Why Australia has become a prime target for global investors: Gottliebsen

As the US dollar declines amid a sea of liquidity in global markets, two catch cries are going up around the world. The first is: “Buy equities not debt.”

Last night we saw the private equity group Blackstone looking to sell to the market equity in eight of its private equity investments because it wants to take advantage of the strong demand for shares.

And at the same time there is little or no demand for high yielding interest bearing securities, so the old highly leveraged private equity structures are simply not repeatable. The Myer float is a local example of the same forces.

Institutions around the world don’t want to buy interest bearing securities because of the difficulties with currencies and the threat of inflation. So they are going for real assets led by equities but including oil and copper.

A year ago when the G20 leaders and the global central bankers planned to flood the markets with liquidity and low interest rate debt they had no concept that they would quickly restore the cult of equity and spark a major rise in shares.

The second catch cry is: “Aussie, Aussie, Aussie – buy Aussie.” The reasons behind the Aussie catch cry will lead to some fundamental changes to our society. In simple terms we are being classed as part of the Asian market because of our rising population and big investment in infrastructure, which makes us very different to the US and Europe.

Last week when there was a correction to the market, I set out the forces that were driving the market lower, led by concerns that traders had boosted the price minerals beyond levels justified by the demand and supply forces. I then concluded that to reverse the trends would require confidence that liquidity is not in danger – China would need to cast aside slow-down stories and the market would need to see strong October quarter profits in the US. And that’s exactly what happened.

In the US the lower dollar is giving companies with major global assets a significant profit boost. At the same time they have substantially reduced their costs. And while in Australia we are slowing down the stimulus, I am not seeing widespread calls for a slow down in the US and Europe.

But the key to just how long the two catch cries of ‘equities’ and ‘Australia’ will continue depends on China. Currently it is using its banking community to pump up growth. In the longer term it needs to establish strong consumer spending to replace the looming consumer decline in the US.

Morgan Stanley’s Stephen Roach, in his book The Next Asia, warns that it is not going to be easy to synchronise these US/China consumer movements and warns that the recent massive increase in lending by China’s banks might have delivered a fast recovery, but has not delivered the required boost to Chinese consumer spending. There will be many bad loans among all that lending.

But as China buys assets around the globe it is also part of the equity play. These trends may not be sustainable in the long term but that’s of no concern to a liquidity driven equity market.

This article first appeared on Business Spectator.