What do Britain, Canada, Australia and New Zealand have in common? Quite a lot, actually. They were all once part of the same political entity whose name we are now ashamed to mention – the British Empire. They all speak English. They use a system of common law based on the adversarial principle of defence and prosecution, adjudicated not by a Prosecutor, but by a jury.
Published by: Master Investor Magazine
They are all stable democracies which enjoy a high degree of political liberty and free speech. They respect the rule of law. They have generally pro-business economic systems that have secured a high degree of prosperity for their citizens.
They all enjoy a vibrant media which reflects a broad spectrum of opinion based on a shared revulsion for political censorship. A high degree of transparency makes for generally good corporate governance. They all boast brilliant writers and film-makers who continue a rich literary and filmic tradition.
Although most of their citizens still trace their origins back to the British Isles, many have come from elsewhere; and all these four nations are proud of having achieved a high degree of social cohesion while celebrating racial and religious diversity. The Anglosphere therefore is not a racial concept. Canadian Prime Minister Justin Trudeau’s cabinet includes four Canadians of Indian heritage, just as David Cameron’s cabinet has one Briton of Pakistani and one of Indian heritage…
And they all share the same head of state. A French friend of mine was amazed on his arrival in Australia that the Queen’s head smiled at him from an Ozzie Dollar bill. New Zealand stamps bear the Queen’s familiar profile; and those acquiring Canadian citizenship must swear allegiance to Her Majesty. These four nations, linked by a common heritage, are all leading members of the Commonwealth, of which the Queen is head…
This is all very comforting you may say – but does it amount to anything in economic and political terms? That’s the question I want to ask here…its answer could determine what a post-Brexit Britain might look like. And it should already influence our investment strategy, as I shall explain.
Of course there are important differences between the English-speaking nations. These four nations enjoy radically different climatic conditions and geographies and their economies are structured very differently. And, because they are far apart from each other, they are not necessarily natural trading partners (though Australia and New Zealand are good neighbours: Sydney to Auckland is a three-hour flight). Their economic cycles are not always in sync. And yet they have fundamentally similar ways of doing business.
Looking at the table, it’s shockingly obvious that Australia and Canada are massive countries (okay, there’s a lot of desert in Australia and a lot of tundra in Canada) while New Zealand and the UK are diminutive. But the combined population of Australia and Canada is less than that of Britain while New Zealand’s population is about half that of London. What is really striking, however, is that in GDP per capita terms they are all very similar – even more so if you compare them in purchasing power parity (PPP) terms.
Despite their extraordinarily different geographies, unlike the states of the European Union, they are all at almost identical levels of economic development…
You can infer cultural affinity by measuring how favourably people regard other countries. In a survey conducted by Chatham House and YouGov published in January 2015, a sample of UK citizens were asked which country they felt especially favourable towards from a list. Australia was the run-away favourite with 47 percent and Canada just behind on 44 percent[v]. (New Zealand was not on the list.) By comparison, France came in at 18 percent. A half century or more after the strange death of the British Empire, British people still regard Australians, Canadians and New Zealanders as their kith and kin.
But from civilizations to stock markets… I have been looking at the headline stock market returns for the Commonwealth Four since the Credit Crunch of 2008. What is striking is that despite the different structures of their economies, their stock market performance displays a high degree of correlation. The Australian economy is skewed towards mining and resources; Canada has an important oil sector; New Zealand is an important net exporter of foodstuffs; and the UK has a massive finance sector (yet manufacturing is still big in relative terms). Despite those differences, all four countries were traumatised roughly equally by the Credit Crunch. But, at the end of 2015, while the Australian and the UK markets are more or less back to their end-2007 levels, Canada was about 16 percent down and New Zealand was 60 percent up. Indeed New Zealand is the outlier, having lower correlations with Canada and the UK, though a high correlation with Australia.
This data yields the following correlation matrix.
So the interesting thing is that, even though these countries have very different economies, their stock markets are highly correlated, indicating that their business cycles are in harmony, after all.
It is surprising that, despite Australia’s supposedly keen dependence on the Chinese economy, its markets are remarkably convergent with the other three. Despite these high correlations, allocation to equities across these four markets would represent a reasonable degree of diversification.
