Monday, September 29, 2014

Australian shares fall on China economy concerns; Australian dollar slides to 87.1 US cents

There have been more heavy falls on the Australian sharemarket this morning in reaction to continuing concerns about China's economy.

The uncertainty has also helped take the Australian dollar to 87.1 US cents - its lowest level in seven months.

And shares in the world's biggest wine company, Treasury Wines, have been hammered as much as 15 percent  this morning after it called off $3.4 billion takeover talks with private equity firms.

Jobs to go as energy prices surge without gas reservation policy, AWU warns

A national campaign is being launched today for greater controls over Australia's natural gas exports.

The union-backed campaign wants the federal government to enact laws to ensure a certain percentage of Australian gas is kept for domestic use rather than being exported.

A study by BIS Shrapnel warns that one in five manufacturers could shut down over the next five years because of spiralling gas prices.

The "Reserve Our Gas" campaign, headed by the Australian Workers Union, comes amid fears that Australian gas prices will triple from July next year as LNG exports ramp up.

AWU national secretary Scott McDine told AM that Australia is out of step with other major nations such as the United States that reserve a percentage of gas for domestic use.

"Australians have a right to know their rapidly rising gas bills are actually completely preventable. We just need to do what every other gas-exporting nation does and bring in laws to look after the local population. Australians should pay the Australian price for gas - not the global price - because it's our gas," Mr McDine said.

"We currently have a situation in which our abundant gas reserves are hurting Australian jobs and households instead of helping them. That's crazy and it's no wonder no other gas-exporting nation allows it.

"We are throwing away hundreds of thousands of jobs, and our national competitive advantage, simply so gas exporters can squeeze a little extra profit out of what is already a spectacularly profitable business.

"Of course our abundant natural gas can and should be exported to the world. But a portion of it also needs to be providing a competitive advantage to our local industry, and a cost of living benefit to Australian consumers. We can have both, just like every other gas exporting nation."

The AWU campaign is being supported by major Australian manufacturers exposed to rising energy prices including Alcoa and Australian Paper.

The study by BIS Shrapnel, commissioned by the AWU, finds that rising gas prices will have significant impacts on the economy:

* One in five heavy manufacturers will shut down within five years

* Total manufacturing production will be reduced by 15.4 per cent by 2023

* 91,3000 jobs will be lost in this period as a direct result of manufacturing shutdowns, with 235,000 jobs to go economy-wide

The BIS Shrapnel report also notes a high profit ratio of 66 percent compared to 32 percent for iron ore producers.

While there is no national gas reservation policy, Western Australia mandates the reservation of 15 per cent of the state's gas.

The report says the WA policy has not damaged gas investment or create sovereign risk, with $88 billion invested in WA gas production since reservation was introduced in 2006.

Wednesday, September 24, 2014

RBA warns property investment is "unbalanced" and that speculation raises risk of price falls

The Reserve Bank has warned that investment in Australia property is becoming unbalanced and that speculation increases the potential for the current stellar prices to fall.

In its latest Financial Stability Review, the RBA says recent house price growth in Sydney and Melbourne has encouraged more lending and construction activity by investors.

But the central bank has signalled that the boom in rising prices could unravel if there is "a significant reassessment of risk" lead to a "sharp reprising of assets".

The RBA cites revised expectations for monetary policy - in other words, rate rises sooner than expected - that could derail investors overburdened with debt.

The RBA says "additional speculative demand" could amplify the property price cycle with a subsequent fall in prices hurting household wealth and spending.

"The apparent use of interest only loans for both owners and occupies and investors might also be consistent with increasingly speculative motives behind current housing demand."

And in a stark warning, the Review signals that the dynamics of a fall in asset prices would not only hurt those who fuelled to the speculation.

"The households most effected by the declines in wealth would not necessarily be those who contributed to the heightened activity."

While not directly suggesting the need for tighter lending standards through macroprudential regulation, the RBA said recent measures announced by the Australian Prudential Regulation Authority (APRA) "should promote stronger risk management by lenders".

The RBA says it is now discussing what it calls "additional steps" that might be taken to reinforce sound lending practices to property investors.

The Review has also raised concerns about Australia's commercial property sector which has also been the focus of strong demand from both domestic and foreign investors.

The RBA warns: "any significant reversal of demand could expose the market to a sharp repricing."

The RBA gives Australia's financial system a tick, saying it is underpinned by the strong performance of the banking system.

