Bill Nikolouzakis

Foreign investors play a critical role in the Australian residential property market, with the current guidelines to investing providing the right legislative framework, says Nyko Property Director Bill Nikolouzakis.

In a submission to the House of Representatives’ Standing Committee on Economics inquiry into Australia’s foreign investment policy for residential real estate, he said foreign investment helped underpin the residential construction market, especially for inner-city apartments, and as such was evidence that the system was working.

“From our experience there is a degree of misunderstanding around foreign investment in residential real estate. In our opinion, this misunderstanding, and, in some instances, the misreporting of what is and isn’t permissible in terms of foreign investment in residential property, has the potential to damage a valuable source of investment in a $4.75 trillion industry.

“What is often forgotten is that foreign nationals can’t buy existing residential property, but they can typically get approval to buy residential property in new developments so they are not competing with first home owners or anyone else for those existing properties.” [This can occur either before, during or immediately after construction.]

Mr Nikolouzakis said it was Nyko’s experience that foreign investors normally bought apartments in the larger blocks within the CBDs of Melbourne and Sydney and to a lesser extent Brisbane.

“This is a market that Nyko Property’s clients in Australia normally are not very supportive of as an investment option and are therefore not competing with foreign investors for those properties.

“We see the involvement of foreign investors (Nyko has established an office in Indonesia) in the residential property market to be completely positive from that standpoint, investing in property that is required for our cities to grow and become the cosmopolitan centres that we know work so well across the world when people live closer to their workplaces.

“In addition, it’s worth noting that the construction industry makes up 9.1% of the Australian workforce and a change in the rules for foreign investors making it more difficult for them to invest in new Australian property would be detrimental to that industry in a workforce that is already struggling with job losses in manufacturing.”

Mr Nikolouzakis said the current process appeared to be streamlined in such a way where it did not cause any roadblocks for foreign investors while giving Government the relevant information to perform checks on this investment.

“Foreign investment, operating under the right guidelines, can continue to be a valuable source of capital to enable positive social outcomes for the Australian populace.”

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Foreign investment to impact Australia’s infrastructure development.

The way Australia solves its infrastructure challenges will impact the level of foreign investment flowing into the country, according to The Trust Company, Australia’s only trustee with licenses to operate in Australia, New Zealand and Singapore.

Speaking at a recent symposium held by Infrastructure Partnerships Australia, The Trust Company’s General Manager – Corporate Clients, Andrew Cannane, said Australia remains an attractive investment destination for investors relative to other jurisdictions.

The rising trend in Australia of privatising public assets, and the increasing sophistication of global investors and pension funds, means demand for key infrastructure assets in Australia is on the rise.

“Australia has a pipeline of attractive and profitable infrastructure assets, that will ensure investment continues to flow in this area,” Mr Cannane said.

However, he believes a lack of clarity on policy decision-making may impede on the protection of infrastructure assets, and impact on their prospects.

Discriminatory changes in law have the potential to encroach on the business profile of an asset bought, particularly on large-scale infrastructure projects such as ports.

Mr Cannane says legislative changes such as doubling the MIT withholding tax rate or tinkering with the thin capitalisation rules have the potential to weaken asset values.

“Despite strong competition for the quality of assets that come up, if investors can’t predict what the government might do in the future that has the potential to drastically change the profile of the asset,” he said.

He said regulatory uncertainty was particularly unsettling for foreign investors looking to enter or deepen their interest in the Australian infrastructure sector.

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Reporting to Count CEO Andrew Gale, Ms Tonitto will be responsible for the development of innovative strategies to accelerate growth of Count and of Count franchisees’ businesses. She will also oversee the rollout of a new Practice Management program for Count advisers.

“Lee will develop and implement growth strategies for the Count network and individual advisory businesses at an important time in the company’s development. She will also drive marketing initiatives to enhance Count’s brand and market positioning and to attract new clients in targeted areas,” Mr Gale said.

Ms Tonitto has extensive experience in wealth management marketing, distribution, and licensee network growth. She comes to Count after 15 years with the AMP group, where she was most recently General Manager, Strategy and Direct, and three years at AMP wealth management firm Hillross Financial Services.

At Hillross, Ms Tonitto held National Manager roles covering strategy, practice management and business operations. In this capacity she developed a cohesive practice management strategy and an online practice management hub. She also assisted 115 Hillross advisers with client segmentation and a comprehensive change management program in transitioning to Fee for Service.

At AMP, Ms Tonitto focused on developing and implementing distribution and marketing programs for financial planning services. This included a leading role in growing planner numbers through the creation of the AMP Horizons Financial Planning Academy, establishing a Customer Value Offer Development function and developing new brand architecture and advertising programs.

Chair of leading industry body the Australian Marketing Institute (AMI), Ms Tonitto’s experience is backed by an Executive MBA from the University of NSW’s Australian Graduate School of Management and a Diploma of Financial Planning.

