30/04/2008 - 22:00

Being judicious with risk

30/04/2008 - 22:00

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The ructions that have stirred up international financial markets this year and cast a pall over the global economic outlook would, you might think, make investors and business operators cautious.

Being judicious with risk

 

The ructions that have stirred up international financial markets this year and cast a pall over the global economic outlook would, you might think, make investors and business operators cautious.

There is certainly plenty of good reason for caution.

Banks have become much more restrained in their lending decisions, declining to back deals that a few months ago would have been almost assured of financial support.

Stock markets have been lacklustre at best, and in some cases decidedly weak.

Aggressive margin lenders Opes Prime and Lift Capital Partners have gone into administration and a third firm, Chimaera Capital, had to be propped up with an ANZ Bank capital injection.

The Australian dollar has continued to scale new heights, currently trading around a 20-year high at US94 cents.

That’s great news for importers, for consumers who can afford new cars and plasma television sets, and Australians planning an overseas trip, but it makes life tough for Australian exporters and for local producers trying to compete against imported goods and services.

Interest rates have risen sharply, as a result of increased official interest rates as well as higher wholesale rates, both of which feed into the funding costs facing banks and other lenders.

That means borrowers face higher costs.

It appeared earlier this month that the increases in official interest rates had come to an end, but unexpectedly high inflation data released last week – putting annual inflation at 4.2 per cent, well above the Reserve Bank’s comfort zone of 2-3 per cent – has the markets speculating that more rate rises are on the cards.

The future of the Australian dollar is equally hard to predict.

One of the main drivers of the exchange rate is meant to be a country’s trade balance.

Australia is currently experiencing record trade deficits, as the modest growth in commodity exports is swamped by a flood of imports of consumer goods and capital goods.

While coal prices and iron ore prices have risen dramatically, there have been equally dramatic jumps in the cost of imported steel products.

Currency traders seem to be focusing on the prospect of higher exports in future, especially as capacity expansions come on stream, and crucially the wide interest rate differential in Australia’s favour.

Against this backdrop, there is remarkable resilience in some parts of the financial markets.

In particular, new stock market floats are starting to emerge at a regular pace, and we’re not talking about blue chip companies with an established earnings record.

Iron ore explorers are emerging with great regularity, either through new floats or existing companies shifting their focus.

Similarly, coal exploration floats are starting to emerge.

Cast your minds back a year, and remember all of the uranium floats that were flooding the market?

Many of those companies are languishing, as the uranium price has dipped, political and regulatory hurdles remain in place, and the cost of drilling rigs stays in the stratosphere.

Australia uranium explorers are operating in nearly every corner of the globe, and good on them for showing some entrepreneurial flair.

But do the investors who back these companies understand the risks they are taking on? Let’s hope so.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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