It says while some households have taken on more debt, lower interest rates for now allow them to service the debt load.

Follow Peter Ryan on Twitter @peter_f_ryan

A third of Australian listed companies risk financial catastrophe, CPA Australia warns

A report out today on the health of Australia's listed companies says nearly a third are confronting the risk of a financial catastrophe.

Analysis of almost 16,000 annual reports by the professional accounting body CPA Australia, shows there are more alarm bells ringing now than during the depths of the global financial crisis in early 2009.

Listen to my extended interview with CPA Australia chief executive Alex Malley from this morning's edition of AM on ABC Radio.

The research, conducted between 2005 and 2013, says the red-flagged companies are exposed to the dual risks of end of the mining investment boom and an unexpected slowdown in China.

The CPA study is based on the snowballing of "going concern" warnings from auditors which are used to flag "significant uncertainty" in a company's ability to survive.

CPA Australia chief executive Alex Malley says the findings are a sobering reality check that many Australian companies are fragile.

"We've been talking about the potential impacts of the slow-down in China, the strength of the Australian dollar and the effects of the tapering mining boom on the economy for some time," Mr Malley said.

"Now, this report, compiled based on virtually all companies listed on the ASX, shows these economic factors are being felt across the market and are putting almost a third of ASX listed companies at risk of 
financial catastrophe.

"It really begs the question how our economy would be placed were we to face another shock like the GFC?" 

According to the research, the "going concern" warnings has risen significantly in the energy and mining sectors with more than 40 percent of companies feared to be at risk in 2013.

The report comes as evidence mounts that China's economy is slowing faster than expected and that the official growth target of 7.5 percent might not be achieved this year.

Australian miners are exposed with the iron ore price now at a fresh five year low of US$79.80 per tonne.

However, the CPA report says non-mining sectors sych as consumer staples, industrials, healthcare and utilities are also facing concerns about their financial health and how they would fare in another global shock.

Tuesday, September 23, 2014

White flag goes up from big end of town - independent regulation of financial advisers needed now

The peak body representing the financial services industry has admitted that an independent external regulator is needed to stamp out unethical and at times unlawful behaviour.

In the face of worsening image problem after a string of financial planning scandals, the Financial Services Council (FSC) has recommended that the federal government establish a statutory body to regulate professional standards within the industry.

The Council's chief executive John Brogden acknowledges the recommendation reflects the deepening public distrust of financial advisers and the low qualifications to enter the industry.

"The reality is that public trust is so low, public expectations are so low, yet public demand for advice is so high that we have to acknowledge that self regulation has failed and we need to go to government and independent regulation," Mr Brogden told the ABC.

"At the moment the standards are far too low - everybody agrees with that. We've seen lots of different suggestions as to how they might be improved. We've decided to go right over the top of all of those and call for the creation of a standalone independent statutory body."

"Self regulation is no longer a credible option for establishing higher standards."

The surprise recommendation to the parliamentary joint committee into adviser competency and the Murray Review into the financial system is being seen as the financial planning industry putting up the white flag in a hostile consumer and government environment.

The FSC paper calls for the creation of the Advice Competency Standards Board (ACSB) which would regulate professional standards and the education of financial advisers.

While the FSC does not specify educational standards, it says the Board should determine minimum qualifications which could include a single national exam for potential advisers,

John Brogden acknowledges that higher regulated standards could hurt veteran planners who have been in business for decades especially if they don't already possess a university degree.

"I feel very sorry for good professional advisors who have always acted ethically, have very happy clients, have always acted in the best interests of their clients who have been dragged down by bad advisers," Mr Brogden said.

"For them I feel very sad that their reputations have been tarnished."

Mr Brogden says the Board should be funded by the financial planning industry but have an independent chair and directors.

Thursday, September 11, 2014

Rupert Murdoch says page 3 topless girls here to stay as long as customers want them

Rupert Murdoch has take to Twitter once again to defend the use of topless women on page three of his mass circulation British cash cows, The Sun and The Sunday Sun (which replaced The News of the World).

While Mr Murdoch thinks the page 3 pinups are "old fashioned", he says average readers still want them.

But the media titan asked his Twitter followers for their opinions tweeting  "aren't beautiful young women more attractive in at least some fashionable clothes?".

It's a long debate between profit and punter preferences - assuming of course that readers of The Sun buy it to read the journalism.

