The End of the Aussie Investment Boom

What does the future hold for Australia’s economy? Well, if we focus on the economy for a moment (a quaint notion) then the story for Australia in 2013 is what will replace the mining boom. Today’s Financial Review reports that one of Australia’s largest contractors, UGL, will cut more than 700 jobs in response to a downturn in engineering work. CEO Richard Leupen reckons the sector faces the biggest structural change in a decade.

It’s all in response to the peak in mining investment, which should start showing up in the figures this year. Recently, contractor Monadelphous announced a near 40% increase in first half earnings on what it repeatedly described as an ‘extraordinary surge in construction work’. It made the obvious point that it wouldn’t repeat such strong growth.

The end of the Aussie mining investment boom looks like closely matching the end of the Chinese credit boom. Check out these charts from the RBA’s chart pack. The first one shows business investment as a share of nominal GDP. It’s approaching 19%, the highest level in we don’t know how long, but certainly for a few decades.

 

As you can see, investment levels really picked up at the start of 2000. This was around the time that ultra-loose US monetary policy, transmitted to China through the US dollar peg arrangement, began stimulating the Chinese economy. It needed resources to grow. Australia had the resources, but not the infrastructure to develop them.

Hence the investment boom to develop and ship these resources out of the country.

As the next chart makes clear, the real driver of the investment boom was the engineering sector…the contractors to the mining sector and the constructors of the huge resource projects. Having gone from a less than 2% share of nominal GDP to 7% in just over a decade, you can see why UGL’s CEO reckons the sector faces massive structural change, if investment (and China) has peaked.

Australia has a dwindling number of projects to sustain the boom. The RBA reckons it will be over in 2014. So they’re trying to generate a housing boom to take up the slack…an absurd idea if we’ve ever heard one, but certainly straight out of the central bankers’ playbook. And with faith in this playbook so high, it’s one the market whole-heartedly agrees with.

So if capital expenditure figures due out today prove disappointing, expect pressure to mount on the RBA to cut rates again in March…because cutting interest rates and debt monetisation fixes everything. Just ask Japan.

Except low interest rates will have a hard time fixing anything if you throw a stumbling China into the mix. And it IS stumbling…

More on China’s (and Australia’s) problems tomorrow.

Regards,
Greg Canavan
for Markets and Money

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From the Archives…

High Tide on Main Street?
22-02-13 – Bill Bonner

The Fed’s Funny Money is Losing its Mojo
21-02-13 – Dan Denning

Resurrecting BHP, the ‘Big Australian’
20-02-13 – Dan Denning

End of the Australian Boom?
19-02-13 – Satyajit Das

Bond Guru Still Likes the Unthinkable: US Treasuries
18-02-13 – Chris Mayer


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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