The G20 Financial Stability Board has alerted Australia that our banking sector is becoming too exposed to the commodities boom. Worse still, the G20 is in effect warning us that our retirement savings are now more dependent on commodities than those of any other nation on Earth. That warning should be a red alert to the people who are managing the bulk of our superannuation savings that they are now punting too high a proportion of our retirement savings on the commodities boom.
Worse still, they have adopted an investment philosophy that is seeing key Australian non-mining stocks sold out at low prices, so compounding the mining gamble. I cannot think of any other industry in Australia that is so cavalier about the long-term well-being of its customers.
Australians investing in large publicly available superannuation funds (either via default funds or because they tick the Australian equity box), usually have a major exposure to Australian equities. Indeed, it is normally their biggest single investment.
By far the majority of that Australian equity investment is concentrated on the stocks in the ASX 200. About 26% of the ASX 200 is in mining stocks but another 38% is in financial stocks, which are dominated by banks. Four of the top five companies on the list are banks. We have often pointed to the vulnerability of our banks to the housing market but at least in that industry there is a wide spread of loans.
Meanwhile, the G20 says that Australians banks have at least $30 billion in direct loans to mining companies but that sum could rise sixfold. Large bad debts savage share prices.
I am not in the process of forecasting the end of the mining boom, but we saw last night just how sensitive commodities are to the global troubles. Copper and oil fell, the Shanghai index is at its lowest point for a year and the global market is waking up to the fact that European leaders are not smart enough to come to a sustainable arrangement and so require more market punishment.
If that situation turns really nasty, or China is successful in boosting the supply of minerals so that the prices are slashed, there will be a huge fall in mining stocks. We have always known that. But the G20 is saying that our banks are now also exposed so our Australian equity funds are now 63% directly or indirectly exposed to mining.
In this environment our blinkered fund managers have a policy of not looking closely at the value of non-mining, non-banking stocks and flogging them if someone comes up with a bid well above market. And so they sold out Axa, to the joy of the French who then boasted at the bargain they secured.
We have just sold out ConnectEast because the independent expert Deloitte and the board used the market value system rather than long-term annuity value to assess the worth of the stock. Future Fund chairman David Murray looked at the long-term annuity value situation and the national interest and voted against the bid but he could not carry the day against the “flog it” brigade.
The Foster’s situation looks like it may be just as bad as ConnectEast (but not as bad as Axa).
We need the chief executives of the big organisations that run these superannuation funds to wake up to the fact that they are actually concentrating risk when they should be adopting the reverse strategy. But I fear the culture among our arrogant fund managers is so blinkered that they won’t change. That’s why it’s so important for the nation that as many people as possible start up their own superannuation fund so they can tailor risk taking to their needs.
*This article first appeared on Business Spectator