Count provides its network of 350 accounting firms Australia-wide with high quality research, technical, business development and professional training support.

“The appointment of Ms Tonitto also demonstrates our dedication to existing Count franchisees, where we aim to help them grow their accounting and financial planning businesses to their fullest potential,” Mr Gale said.

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The good news for stock investors first. The Jakarta Composite index rallied 46% last year, after soaring 87% in 2009, as investors chased stocks benefiting from an economy rejuvenated by reform. Since he was elected to power in 2004 (and re-elected in 2009), President Susilo Bambang Yudhoyono has implemented financial, tax, customs and capital market reforms and introduced stimulus measures to shepherd southeast Asia’s largest economy through the global recession.

The result was that Indonesia’s economy grew at an average annual pace of 5.5% in the past three years, a fair achievement during a global recession. Investors thought the world’s fourth most-populous country of 240 million people could maintain that growth rate in coming years.

But that thinking didn’t last too long into 2011. On January 3, the Central Bureau of Statistics said consumer prices in Indonesia jumped 6.96% in 2010. Stocks fell on a view that the central Bank Indonesia will need to raise the benchmark reference rate by 100 basis points over 2011, to slow the economy and lower consumer inflation to under 6%.

The slide in stock prices was exacerbated, almost perversely, on January 5 when Bank Indonesia at its monthly policy-setting meeting left the reference rate unchanged at 6.5% for a 17th consecutive month. Investors fretted that a larger overall rate increase would be needed in the long run if the central bank didn’t attack inflationary pressures quickly. Over the three trading days from January 7 to January 11, the market plunged more than 8%. For January, the index dropped 7.9%, a decline beaten only by India’s slump of 10.6%.

Stocks did better over February because the Bank Indonesia finally acted against inflation, raising the reference rate by a quarter point to 6.75% on February 4. The Jakarta Composite Index gained 1.8% in February, to be Asia’s third-best performer for the month, but still ended the month as Asia’s third-worst performer so far in 2011.

The main action Indonesian authorities took last year to curb inflation was to order banks to set aside more reserves. The central bank kept interest rates on hold because core inflation, at just 4.3% in 2010, is under its 5% target. The bank has been cautious about raising rates because it is concerned that higher rates will encourage speculative foreign inflows and expects the jump in food prices that is fanning inflation to be only temporary.

Heavy rains in recent months have disrupted food production across the archipelago and boosted the price of staples. Rice is reported to have risen about 10% recently, while the country’s favourite spice of chilli pepper has nearly trebled in price. Food comprises about 20% of the basket of goods used to calculate inflation in Indonesia.

An upbeat future

But hey – even if inflation and interest rates rise this year, optimism abounds about a country that fewer than 15 years ago almost collapsed politically and economically – even if it still has many challenges such as a lack of infrastructure and an abundance of red tape.

Politically the Muslim country is stable. After overthrowing 31 years of the Suharto dictatorship in 1998, the country has turned itself into a secular democracy and controlled extremist voices. So successful has this transformation been that the country is touted, along with Turkey, as a model for Muslim countries in North Africa that have overthrown autocratic regimes in recent weeks.

It’s not just investors who are upbeat about an economy that is posting a current-account surplus of around 1% of GDP, where the government’s finances are under control, and where inflation, while troublesome, is well below the double digits recorded as recently as 2002.

In December, the government articulated an economic vision for 2025 that sees Indonesia as one of the 10 largest economies in the world with a per capita GDP of US$12,800 to US$16,160, from about US$4,000 now. The IMF expects the economy to grow between 6% and 7% in the coming four years.

On February 25, Fitch Ratings raised its outlook on the country’s sovereign rating, to imply that Indonesia’s debt is soon to be classed as investment grade. Fitch at the moment rates Indonesian debt BB+, its highest non-investment-grade, or junk, rating.

In December, Moody’s Investors Service upgraded Indonesia’s sovereign rating one notch to Ba1, its highest non-investment-grade rating, because of the government’s improving debt position and the country’s build-up of foreign reserves, which stood at US$96.2 billion on December 31.

“The economic policy framework remains increasingly well positioned to deal with evolving macroeconomic challenges and potential shocks,” Moody’s said in a release, foreshadowing the upgrade.2

Including, stock investors take note, the challenge of inflation.

Jakarta Composite versus MSCI Asia ex-Japan Index since start of 2009

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“The Investment Manager Regime was a recommendation of the Financial Services Council to the Financial Centre Taskforce (Johnson Review) and we strongly support the Government’s initiative today,” Mr Brogden said.

“The announced changes will provide tax certainty for foreign investors investing in Australian managed funds. It will take away the uncertainty that currently exists which can result in foreign investors being unfairly taxed.

“The importance of this change cannot be underestimated – it removes a major barrier to Australian based fund managers attracting foreign investment.

