Markets

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

If economies need animal spirits to thrive, what sort of beast is Australia in the aftermath of its mining boom? Something like a wounded bear that would rather hibernate than go hunting for food, if you listen to Treasurer Scott Morrison.

Governments need to work at building an economy that "can coax private capital out of its cave," he said at a Bloomberg Address event in Sydney Thursday. "Global capital is sitting dormant. How else do you interpret the absurdity of negative bond yields?"

Though Australia's 25 years without a recession represent a remarkable success story, it's fair to say the country's going through a rough patch. Interest rates are at a record-low 1.5 percent, and local businesses are showing more of a tendency to lick their wounds than search for new investment opportunities.

What Lies Beneath
Take out mining, and capital spending in Australia has been stagnant for a decade
Source: Australian Bureau of Statistics, Bloomberg
Note: Seasonally adjusted figures.

The huge splurge of capital expenditure that accompanied the mining boom helped cover for a while a fact that's becoming embarrassingly clear as the resource spending recedes: Take out mining, and investment by Australian businesses has barely increased since the global financial crisis.

So where's the money going? Blame the baby boomers.

Gray Army
The value of net assets in Australia's self-managed retirement funds is plateauing after a decade of growth
Source: Australian Taxation Office, Bloomberg

Self-managed super funds -- accounts that are controlled by their owners rather than professional fund managers -- make up the biggest share of Australia's pool of retirement savings.

The funds, which have benefited from a range of overly generous tax breaks during the past decade, have an outsized influence on the Australian stock market, according to Hasan Tevfik, director of Australian equities research at Credit Suisse. Retirees' desire for a steady income from their investments helps explain why certain types of stocks tend to be overvalued in Australia relative to their performance elsewhere, and why local businesses so often fall over themselves to pay dividends above the levels found in other markets.

Show Me the Money
Australia's S&P/ASX 200 benchmark has the best dividend yields among its major peers
Source: Bloomberg

There's nothing wrong with rewarding shareholders for the capital they provide, but things that are good in moderation can become troublesome in excess.

In the long term, companies that dedicate more of their free cash to shareholders rather than finding new ways of making money are robbing the future to pay the present. Countries where that becomes the predominant mode of corporate behavior are in even greater trouble.

Worryingly for Morrison, the trend is already well underway. Dividend payments by companies in the S&P/ASX 200 benchmark were already ahead of capital spending 12 months ago, data compiled by Bloomberg show, and payouts have held up well since then, even as investment has declined further.

Cash Rules Everything Around Me
Companies in the S&P/ASX 200 index spend more keeping shareholders happy than investing in growth
Source: Bloomberg
Note: Based on current S&P 200 constituents.

Morrison is making some changes that might help reverse this dynamic. The country's May budget proposed the elimination of some of the tax breaks that have encouraged Australian households to sock excessive amounts away into their retirement accounts.

The measures are by no means a done deal, given the government's narrow majority in parliament and the need to pass the laws through the Senate using the votes of opposition and minority parties. But if successful, the changes should help slow the growth of self-managed superannuation assets to 2 percent annually until 2020, from a rate of 15 percent over the preceding 12 years, according to Tevfik.

It's not a point Morrison chose to emphasize in front of the fund manager-heavy audience at Bloomberg's Sydney offices, but stemming the river of gravy flowing toward Australia's retirement accounts isn't a bad way of kicking the corporate sector out of its sulk.

Retirees watching an era of easy returns coming to an end might encourage managers of both funds and companies to take a few more risks for the sake of long-term growth. Animal spirits always did thrive best on an empty stomach.

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

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net