My children are desperate to go to Australia. Some of their friends moved to Perth late last year, and they think we should go and see them. I think so too. Just not yet.
I’ve spoken to two people recently back from Australia, and both of them were almost unable to discuss anything about their trip except for the cost. The pound is weak, the Australian dollar is strong – and that makes a round of ice creams pretty pricey.
But for how much longer? Australia has recently done two things that suggest the answer might be “not much”. The first is the Significant Investor or ‘golden ticket’ scheme.
Under this, anyone who has A$5m to spare gets a fast track to residency with most of the usual requirements waived. If they put the money in the right investments and spend 160 days in the country over four years, they get to apply for permanent residency. It’s remarkably similar to the schemes available in several European countries (including the UK) and under discussion in Spain.
In Madrid, they’re suggesting that if non-EU citizens were to spend €160,000 on a house, they would get permanent residency chucked in for free. In Portugal, they’re setting the bar at €500,000.
You might say that there is a big difference between being so desperate to prop up your wrecked housing market that you’ll let anyone in for €160,000, and insisting on an investment of A$5m. But there isn’t that much of a difference.
There seems to be agreement in Australia that this is really about making it easy for rich Chinese people to invest in high-end residential developments. And given that once you have stepped over what some might consider a moral line by putting the right of residency up for sale, the question is no longer about the motivation, it’s really only about the price.
This week, Australia also fired its first shot in the currency wars by cutting its benchmark rate to a record low.
Clearly, this isn’t going to have much impact right now. Japan is planning to double its monetary base; the UK has negative real interest rates and a base rate stuck at a 300-year low (Australia only has a 59-year record, so it can’t beat us on this one); the US has agreed to keep shovelling $85bn a month into its economy; and there have, according to Merrill Lynch, been over 500 central bank rate cuts since 2007, with South Korea and Poland joining in this week.
So a half-point cut is the kind of feeble beginning that will be sniffed at by the other central banks of the West. It is, as one of my colleagues puts it, “a pop gun in a firefight”.
However, what these two starter policies do is to make clear that Australia isn’t quite the financial safe haven many like to think it is. The mining supercycle has given the country a dose of the Dutch disease – strong demand for commodities and a flow of foreign investment into mining has done wonders for some, but the consequent strength of the dollar has squeezed manufacturing. That’s left Australia nastily vulnerable to China’s slowdown, since about a quarter of its exports – mostly minerals – go there.
At the same time, the dollar has been a beneficiary (or victim) of the carry trade: relatively high interest rates have pulled in foreign capital from around the globe. But now, with commodity prices and mining investment falling, the weakness of the underlying economy is being exposed.
Despite a decade-long resources boom, Australia has been running a current account deficit; it has one of the few credit and housing bubbles in the world still left to pop properly; and on top of that, a banking system that analysts refer to as “capital light”.
It is all, GMO’s James Montier told me at the London Value Investor Conference this week, “an accident waiting to happen.” That’s something the Reserve Bank of Australia (RBA) is clearly aware of: when it cut rates last year, it said publicly that the plan was to boost housing and business investment as mining investment peaked.
That hasn’t happened, hence the rate cut. This time, the RBA is presumably hoping not just to boost housing but to push the currency down enough to give the manufacturing sector a fighting chance of survival. And “this time” is unlikely to be the last time.
While I was with Montier – someone considered something of a guru by diehard value investors – I asked what we should do with our money at a time when there are no safe havens left and when almost every country in the world is relying on the doomed-to-failure strategy of currency debauchment to save their economies.
His answer was far too honest: he doesn’t know. This, he says, is “the hardest market to be an asset allocator in” he has seen in his career.
The best investors can do, given the range of possible outcomes from here, is to avoid low-yield sovereign bonds, because with yields this low, the best-case scenario is that you make a minute amount of money on them. The worst is that you lose a great deal, something that could happen if any central banks abruptly stopped buying their own country’s bonds via their quantitative easing programmes.
Investors should keep holding the high-quality dividend payers we have all been buying for years; they should look for value where they can (mostly in Europe); and hold a great deal of cash so that they can take any new opportunities to buy cheap assets when they arise.
What might those opportunities be? If you are interested in buying yourself residency in the lucky country, I’d keep an eye on the price of a golden ticket. In sterling terms, it’s currently £3.25m. It should at least start coming down soon.
• This article was first published in the Financial Times.