International and Global

Investment Trip Notes: Australia & New Zealand

The growth that many had grown accustomed to, and 36% of the whole population have known nothing different from, is now needing ever more heavy lifting from the government and Reserve Bank to maintain.
January 2020

Sitting in my Sydney hotel room preparing for my meetings the following day I suddenly noticed a very strong smell of burning. That’s not normally a good thing in a hotel, so I was quickly in the corridor investigating. The smell was even stronger there, but through the large windows opposite my bedroom door I could see that the source of the smoke wasn’t anything inside the hotel as clouds of blue smoke were billowing down the street towards the building. In fact the fire was 100km away and heralded the beginning of the current phase of this year’s very severe bushfire season.

As I write this several weeks later, the fires are significantly worse and now nothing less than a lack of forest to burn or a prolonged cool, wet period in the height of summer will put them out. Whether the severity of the fires is part of a natural cycle, the consequence of preventative burning programs being cut back under pressure from environmental groups or the direct result of Australia, as a country, dragging its feet in respect of global climate initiatives will be the subject of intense debate. My view, that all three factors are relevant, is too dull to be getting much airtime yet. What is certain though is that this is the last thing Australia needs at the moment, even beyond the obvious and manifold personal tragedies involved.

Having side-stepped the GFC and the collapses in commodity prices and oil in 2014 and 2015, despite being a significant producer of both, Australia’s 27 year record of uninterrupted economic growth has started to look a bit vulnerable. A multi-year run in residential property prices fuelled largely by debt, followed by a highly public shaming of much of the financial services industry during the 2018 “Royal Commission” has left everyone feeling rather cautious and economic growth is now the slowest it has been since 2009. There are still positives – the heat has come out of the property market reducing the risk of a major crash, government finances look very strong compared with pretty much anywhere else and the Australian dollar is much closer to fair value than it has been for many years. However the growth that many had grown accustomed to, and 36% of the whole population have known nothing different from, is now needing ever more heavy lifting from the government and Reserve Bank to maintain.

On my trip, and in the week prior, I met senior executives of two of Australia’s big four banks. They were all still reeling from the aftermath of the Royal Commission and, alongside their two peers and much of the life insurance and financial advice industries, are waist-deep in historical paperwork. They are all trying to work out whether the advice given by employed or affiliated advisers up to 10 years ago was appropriate, or indeed whether it was given at all! There were numerous examples of “fee for no service” that were examined by the Commission. Just the cost of undertaking this work is eye-wateringly expensive and that’s before any client receives a cent of compensation. They have all made very large provisions over the last year but freely admit they have no certainty about what the final numbers will be. There will be a time to hold an Australian bank for our clients, but it’s not arrived yet.

Also on my trip I met two leading companies in the packaging industry. One in particular performed badly during the second half of 2019 on concerns that environmental campaigns against unnecessary packaging would present a severe headwind to their growth. It may, but the company specializes in high-end “flexible” packaging which the world’s best known brands need to promote, preserve and differentiate their products and that market isn’t going away.

Meetings with companies in telecoms, resources, waste management, plumbing fittings, wealth management, engineering, recycling, shopping centers, and beverages and with a number in New Zealand too filled the trip and left me with plenty of follow-up for dark January days in the UK.

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Pyrford International Ltd is authorized and regulated by the Financial Conduct Authority, entered on the Financial Services Register under number 122137. In the USA Pyrford is registered as an investment adviser with the Securities and Exchange Commission. In Australia Pyrford is exempt from the requirement to hold a financial services license under the Corporations Act in respect of financial services it provides to wholesale investors in Australia. In Canada Pyrford is registered as a Portfolio Manager in Alberta, British Columbia, Manitoba, Ontario and Quebec. Pyrford is a wholly-owned subsidiary of BMO Financial Group, a company listed on the Toronto Stock Exchange (ticker BMO).

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