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Global Financial Crisis (GFC)

When the US sneezes Australia catches a cold, but for how much longer?

Glenn Fairbairn
Director/Private Client Adviser
27 Sep 2010

At the height of the Global Financial Crisis (GFC) we were continually reminded by Politicians and Economists alike that the Australian economy was in good shape, our banking sector was sound and demand for resources would continue. However our local sharemarket followed Wall Street into a downward spiral. This further strengthened the argument that “When the US sneezes, Australia catches a cold”.

So, with the US economy showing no real signs of recovery and talk of an extended period of stagnant economic conditions, what does this mean for our local sharemarket?

It was this question that had me paying particular attention to Philip Lowe’s (Assistant Governor of the RBA) recent presentation regarding ‘The Development of Asia: Risk and Returns for Australia’.

Mr Lowe made comment that as the countries of Asia, in particular China and India have urbanised and industrialised, the demand for communication and transport networks, roads, bridges, railways etc, has grown rapidly. This has resulted in the strong growth in demand for resources of which Australia has been a major benefactor.

As highlighted in the chart below, the proportion of the Chinese population living in urban centers has more than doubled to almost 45 per cent over the past decade. There are now around 170 Chinese cities with more than a million residents, compared with only around 35 in Europe. Further there are still another 300 to 400 million people expected to move from the country to the city over the next 20 years.

Mr. Lowe added that while India is also urbanizing the process is more gradual, with the number of people moving to urban areas over the past 30 years less than half that in China.

The rapid urbanization taking place in Asia paints a very pretty picture for Australia’s economic future. This can be clearly seen in Australia’s international trade statistics. The four largest markets for our exports in 2009 were China, Japan, India and South Korea. Unbeknown to many, India now ranks as Australia’s third largest export destination, surpassing Australia’s more traditional destinations such as the United Kingdom and the United States.

So what does all this mean for our local sharemarket?

The fact remains that the US is still a global economic power. For the time being, at least, investors will continue to look to the US as a leading economic indicator. However that is not to say things won’t change in future.

In the late 1980s it was Japan that wielded the power of influence over global financial markets. At its peak the Tokyo Stock Exchange accounted for over 60% of the world’s stock market capitalization, by far the worlds largest. It was not until a property crash, for reasons similar to those experienced in the US, that asset values began falling precipitously. Over time, with decades of recession and deflation, the ranking of the Tokyo Stock Exchange as a market of influence waned significantly.

Will history repeat itself? Only time will tell, but I think it is only a matter of time before investors start paying closer attention to our emerging Asian counterparts.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.