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Schroder’s Parbrook: Australia’s ‘lucky’ label is wearing off

Schroder’s Parbrook: Australia’s ‘lucky’ label is wearing off

Australia’s housing market is unravelling and threatening to create huge difficulties, according to Schroders’ head of Asia ex-Japan equities.

In a column entitled ‘Is Australia’s luck running out?’, Citywire A-rated Robin Parbrook, who runs four Asia-focused funds at the group, said the country’s recent strong economic growth is now significantly under threat.

Parbrook said, as other economies suffered during the 2008 Global Financial Crisis, Australia’s economy escaped the effects of the global slowdown because it was buoyed by a mining boom caused by China’s insatiable demand for commodities.

‘Even though in the past few years slowing Chinese growth and falling commodity prices have led to an unwinding of mining investment in Australia, it was swiftly replaced by a housing boom and strong consumer spending. But is Australia’s luck running out?’

Focusing on the housing sector, which he said had replaced the mining sector as a growth driver, Parbrook said the growth is actually generating over-supply in apartments, while the industry as a whole is weakening, with approvals for detached housing declining.

Although the housing bubble has been discussed in many quarters – particularly among fund managers – Parbrook said both developments and pricing have continued to accelerate.

‘Betting on further advancement is becoming more dangerous. In its most recent report in April, the Reserve Bank of Australia took the opportunity to remind the country that growth of new supply of apartments in key cities, due to be completed over the next few years, “may weigh on prices and rents in these areas”.

‘Although the RBA may have chosen to keep its target rate unchanged in September, we suspect that with the central bank’s eye still keenly trained on the domestic housing market, any hopes that the sector will resume its upward trajectory and lift economic growth again are likely to prove wishful.’

Debt dynamics

Parbrook said an unravelling in this market could expose vulnerabilities within the ‘hugely overleveraged’ Austrian consumer. He said industry data now puts household debt at four times the level it was 27 years ago.

This, he said, comes at a time when overall household debt-to-GDP ratios has risen, but Australia now sits fifth in a table of debt-to-net-disposable-income globally.

‘With household gearing at historically high levels, a correction in the housing sector will likely trigger a process of deleveraging by the average Australian consumer, leading to further softening of consumption and dampening economic growth.’

Although the RBA could cut interest rates to ease debt burdens, Parbrook said the current gridlock in parliament, coupled with limited flexibility in fiscal stimulus efforts, means upward growth will be hard to come by.

In the $2.43 billion Schroder ISF Asian Total Return fund, which Parbrook co-runs with King Fuei Lee, Australia accounts for 14% of exposure. This is the fourth largest country bet behind Hong Kong, Taiwan and China.

The Schroder ISF Asian Total Return fund returned 19.3% in US dollar terms over the three years to the end of September 2016. The average manager in the Alt Ucits – Emerging Markets Including Asia sector returned 4.6% over the same period.

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