Not surprisingly, Mr Murdoch reminded his critics who is in charge.

"Brit feminists bang on forever about page 3. I bet never buy paper. I think old fashioned but readers seem to disagree."

Wednesday, September 10, 2014

Scotland independence poll puts banks on alert; Deutsche Bank warns "be afraid, be very afraid".

After being overshadowed by other greater geopolitical events - such as turmoil in Ukraine and the Middle East - next week's referendum on whether Scotland should secede from Britain is starting to get interesting.

An opinion poll has shown for the first time that a narrow majority of Scots might vote for independence and splinter the 307 year old union with the United Kingdom.

The poll points to a knife-edge result but already it has caused enough uncertainty to push the British pound to its lowest level since November.

Here's my report from yesterday's edition of The World Today.

Now some of the world's biggest banks have gone on alert given the implications of a "yes" vote which until now has been seen as unlikely:

  • "Be afraid, be very afraid."
  • "The implications of a yes vote would be huge, and are magnified by the sense of institutional unpreparedness. A 'yes' vote could easily derail the UK economic recovery.
  • Could cause a "destabilizing crisis" in the banking system and at best leave the rest of the UK with an unstable currency union during talks on the new fiscal and monetary arrangement.
  • "There is now no question that the momentum is now all with 'yes'."

  • Near-term consequences of a "Yes" for the Scottish economy, and for the UK more broadly, could be "severely negative". In the long run, "little reason why an independent Scotland could not prosper: there is no evidence to suggest that smaller countries are richer or poorer, on average."
  • Highlights risk that uncertainty over whether an independent Scotland would be able to retain sterling could result in an "EMU-style currency crisis" for the UK.

  • "Significant risk" of bank deposits fleeing Scotland within days of a Yes vote.
  • Investor concerns would likely focus on currency issues, EU membership and future Scottish economic policy. This could deter investment in Scotland from foreign and British companies.
  • The increase in the net debt-to-GDP ratio for the rest of the UK if Scotland refuses to repay its debt is "relatively slight" and potentially a price worth paying for avoiding a dysfunctional monetary union. Scotland would pay more relatively for issuing its own debt as a result.

  • The forex market's single biggest player made sell sterling its trade of the week on Monday. A "Yes" vote could drive the pound to $1.56 or lower.
  • "With the lessons of the euro zone debt crisis still fresh in investors' minds, a currency union (after a "Yes" vote) may weaken sterling in the same way it weakened the euro."
  • Concerned that a Scottish exit will raise the chances of Britain leaving the EU within years.

  • Yes vote would prevent the Bank of England from raising interest rates, encourage "financial fragmentation risks across Europe".
  • Negotiations on debt and North Sea oil to fuel volatility.
  • "Yes" voters tend to underperform their pre-voting polls by a significant margin as minds change in the privacy of the voting booth.
  • Lenders would likely ask for risk premium for borrowing to newly independent nation.

  • A quick 5 percent move, towards the high 0.80s for euro/sterling, is certainly possible after a Yes vote, and, with this, a move to the mid-1.50s against the dollar.

  • Yes vote could knock 10 percent off value of sterling.
  • One of the few banks to focus earlier this year on the potential that Scotland might not take on its portion of UK public debt.
  • Bank's economists chiefly concerned on Monday by the prospect of Scotland being refused EU entry and the rump UK following it out after a 2017 referendum on membership.

  • "Market complacency on Scotland is shattered."
  • Scotland leaving the UK would make the UK leaving the EU considerably more likely, which could reduce potential GDP growth by as much as 0.5 percent per annum.
  • Sterling could drop as much as 5 percent against the dollar after a Yes vote.

  • A transition to other currency arrangements would be complex, with "sterlingisation" or a fixed exchange rate likely to put upward pressure on Scottish interest rates.
  • Still expect downside for the euro against the pound, but it "could be a bumpy descent" into the vote.
  • Scottish bonds could yield between 50 to 150 points more than AAA gilts, depending on how talks on independence pan out.
  • In an "unfriendly outcome" of such talks between London and Edinburgh, the 10-year gilt asset swap could cheapen by 20 basis points, consistent with a 1-notch credit rating downgrade.


  •  "If elevated uncertainty receded fairly swiftly, the effects of any lasting decline in the currency might be the dominant consideration, potentially adding to the case for the BoE to begin raising rates."