1 January 2025

I wish everyone a very happy New Year with those near and dear to you.

The past 14 months have been a traumatic time for many Australians, particularly those who have suffered a series of terrible attacks following the atrocities committed by Hamas on 7 October 2023. Our political leaders failed the test by not stamping promptly on the wave of antisemitic activity which began with the infamous Opera House demonstration which followed the atrocities. Australians expect their prime minister and premiers to act quickly to speak out promptly in a forthright manner. To react timidly is to let these un-Australian attacks fester and grow. Hopefully, now that our political leaders have been shamed by their inadequate and belated response to the fire-bombing of a synagogue, there will be a return to proper application of the law and to civilized behavior by those who have set out to cause trouble. 

2024 summary 

60 percent of the world measured by gross domestic product went to the polls and in 80 percent of those the incumbent governments were voted out. US presidential candidate Donald Trump was almost shot twice and won the presidential election taking all seven swing states. Wars raged in the Middle East and Ukraine and there were a normal number of natural disasters. Overall financial markets went up.

2025

The two major forces are likely to be the Chinese economy and President Trump.

Trump’s tariff threats may turn out to be less than threatened but will be used as a bargaining tool. Despite his inauguration being weeks away Trump is having a huge impact. Nobody who matters cares what the fading President Biden thinks. Decision makers and leaders have been beating pathways to President-elect Trumps door and to those of his key appointees. Some of his cabinet appointees are strange. One has been forced to withdraw and others look likely to face stringent questioning before senate ratification of their appointment.

China is experiencing a serious economic slow-down but much is hidden. When youth unemployment reached 20 percent, the Chinese government stopped releasing that statistic. China has passed the point where population growth has turned negative. It is now captive of a declining and aging population with devastating impact on property demand. This is a significant blow to attempts to recover from the collapse of huge property developers with the vast number of unfinished apartments for which Chinese investors had paid for up front with the assistance of borrowed money. How the Chinese government resolve this disaster is not apparent. A huge amount of Chinese national savings has been destroyed, much of it sitting in huge unfinished concrete and steel buildings. Housing value is now in long term decline as fewer people require less homes. Local governments, which rely heavily on land sales to property developers, are reported to be in bad financial condition. Trumps tariff threats are an unsubtle warning to China’s export industries.

Despite regular military demonstrations, I doubt that China will invade Taiwan. The cost to Russia of its ill-judged invasion of Ukraine will have been studied by China. Given its economic challenges China would not wish to risk the majority of Western economies shutting down their importation of consumer goods in protest. Nor does the sea gap and the mainly rugged terrain in Taiwan suggest that an invasion would be an easy operation. Huge losses are likely.

The impact of Trump appears to already be influencing Hamas and its long-term weapons supplier Iran. A ceasefire and hostage release agreement appears likely since Trumps blunt threat as to what might happen if the hostages are not released before his inauguration.

Outlook for the Ukraine War 

While President-elect Trump boasted that he would end this war he will not wish to be associated with a debacle like President Biden’s shambolic withdrawal from Afghanistan. Some mixture of carrot and stick is Trump’s likely approach.

Putin will want to be able to claim to have achieved something to justify an estimated 600,000 Russian casualties. The economic impact in Russia includes 21 percent interest rates, having its foreign currency reserves frozen and shortages of key consumer staples like butter, eggs and potatoes. The Russian Oligarchs had their foreign assets seized including luxury yachts. What was expected to be a short military operation has dragged on. Ukraine has fought bravely, and substantial aid has been provided to it.

Ukraine wants an end to its huge losses but is unlikely to disrespect the enormous bravery of its forces by surrendering. It will want credible guarantees of peace in the future.

The surplus of oil coupled with restrictions as to where Russia can sell its main export means that the price it receives is far below its peak thereby starving Russia of foreign currency. Russian industry has largely been deprived of access to key imported components. This situation means that a bargaining face-off against a Trump dominated NATO places Russia in a weaker position than prior to its invasion of Ukraine. 

Leadership lessons from Prime Ministers Hawke and Howard. 

In the aftermath of the Tiananmen Square killing of Chinese dissidents demonstrating in favor of political freedom, Prime Minister Bob Hawke spoke out promptly and offered to let Chinese students studying in Australia stay if they felt that their return to China was unsafe.

