Spreading the risk of Sino overexposure

I TOOK the opportunity to catch up with the investment banking team at Gresham after the news that its chief of 13 years, Michael Ashforth, had quit to join the big rival Macquarie.

Justin Mannolini, Jenny Seabrook and Julian Mills – triple J, as they jokingly dubbed themselves – have formed a leadership team, with Mr Mannolini nominally the head of that.

The most experienced member of the group, Ms Seabrook, will be rejigging her time to devote more of it to Gresham, having split her workload in recent times between the executive work at the investment bank and non-executive directorships at entities such as Iluka.

All three say they’re seeing business again considering M&A activity after battening down the hatches for most of the past year.

“Clients think it is safe enough to look out the front door and start thinking strategically again, that is positive for M&A,” Mr Mannolini says.

However, Mr Mannolini admits to remaining quite cautious when it comes to the global markets.

“I am probably the resident bear here,” he says.

“I think we are exceptionally privileged to have this leverage to Asia, but sentiment is driven by Wall Street.”

Mr Mannolini remains to be convinced that the GFC has completely washed through the US system.

What I found particularly illuminating from the general conversation were some thoughts on Japan and our market’s recent neglect of this major trading partner.

Ms Seabrook was the most strident in discussing the opportunity presented by rebalancing our portfolio back to the land of the rising sun.

Her view, reflecting she says what she is picking up in the market, is that we are over-exposed to China and that there big potential in spreading that risk.

“If you think about risk management we have all our eggs in the one basket,” she says.

“We need to be thinking more broadly than that.

“Japan has been important and I think we’ll see Japan rise again.”

Her colleague, Mr Mills, agrees that Japan should be a focus of Australian companies. He believes they will need to reinvest in Australia to maintain market share as existing assets, notably in resources, come to the end of their useful lives.

But it will not just be about minerals and energy resources. China has already started buying up agricultural assets such as CSR and Nufarm as it focuses on food security.

This broader interest will create competition in industries allied to natural resources, particularly those that are knowhow rich or control intellectual property, such as engineering firms.

With all this in mind it is worth reflecting on our relationship with Japan.

The question is how long can Japan remain the investment under-achiever? For the past 80 years many of its strategic activities have been focused on resources security.

It went to war in the Pacific in order to gain control of the region’s resources, especially its oil wealth.

After that battering, it emerged within two decades as economic powerhouse that could afford to fund the development of our resources sector.

It was then that Japan established the first of its key trading relationships with Australia and invested in our resources.

Later it did become a rich nation again and invested heavily in more speculative areas such as tourism property. That fashion soon ended as the bubble of Japan’s economy burst.

Since then it has been largely dormant compared to its key rival in the region, China, which has taken the front running on resources investment. How long can Japan afford to let China muscle in on Australia without responding?

As an island nation with little to offer except the resourcefulness of its people, Japan has proved that natural abundance is not necessary to create wealth.

In fact, it is Australians, with our land abounding in nature’s gifts, who buy Toyota cars, Sony music systems and Panasonic telephones.

Perhaps they have been waiting through the years of hubris – ours and China’s – to see when the markets would again favour the yen?

I suspect much will depend on what happens in China this year as it suffers from its own expansion of credit.

But some of the onus will be on us.

The Japanese may be long-term investors in Australia but their enthusiasm for our resources waned as they found their security of ownership bundled up with the risk of industrial action, which regularly brought the north to a standstill.

It is well known that the Japanese funded the development of the Brazilian iron ore industry to foster some competition in the market.

Could this distrust of our industrial system be one of the reasons they have been less prominent investors in recent decades?

Are the Chinese, who have invested huge funds in third-world developments, about to get the same rude shock when it comes to the nature of our workers and their demands?

With that in mind, I wrote this following thought piece for our website at the height of the strikes last week but I can’t help feeling a few newspaper readers might have missed it.

Flagging fortunes

JUST as uncivilised elements can spoil a good Australia Day party and sully our image as fun-loving people, so too can construction workers damage the way the world sees us.

The current strike action by well-paid workers on the site of Woodside’s Pluto project has the risk of doing as much damage to Australia’s commercial reputation as the flag flying thuggery of recent years has done to the wider world’s view of this country.

Investors in resources and buyers of commodities will be watching the action in the Pilbara closely to see how far the federal Labor government will allow the union movement to go.

That is assuming the government has any control of the situation, given the union movement has bankrolled Labor and is operating under new laws that are already proving weak when it comes to reining in industrial action.

Strikes over which room a worker gets to sleep in appear massively trivial and will jeopardise Australia’s reputation as a costly but safe place to invest.

Well-paid people downing tools over something so embarrassing will cause astonishment in places where many people count their annual income in three figures.

Interestingly, the news that more than 1,600 are on strike at a critical project that will help underpin the nation’s long-term revenue barely rates a mention in the national press.

Why Labor is allowing its union rulers to potentially kill the golden goose will bewilder most in business who have been wondering for some time when the new industrial storm was going to hit them.

It is here now, wrapped up in a Eureka flag.