Now let’s compare some key economic variables for Australia, Canada, New Zealand and the UK.
Flexible labour markets have enabled all these four countries to maintain high levels of employment for their workforces. The two northern countries with high debt burdens are of course maintaining a near-zero interest rate policy (NIRP) while the antipodean pair have managed to get through the post-credit crunch years without a debt explosion and have almost “normal” (though declining) interest rates. Growth was sustained in all four countries during 2015, though Canada lagged behind (and well below its neighbour, the USA).
Canada’s economy continues to outperform those of most other industrialized countries thanks to a number of competitive advantages: low business costs and corporate tax rates, ready access to markets, a highly skilled and educated workforce, strong public support for R&D and robust financial institutions. Forbes magazine has consistently considered Canada one of the most business-friendly economies on earth.
Even though Canada faces many of the issues of the rest of the developed world, such as unfavourable demographics and a low savings ratio, it gains strength from its uniquely bifurcated economy. Eastern Canada – Ontario and Quebec – relies on its extensive automotive and aerospace industries which supply its big American neighbour. However, Western Canada – British Columbia, Alberta, Saskatchewan and Manitoba – is in the enviable position of exporting what the emerging economies need most: energy and food…
The Australian economy seems to have ridden out the Chinese Wobble of last summer. The key here is not to judge the performance of the economy on the basis of the performance of its currency. The Australian Dollar fell from near parity with the US Dollar in May, 2013 to 72 cents as I write. A recent upswing was cut short on May 3rd by the decision of the Reserve Bank of Australia (RBA) to cut its cash (base) rate from 2% to 1.75%. RBA expressed some concern about the Australian economy. Inflationary pressures are lower than previously expected and there is little upward wage pressure. RBA commented that the “global economy is continuing to grow, though at a slightly slower pace than earlier expected” and that “China’s growth rate moderated further in the first part of the year”…
While Australia, Canada and the UK are all rated AAA with stable outlook by Standard & Poor’s, New Zealand is rated AA Stable. Of the four, its stock market is probably the most volatile. On the other hand, New Zealand is the one country where equity investors have made strong gains since the Credit Crunch. A recent report by ANZ bank described the New Zealand economy as having Jekyll and Hyde characteristics. Housing is booming, as are construction and tourism. Yet the dairy industry is in the doldrums. Household debt is growing. ANZ is forecasting 2.5-3 percent growth over the next three years.
Overall, I conclude that, as of now, growth prospects are better in the Anglosphere than in the EU.
Former Prime Minister of Australia, Tony Abbott, declares #Australia #UK free movement as “economic common sense”:https://t.co/yynl4VHBbX pic.twitter.com/FyQKJNRMvf
— The CFMO (@theCFMO) November 2, 2016
Of course Canada, Australia and New Zealand are rightly proud of their high standing on the world stage. Do they need Britain? Or each other? It’s not a matter of sentiment but a question of interest. The Anglosphere, including America, accounts for more than one-quarter of the world’s GDP. The vast majority of the world’s leading software, biotechnology, and aerospace firms are concentrated in English-speaking countries.
English is the language of the internet and it is the English-speaking countries which have adapted to the information economy most enthusiastically. Internet penetration in the UK is nearly 90 percent in contrast to a number of countries in the EU (it is 58 percent in Italy). But if English is the language of the internet, it is because it is also the language of science. Most academic papers now, even in French-speaking countries, are published in English (they are often incomprehensible to mother-tongue English-speakers, mind you)…
Does all this really matter? Where a language is predominant, those who speak it have a social and economic advantage. This means that centres of learning (universities) located in this language area will be favoured. (Just consider how the ruling elites in Europe – and especially the clergy – continued to communicate in Latin long after the Roman Empire had expired.) Interestingly, there is a huge rivalry going on right now between the universities of Britain and Australia to attract students from India, Singapore and Malaysia…
This could be the Big Idea of 2016. The REMAIN people always insinuate Britain has nowhere else to go but Europe. But when the idea of the Anglosphere takes root we shall wonder why we didn’t take this path earlier.
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