The Infrastructure Story In Australia

Do you want the good news or the bad news?

I’ll give you the good news first.

According to a study by Boston Consulting Group (BCG), private wealth in Australia grew by 16% in 2014 to $3.52 trillion. According to BCG, this is largely due to the build-up of compulsory superannuation.

Although the study excludes the principle place of residence from assets, I imagine that a big increase in the value of investment properties would have boosted the wealth figure.

Either way, this ‘paper wealth’ is not really having the desired effect on the economy. According to an article in today’s Financial Review:

The Reserve Bank’s interest rate tool has been blunted by baby boomers saving rather than spending in response to a lower cash rate, research by ANZ Banking Group has found. 

The scarring experience of the financial crisis, declines in interest income and uncertain superannuation policy is compelling senior citizens to save more. This is reducing the effectiveness of RBA rate reductions aimed at spurring borrowing and spending to lift economic activity.

That’s interesting. The direct beneficiaries of this supposed big wealth increase, the superannuation-rich baby boomers, are cutting back on spending because of lower interest rates.

That’s monetary policy for you. It gives with the one hand and takes away with the other. That is, while lower interest rates create a wealth effect by inflating asset prices, it diminishes income levels of the ‘savers’.

But Australia as a whole isn’t a saving nation. We’re a net debtor nation, which means we borrow from foreigners to maintain our standard of living. So in the aggregate, lower interest rates do have a ‘positive’ effect on economic growth.

I say that tongue in cheek because lower interest rates aren’t really helping the Aussie economy. Which brings me to the bad news. Here’s another Financial Review article:

More than one-third of Australia is in recession, with a shrinking handful of locations generating most of its wealth, according to research that highlights the need for businesses and governments to make tough investment and spending decisions.

The groundbreaking work by accounting giant PwC shows that close to one in every five dollars of national income is produced by just 10 locations out of 2214 nationally, led by the central business districts of Melbourne and Sydney as well as the iron-ore-rich Pilbara in the north-west.

Australia now joins its northern hemisphere developed country mates in having a near recessionary economy propped up by asset price speculation.

I said that low interest rates weren’t really helping Australia. Let me qualify that. They are ‘helping’ to maintain a structurally unsound economy with asset price speculation at its core. Promoting this vast economic casino also promotes a broad array of ancillary services; insurance, real estate, lawyers, accountants etc.

The heightened activity in these services is certainly providing a boost to economic growth. But these services are not prime income generators.

We no longer have much in the way of ‘prime income generators’. Australia’s traditional manufacturing base is all but gone, killed off by the prolonged strength of the dollar over the past few years. Iron ore and coal have had their best years and prices are now heading back to their long term averages.

So as our primary source of income stagnates, we need lower and lower rates to keep the asset speculation and leverage process going.

Which is where we are now. That is, high asset prices making us ‘rich’ and low interest rates making us feel vulnerable and poorer. Oh well, we can’t have it both ways

Unfortunately, it’s only going to get worse. Interest rates will continue to fall as the economy grinds closer and closer towards recession. That will increase wealth and anxiety levels at the same time.

One of the few potential highlights for the economy is infrastructure spending. We’ve neglected it for so long, that there is a growing realisation that it now needs urgent attention.

Not surprisingly, governments and red tape are a part of the problem. As the Australian reports:

Australia should consider a funding method used in North America and Britain to plug the growing infrastructure gap in the nation’s cities and ease pressure on housing costs, a new report finds.

The paper from Aecom and Consult Australia, obtained by The Australian, estimates that between 10 and 30 per cent of the cost of infrastructure projects could be funded if the method used for Hong Kong’s metro and London’s $29.6 billion Crossrail were adopted here.

What method did London and Hong Kong use? Well, in London they basicallyfg taxed businesses that benefited most from the newly built infrastructure. In Hong Kong they developed shopping centres along new transport infrastructure and sold it to reduce overall costs.

As readers of Phil Anderson’s Cycles, Trends and Forecasts are well aware, when new infrastructure is built it delivers substantial unearned gains to nearby property owners. Phil calls this ‘enclosure of the economic rent’.

The idea proposed by the new report is ‘value capture’. That is, tax the windfall gain for the benefit of the community as a whole rather than hand it to a lucky few. Governments can then use the proceeds of this ‘value capture’ to lower overall project costs.

I have my doubts this will even get a look in in Australia, but you never know.

In my view, the infrastructure story is big one. It’s not just happening in Australia either. It’s a global phenomenon. I think there are a few Aussie stocks that will do well out of it. For more, check out my ‘Golden Age of Infrastructure’ report.

With Aussie banks looking increasingly like their bull run is ending, in my view these infrastructure players could be the next big thing.

Regards,

Greg Canavan+,
For Markets and Money, Australia

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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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