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Jul 05, 2016
In our last article, where we launched Frank Legal’s Business Advisory team, we explained how one of our core purposes is to empower you by providing you with insightful knowledge. Today’s article helps explain why we are bullish about the business opportunities in Australia!
The United Kingdom’s (UK) decision to leave the European Union (EU) has resulted in a plethora of headlines declaring Brexit (Britain’s Exit) to herald catastrophic consequences for global markets on a comparable scale to the 2008 Global Financial Crisis. While I am not a financial prophet or a financial guru, I do believe economic analysis reveals the grossly exaggerated nature of these claims.
The following headlines reflect an excessive focus on negativity. For instance, “Brexit fallout set to rattle markets” (Financial Review,26/6/16, M Mulligan), “Recession in EU ‘very scary’ prospect” (Financial Review, 27/6/16, V Poljack, J Chessell, J Thomson) and comments such as “this is probably the most disastrous single event in British history since the second world war” (Financial Review, 26/6/16, M. Wolf) . [1]
Here are 3 main reasons why I think Brexit is good for the Australian economy and Australian investors.
- The reality
As a combined bloc it is true that the EU is the second largest source of foreign investment in Australia and the largest source of service export by Australia. However, this is mainly made up of trade between Australia and the United Kingdom and Australia and Germany.
In 2015 the total 2-way trade between Australia and the EU was $89,396 million. Of that amount the United Kingdom represented $23,225 million and Germany represented $18,575 million. Thus accounting for more than 50% of the 2-way trade.
Interestingly the United Kingdom was 7 on the list of 2-way trade partners behind China, United States, Japan, The Republic of Korea, Singapore and New Zealand. Germany was 11th on the list behind Thailand, India and Malaysia.
In this Asian Century it is indisputable that Australia’s main trade partners do not lie in the Old World of Europe, but in the new World of Asia.
This notwithstanding, there are enormous opportunities for bilateral trade between Australia and the United Kingdom. Membership of the has prevented Britain from negotiating its own bilateral trade deals.[2] It is important to note that the EU’s restrictive agricultural policies have played a large part in preventing agreements with other agricultural exporters such as Australia.
Brexit thus provides immediate opportunities for Australia to strengthen its relationship with the United Kingdom. The UK is currently facing an uncertain economic future and Australia, with a bit of entrepreneurship, can rekindle the imperial links of old to great economic advantage. Opportunities for our agricultural sector loom large.
Similarly, it is unlikely that Australia’s trade relationship with Germany will change drastically as a result of Brexit. As Thucydides observed as far back as the 5th century BCE, states act in their national interest. It is not in Germany’s national interest nor Australia’s national interest for the relationship to deteriorate at a time of instability in the global market.
Interest Rates
Much talk has been made about the potential domestic impacts of Brexit. One of these mooted impacts is a further reduction in interests rates by the Reserve Bank of Australia. Business Insider Australia have cited the Australian cash rate futures which put the odds of another rate cut by August at around 90% and another rate cut in November at around 33%.[4]
While the events of the last week have shown that anything is possible, I firmly believe that as interests rates race toward to 0 the RBA will be very hesitant to alter rates in a knee jerk reaction.
In any event, the fact is that the market is predicting an interest rate cut before an interest rate rise. This is good for housing stability, the lowering of the Australian dollar, Australia’s export sector and Australia’s tourism sectors. The lower interest rates have positive knock on effects for domestic growth, export growth and the strengthening of the Australian economy.
Other Investment Opportunities
The volatility in globalised financial markets and the consequent loss of returns mean that exposed global investments will become less appealing and other investment opportunities, such as domestic businesses and real property, will become more appealing to investors.
The lower interest rates, the lower Australian dollar and government investment incentives could open up domestic investment in Australian trade export exposed businesses.
As Australia continue to diversify its economy and transition out of the mining boom which has underpinned our economic growth for the last decade, domestic business needs capital to enter the booming Asian markets. The appeal of these types of business investments over highly exposed globalised financial markets could entail a growth in domestic investment. This has the potential to strengthen the Australian economy through innovation and assist in transitioning Australia from a dig-and-sell economy to a high-end service/product economy.
Property Market Boost & Maintenance
Australians know that the past 3 years have been mental for property in Australia’s east coast capital cities. Sydney has seen a price rise of 57.5% since May 2012 with house prices rising nationally 36.6% in the same period.[5]
A number of economists and bodies have expressed some concern with the rapid rise of property prices in Australia. In an article I wrote at the end of 2015 I detailed how I thought the property market could be in for a correction if a number of external factors eventuated. These included employment, a global shock or an interest rate rise.
While some might argue that Brexit is this ‘external global shock’, the RBA still has a number of levers it can pull. On top of this we have seen the banks start to self-regulate investment in Australia by restricting lending to some suburbs that they believe are overvalued.
To compound this, investors will shift from the financial markets into stable investments with higher yields, promoting less speculative investment in property with a focus on the longer term, higher yielding investments thereby stabilising the property market and insuring it against a major down turn.
On top of these elements is our seemingly stable unemployment level.
Understanding the above it seems very unlikely that Australian property will, overall, undergo a major correction. So long as most people want to live in capital cities, the immutable laws of supply and demand will ensure that these cities will have strong and vibrant housing economies. This is not to say that property markets in regional, mining exposed centres won’t be affected, they will. The people who bought in those towns at the height of the mining boom will necessarily suffer losses however this is free market economics - high risk, high reward.
New Trade Agreements
In 2015 Australia and the EU announced that they would enter discussions with regard to a Free Trade Agreement.[6] As a result of Brexit and the loss of one of Europe’s most stable economies, these discussions are likely to be accelerated. As the EU seeks to prevent further losses to Asia, canny Australian statesmen and stateswomen can maximise this sentiment to create new trade opportunities for their respective industries.
As discussed above, Brexit provides Britain with freedom to chart a new course in a globalised world and Australia has a significant opportunity to enter into a free trade deal with Britain.
Conclusion
Over the past week we have alarming rhetoric about the market volatility caused by Brexit, about how the economy is on a downward spiral and that we should brace ourselves for the negative impacts. I have endeavoured to challenge the empirical basis of this alarmist rhetoric.
Brexit can be good for Australia. It can promote new export/import markets, it can promote domestic investment and growth in innovative businesses driving our economy forward, and it can provide stability in the housing market through changing investment strategies.
In my opinion it is time to ignore the headlines and focus on the game that is in front of us.
A wise man once told me, you can only control what you can control. Maybe it’s time to control what we can control.
This article was written & edited by James Frank, with the assistance of Tim Cargill.
Sources
http://www.businessinsider.com.au/australian-house-prices-are-surging-again-2016-6
http://dfat.gov.au/trade/agreements/aeufta/pages/aeufta.aspx
http://www.afr.com/markets/brexit-shock-waves-to-further-rattle-markets-20160625-gprzuu
http://theconversation.com/what-leaving-the-eu-would-really-mean-for-british-trade-deals-56756
[1] http://dfat.gov.au/about-us/publications/trade-investment/australias-trade-in-goods-and-services/Pages/australias-trade-in-goods-and-services-2015.aspx
[2] http://theconversation.com/what-leaving-the-eu-would-really-mean-for-british-trade-deals-56756
[4] http://www.businessinsider.com.au/after-brexit-markets-see-another-rba-rate-cut-as-a-certainty-2016-6
[5] http://www.businessinsider.com.au/australian-house-prices-are-surging-again-2016-6
[6] http://dfat.gov.au/trade/agreements/aeufta/pages/aeufta.aspx
