Business Weekend | 9 November

Key Concepts

• Market Volatility and Risk: The program discusses significant price collapses in Bitcoin and Ethereum, and the US Federal Reserve's intervention to prevent a banking liquidity crisis, raising questions about market stability.
• Economic Growth and Living Standards: Concerns are raised about Australia's slow economic growth (1.8% per annum) and its potential impact on declining living standards for future generations.
• Corporate Competitiveness and Investment: Challenges in Australia's regulatory environment, particularly slow project approval times and outdated market technology, are highlighted as impediments to investment and competitiveness compared to other nations.
• Artificial Intelligence (AI) and its Economic Impact: AI is identified as a potential driver of significant global economic growth, but also a factor in the current market hype and investment in related stocks.
• Capital Markets and Liquidity: A shift from an era of cheap and plentiful capital to one of increasing cost and competition for capital is discussed, with implications for global investment.
• Banking Sector Challenges: Australian banks face rising expenses (staff and technology) outpacing revenue growth, leading to squeezed profits, exacerbated by a slow-growing economy.
• Active vs. Passive Investment Management: The debate between active managers and passive Exchange Traded Funds (ETFs) is explored, with a focus on how passive flows can magnify market movements.
• Private Markets and Listing Alternatives: The trend of companies staying private longer to avoid disclosure obligations and the emergence of alternative platforms for trading private company shares are discussed.

Summary

Global Market Warnings and Economic Concerns

The program opens by highlighting several warning signs in global financial markets. The enthusiastic shareholder approval of a potential trillion-dollar pay package for Elon Musk at Tesla is described as "overindulgence," despite its performance-based structure. The sheer scale of the remuneration and the risks involved are questioned, especially as Musk's future plans pivot to robots and AI, which could theoretically increase the global economy by a factor of ten or a hundred.

Further evidence of market indulgence is seen in the "massive fall in cryptocurrencies, Bitcoin and Ethereum," suggesting prices were set for perfection. A more significant concern is the US Federal Reserve's injection of $125 billion into the US banking system in just five days to avert a liquidity crisis. This intervention, following an interest rate cut and a halt in bond sales (quantitative tightening), aims to prevent difficulties in money markets for banks seeking liquidity. The US Federal Reserve Chair, Jerome Powell, stated that reserves were "somewhat above the level we judge consistent with ample reserve conditions."

In Australia, while there is no immediate credit crunch, Reserve Bank Governor Michelle Bullock is closely monitoring the situation in America. Treasurer Jim Chalmers has also spoken about "intensifying competition for capital" and "liquidity." He cited former Fed Chair Ben Bernanke's observation that global savings have fallen from 25% of GDP in 2005 to around 22% today, representing a significant reduction in available capital. Explanations for this include aging populations drawing down savings, the shift from quantitative easing to quantitative tightening, and China's maturing economy no longer being the same global capital provider. This scarcity of capital comes at a time when more is needed for infrastructure related to AI, transport, health, and education.

Investment Market Perspectives: Momentum vs. Valuation

Fund managers June Beloo and Anton Teglier discuss the current investment market landscape. Anton Teglier believes markets are being driven by "momentum," and a generation of investors is about to learn that "valuation is relevant." He points to the extreme valuations of some AI stocks, citing Palantir trading on 80 times next year's sales with a market capitalization of $500 billion USD, which is half the market cap of the entire Australian stock market. He argues that this momentum-driven market will eventually face a correction when valuations matter again.

June Beloo, while acknowledging valuation issues in some areas, believes the AI trend has "a long way to go." She differentiates the current AI boom from the tech bubble, noting that AI is being actively used and delivering efficiencies. She observed significant activity in private credit and mergers and acquisitions, with Goldman Sachs advising on approximately $1 trillion dollars of assets for the coming period, indicating a healthy pipeline. She also believes the Australian market, in general, does not look "too expensive."

Anton Teglier reiterates that central banks and governments are injecting money, and hyperscalers are spending hundreds of billions on data centers, creating a "wall of money" hitting markets and leading to "irrational behavior." He anticipates a correction is inevitable. He does see value in "out of favor stocks" that are unfairly punished when they underperform, contrasting them with the "hype" in other sectors.

June Beloo, managing a long-short fund, focuses on shorting expensive companies whose earnings are unlikely to meet expectations. However, she also sees opportunities in cyclical stocks that are currently experiencing an "earnings air pocket" due to interest rate cuts not materializing and high inflation. She believes that if share prices of fundamentally sound companies fall, it presents a good buying opportunity, as the Australian economy is "doing okay."

Australian Economic Challenges and Banking Sector Pressures

The discussion shifts to the Australian economy, which is growing at a slow rate of 1.8% per annum. Andrew Irvine, CEO of NAB, acknowledges that banks' expenses, particularly for staff and technology, are rising faster than revenue, squeezing profits. He emphasizes the need to grow revenue faster and manage costs effectively. NAB is seeing increased momentum in its business and corporate banking segments, growing at its fastest rate in three and a half years.

