Nimble: The act of being quick and light in movement
When we think of the Australian Economy, the Global Economy, Capital Markets you name it, the core of market fluctuation is captured in a ‘Nimble’. Recently, the Global and Australian markets have seen a vicissitude of systematic and idiosyncratic risk - one after another.
UBS acquires Credit Suisse, Reserve Bank of Australia (RBA) first rate halt in 10 months, soaring inflation, edgy bond market, reignition of Origin Energy takeover - a snippet of last month’s market wrap.
The fact is markets and economies are nimble. For the Australian economy, the goal is to sustainably gain stability in a manner that avoids a recession and hence revives the economy through a ‘soft-landing’. With this it is our goal to highlight the envelopments of the vast geopolitical world in this article.
UBS acquires competitor bank Credit Suisse
We’ve already delved into the core of what is floating around the economy at the moment. Talk of the town is around UBS acquiring Credit Suisse in a record breaking $4.5 billion deal. For context UBS and Credit Suisse are the largest banking institutions out of Switzerland - rival banks. The origination of this deal fell through due to a pre-existing banking crisis consisting of illiquidity, insolvency and fluctuating share prices amongst many banks. For Credit Suisse they have faced all 3, representative of a -80.58% decline in share price from 10 Oct 2022 to the market close at 6 April 2023. Attributes of this include Credit Suisses’ multiple money laundering scandals, illiquid capital and exogenous contagion within the sell-side market. Seemingly, at surface level UBS stepped in to acquire Credit Suisse on advice from the Swiss National Bank and Swiss Authority - a way to contain contagion within the Swiss banking system and wider global economy.
What does this mean for Australia? Evidently, within Australia this M&A transaction relays onto a multitude of factors for individuals, businesses and governments. Through a macro lens the deal will cause a heavy dent in market sentiment and confidence following the failure of 3 other banks (Silvergate Bank, CA, Signature Bank, NY and Silicon Valley Bank, CA). Bad news continues with the Debt Capital Market as Credit Suisse Tier 1 bonds were ordered on “complete write-down” seeing holders of these bonds unable to liquidate the asset. Businesses and funds that borrow Credit Suisse instruments are inherently beheaded following the collapse. Albeit, UBS acquiring Credit Suisse can see benefits for the benefactor, UBS, as the firm will look to be a power house in asset management with more than $5.0 trillion in assets under management. Such the UBS board will look to restructure with components of different Credit Suisse arms in objective of cost-reduction and profit maximisation.
Australia's equity market has garnered significant attention, thanks to its robust company composition that has positioned it well for growth in comparison to other global markets. Notably, Australia's resilience during the 2007-2008 Global Financial Crisis can be attributed to its strong commodity industry, which has remained in demand. Despite this, the recent surge in inflation, which stands at a 40-year high, has compelled central banks to tighten monetary policies, leading to increased capital costs and reduced market activity.
The global M&A market has been significantly impacted this year, with a 43% decline in deal value due to market volatility, uncertainty, and the difficulty in accessing debt leveraged funding for larger M&A transactions. Furthermore, the shift towards renewable energy has put pressure on the commodities sector, which accounts for 25% of Australia's GDP.
What is Australia’s Plan? To address these challenges, Australia has set a goal to invest $A320 billion in the National Electricity Market, particularly in storage capacity to accommodate the increased variability in power generation. Additionally, Australia is focusing on developing sustainable fuel value chains, low carbon mobility, and a local hydrogen industry to achieve its target of net-zero carbon emissions by 2050. This strategy has resulted in the growth of the technology sector, with M&A and capital funding activities increasing by 13% in volume over the past year. While Australia is not immune to global challenges, its relatively strong position suggests it may experience a softer landing than other developed economies.
The Australian property market has experienced a notable surge since the onset of the COVID-19 pandemic, with property prices rising by 6.7% across the country in the June quarter of 2021, with Sydney and Melbourne recording the highest increases of 8.6% and 7.5%, respectively. Over the past two years, the average house price has increased by AUD$255,000. However, the recent rise in interest and inflation rates has had a significant impact on the Australian property market for both home ownership rates and rental markets.
