Is Australia a safe investment?
Updated: Dec 24, 2019
I get asked this a lot. And that's great because the quick answer is basically ‘no’. It is most definitely not safe. Every Australian should take a long, hard look at their investment portfolio and re-think just how safe they have assumed Australian stocks really are.
Here are three ways I encourage my clients to think about how they have invested, and how they could diversify their portfolio.
From a risk management perspective
Most people are what I call triple leveraged to the Australian economy. They have:
(1) a job in Australia
(2) a house (mortgage) in Australia, and
(3) investments in Australian companies or shares.
This gives people zero diversity and exposes them completely to an Australian downturn or recession. Now, before you panic and check the expiry date on your passport, remember this is risk management. We are not discussing the likelihood that Australia WILL enter a recession (though I think it will, but that's another article). This is just basic risk management. For peace of mind, you simply do not put all your eggs in one basket. Yet, most people do and mistakenly believed they are diversified.
From a debt perspective
Australia has the second largest personal debt to Gross Domestic Product (GDP) ratio in the world. And it's getting worse, not better. In fact, ever since the global financial crisis (caused by too much debt), the financial situation of the average Australian has deteriorated substantially.
We currently stand at over 200% debt to GDP. Australia’s GDP may appear positive, but that is because we are accumulating debt. To put it simply, imagine you take out a loan and when the money hits your bank account you sit back and admire the all the money you have. Except you don’t have wealth, you have debt that is accumulating interest.
The debt Australia has been accumulating is making the economy look stronger than it is. But like a person, eventually Australia will reach a point where it can’t afford to pay the interest on the debt. The debt is too high. The economy will reach its debt capacity and there are signs that we may be rapidly approaching that stage.
From an economic diversity perspective
Australia has one of the least diverse or least complex economies in the world. Check out the rankings here. At the time of writing this, Australia is ranked at #55. Almost halfway down the list; above Nambia, but below Egypt.
The more complex an economy, the more 'diverse' and robust it is. Generally, complex economies are in a better position to weather an economic downturn, or take advantage of economic and technological developments and changes.
Advanced economies like that of Japan, Germany and the United States rank higher on the list. They have a diverse economy. They produce an enormous range of products that are consumed by markets across the world. Whereas non-diverse economies are more limited in their trading. Countries like Bolivia, Bangladesh and Zambia rank in the lower half of the list. At times their economies may be stagnant and slow.
It's all a bit frightening. In this case, complexity represents economic diversity. And diversity is what keeps you safe when things go wrong, because where there are losers, there will be winners. And in a diverse economy, the winners help the economy by becoming the new engines of growth. If you lack diversity in your economy, you run the risk of ending up with just losers.
There are of course other ways to measure the riskiness of the Australian economy. But these three should tell you enough. Australia is a 'RISKY' country.