Awash with cheap funding, investors worldwide are running the ruler over Australian companies.
A falling currency is only adding to the mix. The further the Aussie dollar falls, the cheaper any target company becomes.
Australia has always relied on foreign capital. Governments and companies have regularly raised funds by going offshore. Even our banks are reliant on overseas funding.
Australia’s largest bank, the Commonwealth Bank [ASX:CBA], sources around a third of its funds offshore. This means offshore funding finances one in three of all CBA loans.
With US rates rising, so too are banks’ funding costs. With the Royal Commission in full swing, though, banks are too scared to raise their rates. Add in a softening property market, there’s little wonder why bank share prices are feeling the pinch.
Foreign funding has helped build much of our infrastructure. English loans helped fund construction of the Sydney Harbour Bridge. This loan wasn’t repaid until 1988, more than 55 years after the bridge’s completion.
Ownership versus funding
While offshore funding has always been commonplace, something else has often attracted controversy. I’m talking about foreign ownership. Whether it be houses, apartments or farmland.
The amount, if any, which should fall into foreign hands often raises a great deal of debate. It also causes plenty of squabbles on the political front.
Especially when things don’t go both ways. That is, if the country where the buyers come from don’t allow foreign investors to buy property in their own country.
Perhaps where foreign ownership has caused the biggest debate is property. Overseas demand has pushed up property prices. And soaring property prices kept many would-be first-home buyers out of the property market.
This level of overseas demand, though, is now on the wane. Government levies and taxes have done their job. And so have the tougher borrowing restrictions from banks.
Foreign property ownership has caused angst for some. However, there is another debate that will soon heat up. And it has to do with the stock market.
A shrinking list
It seems like almost every other day, an international investor bids for an Australian company.
This week, it was JCDecaux. The French billboard and advertising company made a $1.1 billion bid for outdoor advertiser, APN Outdoor [ASX:APO]. Although approved by APN’s board, the deal still needs to clear the ACCC.
JCDecaux is not the only French company on the hunt for acquisitions. Another French giant, Unibail-Rodamco, took control of Westfield Group [ASX:WFD] earlier this year.
These are just two in a string of deals hitting the market.
Two weeks ago, Hong Kong based CKI bid $13 billion for APA Group [ASX:APA]. APA owns Australia’s largest network of gas and other pipelines.
CKI already own key infrastructure assets. In 2016, it took control of DUET Group. CKI was after DUET’s power and gas transmission networks in SA, WA and Victoria.
It’s a sector CKI clearly values. CKI already owns a controlling interest in Powercor and CitiPower in Victoria, and a stake in SA utilities company ETSA.
And this week, bidding for residential parks operator, Gateway Lifestyle Group [ASX:GTY], is heating up. Gateway sells houses in its parks, leasing the land underneath. That is, the tenant owns the house but not the land.
Gateway tenants are typically on long-term deals. Many have annual rental increases. Those bidding for Gateway want to get their hands on this growing income flow.
There are two companies in the race for Gateway. US company Hometown, and the Canadian-based Brookfield. Last year we saw another Canadian business take control of ASX listed REIT.
In 2017, NorthWest took control of Generation Healthcare REIT. Generation owned a range of private hospitals, medical centres and other healthcare facilities. Its tenants are long-term and high quality. Some lease terms are set for well over a decade with fixed annual increases.
Hunting for the best return
Part of a free market means that capital can go where it gets the best return. Australian companies have bought plenty of overseas listed companies. Though not always with success.
But unless new companies spring up to replace the ones we’re losing, the list of quality stocks on the ASX will continue to shrink. Capital attracts capital. Fund managers invest where they can easily enter and exit the market.
And liquidity attracts liquidity. Some of our smaller-cap stocks struggle to have a workable market at all. Bids and offers can be thin on the ground.
Offshore investors are chasing companies with common traits. That is, irreplaceable assets…and/or reliable and growing income flows.
If these companies continue to disappear from the market, it means less quality companies will remain on the ASX. The growing multi-trillion-dollar superannuation pie will have less choice in where it invests all that money.
All that might remain is the usual old suspects. That is, banks, supermarkets and telcos — stocks that have barely budged in over a decade. And that will lead to lower returns for all.
All the best,
Matt Hibbard is Money Morning’s income specialist. With nearly three decades in the markets, Matt has traded just about every asset class there is. The one thing that has stuck with him over this time is a very simple premise. That is, it’s the cash a company generates that ultimately determines its value. Sure, some stocks might fly away to multi-digit gains. But unless these companies can convert the ‘story’ into real money, the market will eventually find them out. And when that happens, the share price quickly falls back to Earth. That’s why Matt is on the hunt for the next generation of dividend-payers. Stocks that should be able to pay their shareholders reliable and rising dividends into the future.