Irvine discusses the impact of inflation on costs and the need for cost control, including managing staffing numbers and improving productivity. He sees AI as a tool to automate low-value work, allowing colleagues to focus on higher-value tasks. While acknowledging potential job impacts from AI over time, he believes the economy needs more workers in sectors like construction and care. He anticipates a shift in the type of work rather than massive job losses. For NAB specifically, he expects a lower headcount in operational roles due to AI, allowing for more hiring of bankers and branch staff.

He notes that growing a bank faster in an economy growing below its long-term average is challenging. NAB expects economic growth of 2% this year and 2.3% next year, which they consider sustainable without triggering excess inflation. Credit growth is increasing, with business lending expected to grow by 7.5% and housing by 6% next year. However, Australia needs more productivity, construction, affordable energy, and reduced red tape to achieve a higher growth rate of around 3%.

Irvine expresses concern that while the current government understands the gravity of the productivity problem, the ability to grasp the opportunity is uncertain. He stresses that if Australia doesn't improve its competitiveness and productivity, the high living standards enjoyed over the past century are at risk, and "we cannot with confidence say that our children will have a higher quality of life than we did."

Regarding the business banking sector, NAB has maintained its market share in lending and deposits while holding margins steady, attributing this to good execution, customer service, and lending when needed. He notes that while Australia has many growth opportunities and is attractive to overseas investors, particularly from Asia, the regulatory environment and capital markets in Australia are less competitive than in the US.

Woodside's Australian Identity and Global Operations

Me O'Neal, CEO of Woodside, discusses the company's transformation and future plans, aiming to increase production and operating cash flow by over 50% between 2024 and 2032, with a corresponding increase in dividends. She highlights Woodside's history of being a significant dividend payer, returning 80% of net profit after tax to shareholders over the last 12 years, and values the franking credits for Australian shareholders.

Despite having significant growth opportunities and operations in the US, O'Neal emphasizes Woodside's pride in being an Australian company, born in Western Australia. She states that being ASX-listed is not an impediment to accessing global capital markets, citing a $3.5 billion USD bond raise in the US. She acknowledges that Australia's capital markets and regulatory environment are less competitive than the US, but maintains that Woodside has a strong Australian shareholder base and significant Australian revenue.

O'Neal expresses concern about the slow pace of approvals for energy projects in Australia, such as the Browse field, and the risk of leaving valuable hydrocarbons in the ground. She argues for the importance of gas in the energy system for Australia and abroad, particularly for energy security and decarbonization. She states, "Our message to government is we've just got to speed things up. It's too difficult to invest here." She believes that re-industrialization and the development of sovereign AI capability will require significant energy, including natural gas.

Woodside is also pursuing a new energy strategy focused on lower-carbon intensity molecules like hydrogen and ammonia. While there are positive policy signals from Europe and Asia, the markets for low-carbon ammonia are developing more slowly than anticipated. The company is focused on demonstrating value from its new ammonia project and will be disciplined before further expansion. Regarding the Bass Strait asset, Woodside is excited about the potential to extract an additional 200 petajoules of gas, even if ExxonMobil is less interested.

O'Neal acknowledges the need for Woodside to effectively communicate its story to politicians and the public about the importance of natural gas.

The Rise of Private Markets and Alternative Exchanges

The program then explores the trend of companies choosing to remain private to avoid the disclosure obligations of public listings. The corporate regulator ASIC is investigating ways to improve competition in Australia's listings market, especially after issues with the ASX. SIBO, a Chicago-based derivatives network, is selling its Australian stock exchange, which holds around 20% of market share.

David Ferrell, CEO of Finincare, which owns the FCX platform for trading private company shares, views SIBO's exit as an opportunity for a "refresh" and for someone to provide competition to the ASX. He believes an international listing exchange would be an "obvious owner" for SIBO's Australian operations.

Ferrell describes ASIC's regulatory process as "proportionate" but "long and quite rigorous." He agrees with ASIC Chair Joe Longo's view that public and private markets are converging, driven by technology. FCX is the first regulated market using tokenization of securities and real-time settlement, offering an alternative to traditional structures.

He confirms that private businesses are staying private for longer due to the avoidance of continuous disclosure and public scrutiny. He notes a "bifurcation" in the Australian market: it's beneficial to list at the top end of the ASX, but for smaller companies, there's a lack of infrastructure and support. FCX aims to build an ecosystem for companies from early to mid-stage through to public listing.

Ferrell highlights that the ASX's reputation issues have encouraged businesses to remain private. He points to many successful, multi-billion dollar private businesses that are unknown to the public due to a lack of infrastructure and liquidity options away from public markets.

Over the past year, FCX has managed several transactions, including a secondary transaction for Future Super. They are now focusing on opportunities for illiquid assets and unlisted funds. Ferrell believes it's a good time for advisors and investors to look at private markets for opportunities.