The rising cash rate has deterred homeowners from investing capital, leading to a drop of 1.2% in home ownership growth rates in the past quarter. The RBA has continued to increase the cash rate to combat inflation, but with Australia's economic growth remaining below 1% in the past year, individuals have become less inclined to purchase new houses. Nonetheless, the Australian property market is among the most resilient markets to declines in prices, having only dropped the average house price by 3% in value in the last year, compared to other markets that dropped by an average of 7.2%.
The decline in new home loan commitments has led to a shortage of rental market properties, resulting in an increase in the average weekly rental price by 6.12% in the last quarter. Despite this, the higher cost of capital has enabled individuals to invest in properties, as the high rental prices and lower house prices increase their ROI, enabling them to pay off their debt with less liabilities pressures.
The first Cash Rate Halt in 10 months
Evidently, Australia has been in the spotlight amidst cyclical variance and one of the leaders of the pack is the influence the RBA holds in the macro market. For context, the RBA has 3 main objectives:
- Conduct Monetary Policy
- Financial Stability of Australian Banks
- Operation of Banking Services (Banknotes and Financial Market Infrastructure)
Within Monetary Policy, the RBA alters the domestic money markets in both conventional and unconventional ways to achieve price stability, full employment and economic prosperity and welfare within the Australian economy. With that the RBA has been using the Cash Rate as a controlling tool to dampen accelerating inflation (6.8% April 2023, with a peak of 8.4% December 2022). The cash rate has risen consecutively for the past 10 months up until April, halting at 3.60%. This is the highest the cash rate has been since May 2012 amidst the second Mining Investment Boom.
Again, what does this all mean for you? Taking it back to the origination of this tightening Monetary Policy, high inflation streaming from supply chain issues, Russia vs Ukraine and trade tensions. High inflation streamed many negatives for individuals and businesses from increased cost of living, reduced purchasing power and business downturn. Seemingly, the demand-pull on the Australian market forced the RBA to respond by increasing the cash rate. Increasing the cash rate essentially, increases the bounds on borrowing and saving. This works in 2 prongs - encourage deposits and discourage investment. This is in an attempt to reduce money supply in Australian money markets as a way to decrease consumer and business activity to drive inflation back down. Evidently, this has it’s own contagion of different economic markets such as bonds, housing, job, equities, etc.
Ultimately, the recent halt in cash rate hikes gratifies a spark of hope that the economy is returning to stability. However, moving forward the rates remain tentative especially with the elucidation of Global markets in recent times.
Global inflation rates have surged to 8.8%, despite a slowdown in worldwide economic growth to 3.2% in 2022. In Australia, inflation has also risen, from 7.3% in December 2022 to 7.8% in March 2023, while economic growth averaged at a meagre 0.75% last year. These trends have exposed the significant supply issues plaguing many companies, restricting their ability to maintain competitive pricing. As per the law of demand, higher prices negatively impact demand for goods and services, reducing companies' revenues and profitability margins.
To address these supply challenges, companies have resorted to staff layoffs, leading to an increase in global unemployment rates by 1.61% in Q1 2023 as compared to December 2022. An American investment bank, Goldman Sachs, has also trimmed its workforce, shedding 3200 employees in the past month.
What does this signify for your career? Companies have scaled back their recruitment efforts, with financial firms in Australia reducing graduate offers by an average of 15.1%. With a recession predicted to hit Australia this year, job prospects over the next couple of years appear bleak, with several companies ceasing recruitment altogether. However, the upcoming budget is anticipated to introduce macroeconomic policies that could help alleviate the labour market's challenges.
2022-23 will be remembered as a heavily influential year to the Australian and Global markets. In hindsight, analysts compare the events in 2022-23 to the GFC 2007-08 and its contagion on global institutions. Yet, moving forward with an optimistic view is the way to match the nimbleness of the markets. We mention the effects of global contagion and it poses questions for Australia and whether to de-couple from global tensions and focus on internal stability. However, the way we see it is to try to demystify the global scenes - “instead of decoupling we must diversify”.