A Hugely Influential Australian Investment Banker Has Some Big Questions About Australia's Economy

Getty/ Mary Turner

Matthew McLennan is the largest individual Australian money manager in the world.

Currently managing $80 billion worth of assets in New York for First Eagle Investment Management, as well as previously working as a fund manager at Goldman Sachs for 14 years, the man knows a thing or two about investment banking.

But in an interview with The Financial Review’s Christopher Joye, the hugely influential investment banker made some compelling statements about Australia’s economy and “the outlook could be potentially quite challenging.”

Here’s what McLennan had to say.

ECONOMY:

“The first issue is regional stability. China’s [move] from an urbanisation and export-based model [and] currency instability in some of Australia’s largest neighbours… combined with our own exchange rate volatility, could portend a more difficult period ahead.

“A second challenge is Australia’s … structural headwinds. Notwithstanding the mining boom, several decades of pretty large current account deficits in Australia have produced a very highly leveraged private sector. [And] although the sovereign debt ratios in Australia are currently pretty good … if you had a crisis … the sovereign finances would deteriorate quickly.”

BANKS:

“We haven’t been investors in the Aussie major banks because the raw equity-to-asset ratios … are lower than our comfort zone, [as well as] the dependence on wholesale funding in the business model.

“There has been a fair amount of cumulative credit growth over the last generation – and if you look at the reserves-to-loan losses inside the banks it’s pretty low in the scheme of things.”

HOUSING MARKET:

“I think the Australian housing market is instinctively on the full side of fair value in a situation where the natural constituency, the marginal buyer, is already quite levered.

“I don’t understand why people feel the need to say a market is not in a bubble. I don’t think that’s a prudent approach when you see large levels of leverage and fairly low rental yields. While I get it that you want to support confidence, I don’t know what the upside is in talking down legitimate risks.”

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