the melt up could take us by year’s end. It really comes down to supply of capital and demand for equities.
First, there are a couple of sources of new supply. You have official foreign exchange reserves, mostly accumulated by countries generating huge trade surpluses with America. You also have continued petro dollar surpluses from OPEC nations, Russia, and Venezuela. You have government surpluses in countries like Australia.
More and more budget surpluses are being racked up in commodity producing countries where royalties have produced huge windfalls. You’re also seeing budget surpluses in those countries where resource companies are being nationalised and profits accruing to the state rather than shareholders. This money is being set aside in what Stephen Jen of Morgan Stanley calls a “sovereign wealth fund.”
The money set aside in the fund is designed to offset future public pension and retirement liabilities, to make good in the future promises that pandering politicians are eager to make today. But there is increasing pressure from legislatures to invest this money in the markets, lest the government-flush with its surplus tax revenue-miss its fair share of the boom times. So all of the money in these sovereign wealth funds in places like Korea and Japan could soon find its way directly into the equity market through actively managed funds, rather than say, into actively mismanaged U.S. bonds.
How much filthy lucre are we talking here? Well, Jen reckons there’s about USD$2.5 trillion is these new national slush funds, waiting to be invested somewhere, anywhere. On top of that, the OECD reckons that global forex reserves are about USD$5 trillion.
As is our wont, let us be conservative and say in a global melt-up scenario you could see, say USD$5 trillion in additional money invested into the equity markets. Total global market cap, according to the World Federation of Exchanges, is just over USD$50 trillion.
That would mean just a modest 10% rise in total world equity market cap if sovereign wealth funds and forex reserves make it into the equity market. Locally, that would translate into say, about a 650 point increase in the ASX/200, taking us to 7,000 in short order.
But I think it will probably be much larger than that. Why? Well, the Shanghai index has been rising at a clip of one per cent per day. Ten percent…is just two weeks’ work for that market. But the bigger gains will come from asset management companies and private equity firms floating share on the public markets.
for Markets and Money