In the immediate aftermath of the Port Arthur massacre by a murderer with an automatic rifle, Prime Minister John Howard acted swiftly to announce a gun buyback and restrictions concerning those who had a legitimate need to own a non-automatic weapon. Automatic rifles and pump action shotguns were banned entirely. Howard’s action was unpopular with segments of the population, but he persisted and Australia has had far fewer gun deaths despite a small minority criminal element having illegal weapons.

Political leaders who seize the moment and act with authority gain respect.

Nuclear 

The nuclear debate has been opened with the Coalition issuing its plan. Energy minister Bowen has condemned it but thus far has not demonstrated that he is across the detail. Recently COP 29 endorsed the growth of nuclear energy as an essential component of the global reduction in use of fossil fuels. 29 out of 30 advanced economies have or are building nuclear power. Australia is the exception. Labor mocking the Coalition’s nuclear policy in the face of what is happening globally lacks credibility.

A labor/Greens related medical GP Margaret Beavis, has issued a scary nonsensical statement claiming all manner of ills for those working in the nuclear industry. The US Navy has had nuclear powered submarines since the 1950’s and there is no record of the crews on these submarines which are at sea for lengthy periods having suffered the afflictions claimed. As part of the AUKUS agreement an increasing number of our navy personnel are currently serving on US Navy nuclear submarines. Inaccurate scare campaigns are no substitute for facts.

One of our sons lives with his family in France within a few kilometers of a nuclear power station. France receives 70 percent of its electricity from nuclear power plants, which are scattered through the country, and the population is unconcerned.

Follow the money 

Much of the Australian debate is shaped by those with an economic interest, including those receiving huge Commonwealth Government subsidies to build wind and solar networks. As the saying goes “follow the money”—i.e. tell us who receives the subsidy, and we know what their stated position will be.

Regulated assets 

The huge transmission lines being built to carry intermittent power from wind turbines and solar farms are enormously costly regulated assets meaning that they have a guaranteed investment return to their owners. This is embedded in electricity prices which are passed on to users. Our electricity is becoming ever more expensive and forcing industries to desert Australia and relocate overseas?

Proposed APRA bank hybrid ban 

The Australian Prudential Regulation Authority claims that bank hybrids are too risky and wants them discontinued from 2032. APRA believes that we, poor retail investors mainly via our super funds, are at too much risk.  But as bank hybrid securities rank above bank ordinary shareholders APRA is logically arguing that we should not be able to invest in bank shares via the share market. A couple of motivations could be:

1.      APRA believes that SMSF investors are incapable of understanding hybrids. My belief is that the majority of SMSF investors are a great deal more intelligent than APRA gives them credit for.

2.     It is a government motivated move to stop banks distributing franking credits as part of the hybrid returns in which case many will switch to investing in bank ordinary shares which have a history of paying franked dividends.

APRA’s proposed ban has created strong opposition.

Our family superannuation fund is invested in a range of hybrid securities issued by the four major banks plus Macquarie Group. On announcement of APRA’s stance we sold a short-dated bank hybrid and reinvested the proceeds in long dated bank hybrids.

Trying to recover massive Greensill Capital losses: chasing the insurers for money. AFR 30/11/2024.

When big losses occur lawyers representing those seeking the recovery of their money chase every organization associated with the transactions who may have sufficient assets to repay all or part of the loss.

Greensill was in the business of debt factoring on a large scale. This involved it lending to businesses against their invoices for goods and services rendered i.e. cash flow lending. In order to be able to lend Greensill borrowed at a lower interest rate and insured its activity. If it could charge a margin above its own interest cost plus the cost of its insurance premiums it was able to make a profit.

Greensill’s business ended when its insurers refused further insurance cover but existing policies remained in force for a time. If Greensill had been able to recover its loans as invoices were paid then it would have repaid its financier(s) and the only loser would have been Greensill whose ability to finance new business had ceased. But it was unable to collect sufficient of its debts in order to repay its creditors and hence lenders to Greensill want to recover their money from anyone considered to be legally liable. Greensill had loaned large sums to companies associated with entrepreneur Sanjeev Gupta which are in various throes of financial difficulties and are unlikely to repay their debts.

