Australia Won't Be So Easy for Trump to Bully

(Bloomberg View) -- When President Donald Trump berated Prime Minister Malcolm Turnbull two months ago over 1,250 refugees the U.S. 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 U.S. cooled.

That weakness turns out to be exaggerated. Australia's total trade with China declined 18 percent to $114 billion in 2015 (2016 will show little change when the monthly data is revised as the annual figure) from more than $139 billion in 2013 and 2012. Six years ago, total trade with China amounted to $127 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.

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 percent are in the materials industry, down from 26 percent in 2012, according to data compiled by Bloomberg. Energy's share of the index plummeted 50 percent, with only six firms included, down from 12 in 2012.

The diversification embraces finance, where 50 companies make up 46.7 percent of the index, up from 39.5 percent 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 percent of nations where it is easiest to start a business and to do business, according to the World Bank.

Such flexibility is driving the expansion of health-care companies, whose shares are up 16 percent this year as Australia's best-performing industry. Their 22-percent total return, measured in U.S. dollars, easily beats the 9-percent return for the 60 comparable companies in the U.S. and the 9 percent 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 percent. They also enjoy the fourth-highest net interest margin, 2 percent, and the third-largest anticipated return on equity, 12.4 percent, among analysts surveyed by Bloomberg.

What's true for Australian banks is true for Australia. The ratio of the country's debt to its gross domestic product is 46 percent, 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 percent this year, 2.7 percent in 2018 and 2.9 percent 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 percent this year, best among developed countries and superior to the global benchmark's 2 percent, 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.

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

(With assistance from Shin Pei)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew A. Winkler is a Bloomberg View columnist. He is the editor-in-chief emeritus of Bloomberg News.

To contact the author of this story: Matthew Winkler at mwinkler@bloomberg.net.

To contact the editor responsible for this story: Jonathan Landman at jlandman4@bloomberg.net.

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