27/02/2007 - 22:00

The politics of investment

27/02/2007 - 22:00

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Politics and investment advice are two subjects largely foreign to Briefcase. It knows a bit about the latter, but can’t give it, and knows too much about the former, but can never quite grasp it – far too slippery. But, if you’re a thinking person, you might have noticed that politics and investment are heading for a collision course later this year.

Kevin Rudd, love him or hate him, is doing a marvellous job of mimicking John Howard. It is blindingly obvious that his election strategy is to look and act like a younger replica; a classic case of giving the people what they want.

After considering Mr Rudd’s credentials as a future prime minister, and the fact that the popularity polls point to him succeeding, it is then time for a bit of extrapolation.

In other words, what happens to the markets, and your investment portfolio, should Australia cop Labor governments wall-to-wall, and in Canberra?

The first observation is that as a general rule, markets do not like Labor governments, though this is not always true. But, a wise investor will take note of the potential for increased risk.

The greatest risk, and this will take time to become evident, is the danger of government loosening its grip on financial policy. This might lead to higher interest rates, though it is equally likely that, by the time Australia next votes, the Reserve Bank will have finished its interest rate tightening program, and might even be turning the heat down a fraction – at least, that’s what John Howard hopes.

But, if there is an over-arching threat from Mr Rudd in Canberra, it is the issue of interest rates.

The second observation, and this is getting more specific, is that a Labor government will roll back much of Mr Howard’s industrial relations reforms. Union power will rise, though not, suspects Briefcase, union membership.

What a fresh wave of rigid labor hiring rules means for business will be fascinating to watch, especially as the vast majority of Australian workers no longer belong to a union.

Over time, this will make for great headlines, but in the short term there is an investment message in the potential for changed labor rules – such as thinking twice about investing in listed labor hire firms, and worrying about the effect of union interference on construction sites, and in mine sites.

It would be premature to take evasive action yet. All that Briefcase is suggesting is that a change of government does alter the investment landscape, in both a negative and a positive sense.

On the positive side of the equation there is one place that will be essential for canny investors – Canberra itself, especially property.

Readers with long memories will know what happens when Labor rides back into power in Canberra. The civil service rejoices, money flows freely in the national capital, and space for both offices and accommodation rockets in price.

Replacing Mr Howard with Mr Rudd would, potentially, have an even more dramatic effect than the last time the conservatives got booted out.

This time around it actually means a full-scale return of government to Canberra because for the past 10 years the real centre of Australia has been Howard’s hometown of Sydney.

Mr Rudd, a Brisbane boy, will restore The Lodge as the centre of government, sucking in with him a multitude of acolytes, lobbyists, and assorted hangers-on.

It does not require too much imagination to picture what will happen to the Canberra property market as the town swells with the next flock of Labor true believers.

Entry points for anyone wanting to play the Canberra property market are not extensive, but a starting point is residential rental properties, and a second best choice is commercial office space, given that Labor has a track record of writing very generous rental agreements.

Briefcase is not predicting a Labor win later this year, merely issuing a general warning that the investment climate could change in 2008.

•••

Back in more comfortable territory, and focusing on the serious business of making money rather than the flippancy of politics, the big question that continues to dominate the thinking of most investors is whether the resource boom has run its course.

China, as ever, is the key to this question, and for subscribers to the stronger-for-longer theory of commodity prices, Briefcase brings good news.

Last week a man breezed through town who knows more (a lot more) than any of us about what’s happening in China.

Tom Albanese, who takes over as chief executive of Rio Tinto on May 1, told Briefcase that the view from inside the world’s second biggest mining company is that China has at least a further 10 years of 8 per cent annual growth ahead of it.

If he’s right – and Mr Albanese has guided Rio Tinto into a number of direct exploration projects in China and overseen its forays into neighbouring Mongolia – then a simple mathematical calculation says the economy of China will more than double in size over the next 10 years.

It’s an observation as simple as “10 years at 8 per cent” from a man in the know that makes it crystal clear an awful lot of people waiting for the resources boom to end suddenly will be somewhat disappointed.

Demand from China alone will be sufficient to propel Australia’s miners along at a cracking pace for at least another decade, and that’s without any assistance from Japan, South Korea, Taiwan, or that other awakening giant, India.

Briefcase is uncertain as to whether Mr Albanese had time to visit his most grateful admirer while in Perth, but suspects that Gina Rinehart would have been lavish with her compliments for the way Rio Tinto has expanded its iron ore operations in the Pilbara.

In fact, according to a quick calculation based on Rio Tinto’s latest financial statements, Ms Rinehart had 70 million reasons to say thanks, because that’s roughly the number of dollars she is likely to collect this year from her share of the perpetual Hancock Prospecting royalty negotiated a lifetime ago by her late father, Lang Hancock, and his friend, Peter Wright.

The huge size of Ms Rinehart’s latest payment is actually rather easy to work out. According to Rio Tinto’s full-year financials Hamersley Iron sold $US4.4 billion worth of iron ore. The Hancock/Wright royalty entitles Rinehart and the descendants of Peter Wright to 2.5 per cent of the gross sales – $US110 million, or at an exchange rate of US78 cents, $A141 million.

The exact size of the cheque is one of the mining world’s more closely guarded secrets, and some of Hamersley’s production (such as the small amounts of pig iron produced at the HIsmelt pig iron production facility) falls outside the royalty.

But, even if Briefcase is wrong by 10 or 20 per cent, that still makes this year’s cheque for Ms Rinehart a reason to break out the bubbly.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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