04/12/2013 - 05:18

Britannia’s investors run rule over Australia

04/12/2013 - 05:18


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Despite the old enemy’s comprehensive recent loss in the first Ashes cricket test, England’s rise as a sporting powerhouse has been rather annoying for Australians.

Despite the old enemy’s comprehensive recent loss in the first Ashes cricket test, England’s rise as a sporting powerhouse has been rather annoying for Australians.

And we might have something even more annoying to consider soon, because the British economy is starting to grow at a faster rate than Australia’s.

Unimaginable at any time over the past 20 years, the rise of Britain is one of the more interesting developments anywhere in the world of business, and is important to Australia for three reasons.

Firstly, it is a fabulous example of ‘currency power’, with the fall in value of the pound sparking a stampede of investment (and tourists) into the country.

Secondly, what’s happening in Britain today is a preview of what should save the Australian economy as our dollar is poised to drive below US90 cents.

And thirdly, the return of financial strength in the British economy should unleash a fresh round of investing in the Australian resources sector, one of the favourite destinations of rich Brits.

The latest economic data released in London show the British economy growing next year at around 3 per cent, and perhaps a bit higher, which is roughly the speed at which the Australian economy is growing.

The big difference is that Britain is accelerating and Australia is decelerating.

More is expected of the British economy, with job creation in the all-important finance sector growing at the fastest rate for more than a year and Stephanie Flanders, the chief European market strategist for investment bank JP Morgan, tipping five years of strong growth for Britain.

Ms Flanders told London’s Financial Times newspaper this week it was a common mistake to believe that good times or bad times continued forever, meaning that people often missed the turn in an economy.

Her analysis indicated any economy that sank into a recession, such as Britain’s had during the past decade, always made up for lost production. In the case of Britain, this represented the loss of around 12 per cent of growth that would now be recovered as it had been done in every previous downturn.

Because Australia has become more Asian focused, not many people understand the very close ties between our resources sector and the world’s mining finance industry, which remains headquartered in London.

British investors are inevitably first in, and first out, of the Australian mining industry, often enjoying the benefits of share price movements and currency movements in the same transaction.

In recent years the rising Australian dollar has frightened off foreign investors; but that situation is changing, with the falling dollar perhaps a precursor to a recovery in mining company share prices as investors shopping with pounds and euro take a fresh look at Australia.

Evidence of early interest in Australian resources can be found this week at the Mines and Money conference in London, which I’m attending and which seems to have attracted an audience slightly bigger than last year.

No-one over here is talking about a sudden revival of mining investment, but they are certainly talking about commodity prices having hit the bottom, with the next move being up (though precisely when is the great unknown).

Early speakers at the conference were cautious in their outlook comments, and there was the usual ‘gold bug’ brigade who believe the metal is set for a huge price rebound, which the top gold-price tip coming in at an utterly ridiculous $US44,000 an ounce.

What planet do these people come from?

If there was one significantly interesting observation that Australian investors could act on it was the expectation that prices for diamonds are set for several strong years, thanks to the irresistible combination of rising demand and falling supply.

Much to my surprise there was even a Swiss banker who had already taken a position in WA’s leading independent diamond miner, Kimberley Diamonds, probably playing a role in driving the miner’s share price from a mid-year low of 24 cents to recent trades at 94 cents.

Kimberley Diamonds is an interesting example of what happens when market sentiment changes, which in its case can be explained by rising diamond prices, and which will be seen in other sectors when international investors decide that other commodity prices cannot fall any further, and the Australian dollar has returned to more attractive levels.

When will that happen?

Judging by the mood over here perhaps not in the first half of next year, but after June there could be a revival in WA resources sector driven initially by the return of British money looking to play a game of currency and commodity prices that it has played successfully many times before.


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