“This will give Australian based fund managers the certainty they need when competing internationally and is a major step towards Australia becoming a real global financial centre.

“The Financial Services Council also praises the Financial Centre Taskforce for its strong support of and commitment to the introduction of an Investment Manager Regime.”

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In a Tri-Securities lending arrangement, the lender is able to take a blended portfolio of securities as collateral in a highly automated and risk mitigated environment. The innovative structure allows loans to be fully collateralised to lender specification and then held for safekeeping by the collateral agent. Daily reports are provided on the market value and the adequacy of the collateral against previously agreed limits, providing greater security than traditional bilateral agreements.

“We are thrilled to be involved in another industry first,” said Jane Perry, Chief Executive Officer for Treasury & Securities Services Australia and New Zealand. “J.P. Morgan’s Tri-Party Securities Collateral Management service provides the market with an innovative, sophisticated platform built for Australian and New Zealand institutional requirements,” she said.

J.P. Morgan’s Tri-Party Securities Collateral Management service offers clients a sophisticated suite of tools to effectively manage exposures of most forms of secured lending, such as securities lending, repo and foreign exchange swaps, as well as other financial instrument exposures. The offering also provides distinct benefits by using local legal agreements, local service management expertise and on-the-ground support during the transaction.

Ms Perry said: “Tri-Party transactions across all forms of secured lending are common in North America, Europe and Asia and we believe our offering will assist Australian firms in efficiently collateralising exposures in line with overseas practice. We have taken our global expertise and world class collateral management platform and made it accessible for local institutional investors.

“Our unique technology combines sophisticated collateral testing and concentration controls with a proprietary algorithm that determines the optimal use of diverse collateral pools across a range of counterparty exposures. The result is that the needs of both sides of a transaction can be met within one secure, risk-managed process,” she said.

Organisations with large balance sheet exposures to securities and short supply of liquid cash are now able to use their securities more effectively through the Tri-Party structure. By using a third party as the collateral agent, Tri-Securities Lending can supplement the more traditional cashbased securities lending market.

“Where companies have long assets the ability to use securities through an independent collateral agent can ensure balance sheet assets are being used in a more effective manner,” said Greg Keyser Managing Director for Equity Finance at UBS Australia, “We believe Tri-party will entice many new domestic entrants into the secured finance market.”

“Receiving securities as collateral instead of cash is an important element of securities lending, and working with an independent third party to manage the collateral helps give us as a lending agent confidence that collateral and other risks are being managed appropriately,” said Francesco Squillacioti, Regional Director Asia Pacific for Securities Finance at State Street Bank and Trust.

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The big picture

• Here’s a scary thought – 2010 is almost over, with just over two months to go to the end of the year. So it is opportune to see where Australia stands in the global rankings of shares, currencies and interest rates.
• One of the interesting findings is that the Australian sharemarket is amongst the laggards, not the leaders. Of the 72 global sharemarkets monitored, the Australian sharemarket is in 57th place, with the All Ordinaries just over three per cent down from the start of the year.
• The best performer is Sri Lanka, with shares up 94 per cent, followed by Estonia (up 59 per cent) and Lithuania (up 46 per cent). Asian sharemarkets have done well with both Indonesia and the Philippines up over 40 per cent and Thailand up 34 per cent. And of the major markets, the German Dax is up 10 per cent, the US Dow Jones is up almost seven per cent and Hong Kong has gained six per cent.
• At the other end of the scale the Greek sharemarket has slumped 28 per cent, followed by Cyprus and Slovakia. But it’s also worth noting that the Japanese sharemarket is down 11 per cent with China down 8.5 per cent.
• The relative weakness of our sharemarket will surprise some, especially as it has occurred at a time of a stronger Aussie dollar. Of 120 currencies monitored, the Australian dollar is the 8th strongest this year against the greenback. The Aussie dollar is currently up almost eight per cent against the US dollar, after being up by over 11 per cent at one point.
• The strongest currency is the Japanese yen, up almost 12 per cent in 2010 followed by the Thai baht, Mongolian tugrik and Icelandic krona (all up around 10 per cent). The other end of the list is dominated by African nations – Ethiopia, Uganda and Tanzania, but the Euro has also fallen against the US dollar over the year, down by around four per cent. Over 2010 the US dollar index is largely unchanged – a result that will surprise many given the perception that the greenback has been weak. Rather it has risen and retreated over the year.
• In terms of interest rates, Australia will end 2010 with the highest rates of any industrialised economy. The Economist magazine has data on 58 countries across the globe and Australia’s 3-month rate of 4.78 per cent is the 14th highest in the world, just behind Iceland and Hungary. Still, if the IMF’s listing of “advanced nations” is chosen instead, then Australia’s interest rates are the second highest, behind Iceland. Whichever way you cut it, Australia’s interest rates have more in common with those of developing nations.