Marsh, a US $94 billion New York Stock Exchange listed company, is an insurance broker which sourced insurance on behalf of Greensill from Sydney based Bond and Credit Co (BCC) a trade credit specialist half owned by $20 billion IAG Group. IAG’s ultimate parent is Insurance Australia Limited (IAL). To complicate matters further BCC was transferred to a new owner—Japanese insurer Tokio Marine—on 1 July 2019, which may or may have taken over liability for some or all of BCCs in force policies. Legal discovery processes are uncovering various documents and file notes.

Complicated commercial cases, involving large sums of money, invariably involve teams of lawyers seeking out documentary evidence to tie as many bodies with significant financial stature to responsibility. In this case lawyers for US financier White Oak are seeking to tie insurance brokers and various insurers with ownership links to the insurance coverage of the financial invoicing of Greensill Capital.  Whether there are other lenders who might join White Oaks action is not apparent.

This matter may only resurface rarely in the public domain, if at all.  Behind the scenes lawyers representing White Oak are trying to tie Marsh, BCC, IAG, IAL and Tokio Marine to responsibility for the Insurance liability for Greensill capital’s losses and hence for the large sum of money owed to its creditor(s). It is likely that at some point an agreement will be reached where some or all of those involved in the insurance related chain including partner companies and owners agree to a basis for sharing the cost of the liability to White Oak but it will also depend on what percentage of its loss White Oak may be forced to accept given that it was in a business of lending of a nature which was inherently risky. Teams of expensive lawyers will be charging huge amounts of juicy fees.

Ultimately out of court negotiated settlement appears more likely than further court action. Inevitably this will be shrouded in confidentiality agreements. 

Victorians are selling their residential rental investment properties in droves. 

A friend in real estate recently told me that over the last six months he had assisted clients selling 36 rental units in Victoria. Not a single one was purchased with an intention to rent. The combination of purchase and selling costs, punitive Victorian land tax on rental property, costly tenants’ rights legislation, increased fire levies forcing up insurance costs, rental agents letting and property administration fees, repair and maintenance, municipal and water authority rates, all of which fall upon the landlord have destroyed residential rentals as a viable investment in Victoria.

The Victorian “build to rent” market has dried up, meaning that the number of new residential towers being built has plummeted with the greatly reduced number largely being for cashed up down-sizers. There is a growing residential rental shortage in Victoria. This was foreseeable, except by the Andrew’s /Allan Government, whose desperation to paper over its worsening financial situation increased land tax on rental property but also strengthened pro tenant anti landlord legislation. Its’ actions are destroying the availability of residential rental properties in Victoria. What use are tenant’s rights if flats to rent disappear?

No sensible investor is going to buy or build residential property to rent in Victoria.

Veterinary companies 

With the private equity purchases of Greencross vets and National Veterinary care the remaining listed veterinary company is Apiam Animal Health Ltd. It is a rural based business with practices spread through productive rural areas across Australia. Since first listing its performance as a share market investment with its recent share price being only 27.6 percent of its value on listing. Running a national mixed animal veterinary practices business is challenging including the challenge of maintaining workable veterinary rosters in widely scattered practices. It has recently rejected a buy-out/takeover offer, but most buyer’s initial offers are rejected.

Despite advising the owners of many leading veterinary practices over many years I have always regarded Apiam Animal Health’s business being significantly challenging and have avoided owning shares in it.

Beam Dental Bidco Ltd nearing full control of Pacific Smiles Ltd. 

Beam which has been regularly buying Pacific Smiles shares has recently passed 76 percent ownership and extended its takeover offer. At 90 percent share ownership it will be in a position to compulsorily purchase the remainder. The end is in sight.

A big thank you to Kay and Kate Middleton for their assistance in editing my writings.

Best wishes to all

Graham Middleton 0448 784 594

General advice and need to confirm. 

As I sold out of an accounting and financial services group, of which I had been a founding partner, on 30 June 2020 I am no longer licensed. The above is general advice and should be confirmed with a currently licensed investment adviser. One I would recommend to you is Campbell Thompson at Ord Minette who is both courteous and experienced. His number is 0407 839 229. His assistant Simone Shelton 0402 085 892 is a helpful person also. If you are after simple transaction advice, they are ideal. I use them but have absolutely no financial interest in any services that they provide to others.

My Financial interest. 

I have no financial interest in the advice I provided and seek no fee. I am secure financially and I seek no personal remuneration. If you find it worthwhile you are able to acknowledge it by making a tax-deductible donation to the registered charity which I support, the Delany Foundation who, I am confident, will apply it to worthy use.