Why Australia isn't so easy for Donald Trump to bully

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This was published 6 years ago

Why Australia isn't so easy for Donald Trump to bully

By Matthew Winkler
Updated

When President Donald Trump berated Prime Minister Malcolm Turnbull two months ago over 1,250 refugees the US agreed to accept from Australia, the phone conversation was perceived ominously: A decades-old alliance that was already strained by Australia's economic reliance on China was now being put under greater stress.

In that narrative, Australia needed all the international support it could get to counteract weakness caused by a resource-dependent economy. Chinese demand for Australia's iron ore, natural gas and coal, the thinking went, could force Australia to comply with the whims of its biggest trading partner, especially if relations with the US cooled.

That weakness turns out to be exaggerated. Australia's total trade with China declined 18 per cent to $US114 billion ($149 billion) in 2015 (2016 will show little change when the monthly data is revised as the annual figure) from more than $US139 billion in 2013 and 2012. Six years ago, total trade with China amounted to $US127 billion, Bloomberg data show.

Australia's reliance on commodities peaked four years ago and its economy is now diversifying more than any in the developed world. Among global investors, the relationship between commodities and Australia's stock market has diminished to insignificance from being a leading indicator, according to data compiled by Bloomberg.

 Australia's economy is less reliant on its commodities than in previous years.

Australia's economy is less reliant on its commodities than in previous years.Credit: Erin Jonasson

Australian business today is more varied than it was five years ago. Among the country's largest publicly traded companies, represented by the 200 members in the S&P/ASX Index, barely 17 per cent are in the materials industry, down from 26 per cent in 2012, according to data compiled by Bloomberg. Energy's share of the index plummeted 50 per cent, with only six firms included, down from 12 in 2012.

The diversification embraces finance, where 50 companies make up 46.7 per cent of the index, up from 39.5 per cent and 37 firms five years ago. Companies involved in health care, consumer products and technology also expanded their roles.

The burgeoning variety of business wiped out the traditional correlation between the composite price of commodities futures contracts and the Australian stock market. For six years until 2014, commodities and Australian stocks fluctuated together. Since then, the two markets separated and the once vivid historical correlation on traders' charts has disappeared. The divergence is most apparent with the surge in global money into Australian exchange-traded funds the past year as commodity prices stagnated.

Obscured throughout the dozen years of irregularly rising commodities prices is the reality that Australia traditionally is among the top 10 per cent of nations where it is easiest to start a business and to do business, according to the World Bank.

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President Donald Trump's view of Australia's economy seems outdated.

President Donald Trump's view of Australia's economy seems outdated. Credit: Evan Vucci

Such flexibility is driving the expansion of health-care companies, whose shares are up 16 per cent this year as Australia's best-performing industry. Their 22-per cent total return, measured in US dollars, easily beats the 9-per cent return for the 60 comparable companies in the US and the 9 per cent returned by 132 members of the MSCI World Health Care Index, according to data compiled by Bloomberg.

Banks are similarly outperforming global rivals. Among the 95 members from 19 countries in the MSCI World Bank Index, six Australian banks have the lowest ratio of non-performing assets to total loans, 0.53 per cent. They also enjoy the fourth-highest net interest margin, 2 per cent, and the third-largest anticipated return on equity, 12.4 per cent, among analysts surveyed by Bloomberg.

Australia's Ambassador to the US Joe Hockey praised 'practical' Donald Trump earlier this week.

Australia's Ambassador to the US Joe Hockey praised 'practical' Donald Trump earlier this week. Credit: Andrew Meares

What's true for Australian banks is true for Australia. The ratio of the country's debt to its gross domestic product is 46 per cent, the 7th lowest among 25 developed countries. Among the Group of 20 countries, Australia was No. 5 in GDP growth last year, improved from No. 10 in 2015. Economists surveyed by Bloomberg say Australia will grow 2.5 per cent this year, 2.7 per cent in 2018 and 2.9 per cent in 2019, a three-year performance better than any of the G-8 economies.

In the bond market, where performance is the surest measure of a strong economy, debt securities sold by Australia and its corporations produced a total return of 5.2 per cent this year, best among developed countries and superior to the global benchmark's 2 per cent, according to the Bloomberg Barclays Global Aggregate Total Return Index.

Rising confidence in Australia also is reflected in the currency derivatives market where the implied volatility of the Australian dollar -- a measure of perceived instability -- declined 17.5 percentage points since 2009.

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Trump should take note. Diplomatic pressure can push Australia only so far because there isn't a Group of 10 country that's doing better right now.

Bloomberg

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