Macro

Australia has long had a love affair with bricks and mortar type investments. This strategy has reaped large rewards for many. Glimpses of the path ahead were evident in the late 1990s tech boom when the Australian stock market was underperforming global peers and seen to be out of step with the global direction. This did not last as the resources boom took over due to China’s urbanisation, extensive infrastructure projects and increasing demand for energy.

Fast forward to 2019 and Australia is now seriously out of step with the increasingly evolving digital world. As the chart shows, only 13% of the revenues in the ASX 200 currently come from the new economy (including healthcare, tech, online retailing, communications and renewable energy). The mix of banks/insurance, resources, supermarkets and property is in stark contrast to developed market equities where technology is being produced - not just consumed. By contrast 26% of developed equity market revenues are derived from the increasingly important digital economy.

Digging further into the data shows that the US is leading the way. The US has by far the largest stock market exposure into the digital economy and is adjusting the fastest. Why?

The US has such a clear strategy stemming from the ivy league universities (and this is increasingly broadening) who have been successfully able to combine world-class research with risk funding, managerial expertise to commercialise innovative products and services to potential markets at global scale and with competitive prices. As these products gain market traction, additional funding comes readily from public markets and pension funds. Data is well documented and shows that the US is investing across all the different life cycle phases and the weighting across these parts of the life cycle is stable.

By contrast, Australia has world class research but an inability to commericialise this research with limited venture capital monies and difficulty in attracting managerial expertise to effectively market the product or service globally. Indeed, Australia prefers to invest in late stage and occasionally mid stage as opposed to early or seed stage. Going forward this must change for Australia to adapt to the new digital economy.

Delving further for root cause analysis, Australia is not moving to develop World Class Digital Economic thinking because:

  • The resources boom has not finished! This has been the backstop to the economy in the past but nothing lasts forever? India will never be China!
  • The Australian banks and insurance companies do not have to do anything new or innovative because they operate in a government sanctioned oligopoly.
  • Further, the Australian banks struggle with valuing intellectual property. They prefer the proven view of residential and industrial property.
  • Universities are not currently set up to commercialise world class research.
  • The government has attempted to address this issue via a $2bn securitisation fund targeted at providing capital for small business. This has failed on multiple grounds, including delayed set-up, regulatory rules and difficulty pricing risk.
  • The ASX does not have a secondary listing capability for start-ups and small/medium sized business moving into an expansion phase.

To conclude, Australia will always be a digital economy laggard and will ‘suffer’ until there is a strategic shift to a more balanced assessment of end to end risk across a company’s life cycle.

For portfolios, monies must be increasingly invested into global investments away from the myopic ASX 200. Within this, investments should be single sleeve and global by design. Australian equity assets should be in the small/micro-cap space or in unlisted single sleeve investments. 




 



Michael Whelan

So, Brigette, what would you envisage or prefer to see on the ASX ? A number of Google/Alphabet, Apple, Amazon and MMM equivalents? We can look at someone like Atlassian and ask why they listed in the US. IP is typically equity risk as opposed to debt risk, especially in early stages until commercialisation and the revenue starts flowing in. Don’t discount the digitisation that has occurred in the economy, the AI being used in the resources sector, and the successes we do have.

Stephen Moore

Nailed it. That was awfully cogent