Knowledge vital in local investment climate

10/09/2009 - 00:00


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How aware are most shareholders of the FIRB rules that may affect their investments?

LAST week, I wrote a news article about federal government rules which mean any company with 15 per cent or more ownership by a foreign government is itself considered to be a foreign-government entity.

With large, notably Chinese, state-owned enterprises taking stakes in Australian companies, this has big implications I'm sure many investors will not have thought through.

To me there is the issue of the rules that restrict foreign government investors. They must get Foreign Investment Review Board for literally every dollar they invest in Australia - be it buying shares in other companies, starting new developments or acquiring other assets such as mining tenements or land.

When a foreign government owns 15 per cent or more of a company, those restrictions apply to that company.

That would be incredibly restrictive, especially for relatively small listed companies used to making quick decisions.

Of course, the other 85 per cent of shareholders may not realise they too are affected. For instance, when the company they own a stake in seeks a joint venture it will need FIRB approval, a condition that will take time, potentially reduce the flexibility to make decisions quickly and ultimately add to costs.

FIRB approvals rose more than 53 per cent in two years - to 8,534 in 2007-08 from 5,449 in 2005-06. I think it would be fair to assume that such a trend continued in the past financial year, which means the workload at the federal government level has increased.

To me there is always a risk with any approvals process that delays become apparent as demand rises above a government's budgeted expectations. We've all seen that occur in Western Australia lately.

I wonder what the process is, or whether it's even being undertaken in many cases. I've seen little mention of FIRB approvals being sought by Australian companies with big state-owned shareholders when striking deals. Does that mean they haven't sought approval? Or just that they don't think they need to disclose it?

I think there are a lot of issues in this for other shareholders.

The word on the street

PREMIER Colin Barnett may be playing down the prospects of another boom but there are all the distinct signs that we are already back in that mentality.

For me, economic circumstances have one real threshold to overcome to be called a true blue boom - it's the 'people-in-the-street' test.

This is when the general public is talking about things that would not normally be their domain. It's when the trickle-down effect is particularly evident.

Usually, the people-in-the-street test not only signals a boom has become fully fledged, it also means it will soon be over. Like a classic pyramid selling scheme, it is bound to fail when it can no longer embrace another exponentially large group of investors.

While I was working during the late 1980s boom, I didn't really get to see that manifest first hand. I probably took it for granted, and had lost my job before I realised the boom had occurred, let alone a bust as well.

In the late 1990s, I recall being at the beach and hearing a couple of fellow swimmers talking about technology stocks - notably ERG - while we waited for waves. It was clearly the conversation of the general public, not some specialists.

The tech wreck followed soon after and it dawned on me that a true boom is one that has widespread impact and, in the case of those lacking a fundamental base, is most likely to fail right at that point.

The cynic in me watched the recent boom unfold in just the same way.

This was especially the case in property. Until the middle of last year, house prices were the number one conversation of the masses and had been for some time. Normal people from Perth were even flying over to Melbourne to buy apartments.

The person in the street was up to his or her neck in debt exploiting these great opportunities.

It was always going to end in tears. What has surprised me is how relatively shallow the impact has been. While the federal stimulus package undoubtedly had an effect, we have also been luckier than most in having a vital economy in this period of history.

And so, less than 12 months after the full extent of the global financial crisis emerged, Western Australia is already talking about booms again.

This time, the people on the street are uttering just one word - Gorgon.

The renewal of boom-like symptoms may be more than just one LNG project, as massive as it is, but this is how people perceive things. They are looking for one point on the compass, and Gorgon offers just that.

To be fair it is not just because of the media coverage, the ads in the paper or prime ministerial visits. There are real companies that have won real contracts, which could soon all go live if the partners in the project press the button.

But this people-in-the-street test has been passed at a point that I would consider to be a relatively early phase in the cycle.

At least I hope that is the case.

I know there is talk of faltering economic indicators from China and Japan, but having just dodged the GFC bullet it would be extraordinary to think we could be anywhere near the precipice again.

Nevertheless, people on the street are talking and that is either worrying or represents a new development in economic thresholds.

Given that we all know booms are about confidence, perhaps that is what happening when the people on the street, the general public, understand what is occurring, and gain confidence.

In the case of technology, or even property prices, it takes time for that knowledge to permeate to, dare I say it, the lowest strata.

But maybe this time is different? Maybe the general public is better educated than ever about what to look for in a boom.

The economy, good and bad, has been front-page news for years. It reached crescendo late last year but remains the number one news subject by a mile. Political careers are being made and broken over it, economists are seeing theory being played out in real life, and mums and dads have watched and worried as they've lost superannuation investments, jobs and even houses.

Maybe the people on the street are ahead of the curve this time? I certainly hope so.



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