The week ahead

• Will Murphy’s Law rule in the coming week? In October economists tipped a rate hike and it didn’t happen. For November, most have gone cold on a rate hike, so does that mean the Reserve Bank will spring a surprise?
• If the Reserve Bank does lift rates it will be a very big surprise. No matter how you cut the inflation data, there are no price pressures to be found. Rather, retailers are coping with deflation – falling prices. Add in the contraction in manufacturing and services sectors, the fact that no one is borrowing and the high Aussie dollar and there is no reason why the Reserve Bank would have to lift rates – even if it used its best pair of binoculars to gauge the future.
• In terms of the economic data, the Bureau of Statistics releases its house price index on Monday together with the Performance of Manufacturing index and October’s monthly inflation gauge. On Wednesday the Performance of Services index and building approvals are issued. Retail trade and international trade data are released on Thursday with the Reserve Bank’s Statement on Monetary Policy slated for Friday.
• It’s worth pointing out that the TD Securities/Melbourne Institute monthly inflation gauge has had a good track record. Not only was it ‘spot on’ with its forecast of the September quarter consumer price index, but past predictions have also been accurate. So the October data is worth watching closely.
• Of the other data, building approvals probably only partially rebounded by 2 per cent during September after the 4.7 per cent slump in August. And we expect that consumers are starting to spend a bit more, although it’s clear from the data that they are very selective. Retail trade probably rose 0.7 per cent in September after a 0.3 per cent lift in August with poor weather restraining seasonal purchases.
• The Statement on Monetary Policy will clearly be pivotal for the direction of interest rates. If the Reserve Bank trims its inflation forecast then rate hikes will be off the agenda until 2011.
• In the US, there will be three events that dominate attention over the week. The first is the midterm elections on Tuesday. Then the focus will turn to the Federal Reserve meeting to be held over Tuesday and Wednesday. And the third focal point will be Friday’s employment (non-farm payrolls) data.
• In terms of the mid-term elections, pundits expect the Democrats to lose seats – it just depends on how many and whether the Democrats also lose control of the Senate. Some investors believe that if control of the presidency and Congress is in different hands this would actually be a positive result – it may lead to fewer changes over the next two years and thus more investor certainty.
• Turning to the Federal Reserve meeting, the Fed would like to cut rates, but unfortunately the zero limit has been reached. (No matter how many times you say it, it’s still a remarkable situation.) So to give the economy a boost, the Federal Reserve is planning another batch of quantitative easing – in effect printing money. Arguably cutting payroll taxes would be more effective, but that gets us back to the political inertia.
• And then there is the employment data. At this early point economists expect private sector payrolls to rise by 80,000, a small improvement on the 64,000 lift in jobs in September. Job gains are still insufficient to trim the jobless queue, but that is largely because businesses are not confident enough to hire.
• Other data to watch over the week includes personal income, construction spending and the ISM manufacturing index on Monday. On Wednesday the ADP employment index and ISM services index are due together with factory orders and car sales.

Sharemarket

• We haven’t changed our end-year forecast for the Aussie sharemarket for around three months. For most of that period it has been more likely that we would have to trim our projection, but just in the past few weeks, our fabled 4,800 point target has moved into sight. We are actually still quite comfortable with our view, but it’s worth pointing out that the sharemarket rally can be traced back to August 27 when Federal Reserve chief Ben Bernanke vowed to do what it takes to restore economic growth. Bernanke said: “The committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”
• Global sharemarkets will be on edge in the coming week when investors put Ben Bernanke’s words to the test. The speculation is that the Federal Reserve won’t undertake ‘shock and awe’ stimulus measures, rather it will opt for modest purchases of bonds. But it is the statement that many will be watching. Businesses don’t have the confidence to use their hoards of cash to invest and employ staff. Economists may debate whether another round of quantitative easing is necessary, but it is the words and confidence effects that are generated rather than the action itself that are now important.

Interest rates, currencies & commodities

• Ahead of the last Reserve Bank Board meeting, financial markets reckoned there was a 74 per cent chance of the Reserve Bank lifting rates. In the end it didn’t happen. Current market pricing suggests a 20 per cent chance of a rate hike. It’s clear that investors have gone cold on the idea of a rate hike, just like the majority of economists.

The post Investor Signposts: Week Beginning October 31 2010 appeared first on AdviserVoice.

• The Reserve Bank Bulletin released yesterday has provided a breakdown of the ownership of Aussie equities.
• The portfolio allocations between households and institutional investors differ significantly. Mum and Dad investors hold 65 per cent of their portfolio in financial stocks – more than double the portfolio allocation of institutional investors.
• The large equity raisings during the GFC has resulted in foreign investors now owning around 40 per cent of the Australian market – in line with the holdings of institutional investors.

Click here to download the document (pdf)

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