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The Lucky Investor Country: if the RBA has a conundrum, spare a thought for the ACCC

by Michael West | Aug 1, 2023 | Economy & Markets, Latest Posts

Why are foreign investors so attracted to Australia? Why is the ASX being hollowed out by takeovers? Why do we consumers pay too much? A UBS research report has the answers. Michael West reports.

Stephen Mayne was out last week reporting about the gutting of the share market by foreign takeover merchants. Some $100b of companies have vanished from the ASX, mostly swallowed by foreign takeover predators. Blackmores is the latest to go, it follows the likes of Afterpay, Ausnet, Coca Cola Amatil, Crown Resorts, Dulux, MYOB, Oil Search, and Sydney Airport.

The ASX is being hollowed out. Check out this list of 163 companies which were once capitalised at more than $1 billion on the ASX but are no longer listed today, whether it be from takeover or collapse. Now Origin energy and Newcrest, among others, are under takeover offer from offshore players.

Mayne goes into the reasons for this “hollowing out”: the rise of super funds buying assets and taking them private – Sydney Airport for instance. There’s the prevalence of marauding private equity types, mostly offshore players descending on Australian equities looking to make a killing by not paying tax and luxuriating in a corporate milieu of high prices and low competition.

Which brings us to a real tickler for Australia: competition policy.

This is the land of duopolies, oligopolies, and monopolies. Airlines, tollroads, banks, paper and packaging, supermarkets. 

We are a big country with a small population. And that is not good news for consumers. A report from analysts at UBS found Australia is a haven for large corporations: dividends are bigger than elsewhere, profit margins are fatter, and industry concentration (that is the monopoly factor) is higher.

Check out this chart: – there we are, way out there on the right scale with far higher concentration, ergo less competition. A standout, in all the wrong ways for consumers, all the right ways for corporations.

When you look at net profit margins, which is the vertical axis, we romp in at number three.

Investor paradise

But what a paradise it is for investors: “Australia are income champions,” says the UBS research team, “which has allowed total returns from Australian stocks to far outpace both global and regional equities over time (9.2% p.a. since 1990 versus 7.0% p.a. from Global equities and 6.6% p.a. from Asia Pac ex-Japan).

Source: Refinitiv, UBS

That’s Australia in the blue, towering over rival nations. Franking credits help, as does compulsory super and a stable system of government, but it is competition policy too. For investors, the nips just keep on getting bigger. 

How about total returns then? Dividends and share price gains: well, here it is, well above the rest of the world, again in the blue.

Source: Refinitiv, UBS

Again, most of the outperformance is dividends which are almost double the global average.

UBS also found migration to be a significant factor. “Australia’s population growth has been amongst fastest; this will continue.

“In the decade preceding the COVID shock, population growth in Australia averaged +1.5% pa, which is double the rate of most other advanced economies (even outpacing India). A fast growing population means that the customer base which Aussie companies are selling into is constantly expanding. This materially impacts medium term earnings prospects for stocks, particularly so for the Retail and Housing sectors.”

And a high migrant intake

UBS also found high migrant intake is a thing: “Australia is a vast and far away country with a dispersed population – this often makes doing business here challenging from a logistical perspective. New entrants are often additionally disincentivised from entering due to the dominance positions which many local incumbents have established. This concentrated industry structure helps explain why profitability measures and profit margins in Australia stay high”.

It is not only the ACCC which has a problem. The Tax Office too must surely be concerned as foreign private equity players have a penchant for dodging tax so every time there is a large takeover the ATO can kiss goodbye to hundreds of millions in tax revenue. Yet now, despite this, the ACCC is entertaining bids from known tax avoiders such as Brookfield for Origin Energy. This is a deal which will not only entail further vertical integration in energy – ergo higher power prices – but also the loss of tax revenue.

 

The sharemarket of deathly hollows: $100b of equity passes from public to private hands in takeover binge

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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