Economy

Hot spots worry economy; FOFA law reforms on pause; no princely sum for King Digital debut; Lachlan Murdoch back in the News Corp fold. By Kirsty Simpson.

Crimean crisis poses risks for the global economy

It is now six weeks since Ukraine deposed its president and Russia initiated moves to annex Crimea. And apart from initially causing some temporary declines in global sharemarkets and a sharp fall in the value of the ruble, the escalation in tension has had little effect on stock exchanges or economies outside the two countries.

The Crimean crisis is just the latest in a series of geopolitical problems that pose risks for the global economy – tentatively on the cusp of recovery. At the moment, everything remains stable, following an initial fall in stock prices. Beyond the Ukrainian borders – wherever they end up – economists are closely watching the risks of: China tripping on its path from developing economy to developed economy; North Korea; and/or another escalation in conflict in the Middle East, particularly in Syria or around Iran’s nuclear program.

None have yet developed to a point that would cause direct widespread harm, but while they remain unresolved they hover in the background as companies in Europe, Australia and the US weigh up whether now is indeed the time to loosen up and start spending after years of holding tight.

“[Ukraine] is a tripwire for global risk assets and could lead to slower global growth than we are forecasting,” says UBS economist Scott Haslem. Any further flare-ups in Ukraine, the Middle East, or a pause in Chinese growth could dent confidence, reduce business’s willingness to take risks and spend money on expansion, and thereby limit the expansion of the global economy.

“While this will have a very severe economic impact on Ukraine, it is less significant elsewhere … But for Russia it is different, if there are moves to impose more substantial economic sanctions, it could become a much more significant issue [globally] for growth.”

Moreover, Haslem notes that the list of geopolitical hot spots is quite extensive. “While I’m not convinced any of them will develop enough to cause the market to fall, say, 20 per cent, there are [more of them] than we have seen over the last decade.”

For now, the immediate impact of the conflict centres on the gas market. It has already been widely reported that Australian and US gas exports might be set to gain in the medium term from selling to Europe (which is seeking alternatives to Russian gas, as the country faces the possibility of broader economic sanctions). But for now the uncertainty has produced a spike in natural gas prices. 

“We have had a precedent to this,” says Macquarie Bank economist Richard Gibbs. “In late 2008-2009 [during a previous Russian/Ukrainian dispute] we saw the Russian natural gas border price in Germany spike to $US16 per btu, up from about $12 prior to that.” So far, European gas prices rose on fears that supplies will be disrupted, rather than the reality of it, which is the possibility of sabotage, the introduction of broad-based economic sanctions, or a retaliatory response from Russia. 

As yet, economic sanctions designed to attack the already anaemic Russian economy are a holstered weapon, to be drawn only if the Russians attempt a further land grab. But should it come to that, farmers are the only other local businesses beyond gas producers that could be directly affected by broader sanctions, if indeed they were applied to agricultural commodities as well as resources. Combined, Russia and Ukraine are among the largest wheat exporters in the world, with Australia. “And any disruption to wheat-growing in the Ukraine would have significant implications,” Gibbs says.

 

Pressing pause on finance laws

On the home front, the week started with a widely welcomed pause in the federal government’s reform of the FOFA (future of financial advice) laws. 

At risk of oversimplifying some complex changes, the most widely criticised element revolved around the federal government again allowing commissions to be paid to providers of general financial advice – something the previous Labor government cracked down on after some egregious cases of advisers giving poor and, in some cases, financially devastating advice to clients in order to attract more commissions (Storm Financial was the best-known case).

The move follows a month of growing criticism of the changes from commentators, financial planning groups and Labor. After the unrelated departure of the man who had led the charge on reforming  FOFA, Senator Arthur Sinodinos, Finance Minister Mathias Cormann was free to say the changes needed more consultation before their introduction. “I have decided to pause the process on the FOFA regulation for the time being to enable me to consult in good faith with all relevant stakeholders before pressing the go button on our changes,” he said. 

And if  FOFA and a budget looming in six weeks were not enough, Cormann also confirmed Medibank Private would be sold in a float, in the 2014-15 financial year, as discussed in this column earlier this month.

 

No princely sum for King debut

Maybe some financial advice was needed in New York this week when the sharemarket’s undiminished appetite for all things geeky was again on display. 

Twelve-year-old games developer King Digital Entertainment (the name behind blockbuster app Candy Crush Saga) raised $US500 million on the New York Stock Exchange ahead of its public listing to initially value the company at $8 billion. But on its first day, the share price slumped 15 per cent, reportedly the worst first-day fall for any company raising more than $500 million since its records began in 1995.

As with the listing of Facebook two years ago, investors ignored the warnings from commentators/spoilsports that it was a risky business and too expensive. King made $1.9 billion in sales in 2013, but 70 per cent came from just one game. Clearly some devotees bought the company’s story that it had developed a “secret sauce” to repeat the success of Candy Crush. Let’s hope they are right – fellow game developer Zynga also listed amid much fanfare two years ago and was trading at nearly a quarter of its listing price within 12 months.

 

Likely News heir named co-chair

In a much safer bet, Australia's best-known export, Rupert Murdoch, has made it clear that eldest son, Lachlan, is heir apparent of the family empire.

On Wednesday night, 42-year-old Lachlan was appointed as co-chairman, along with his father, of both News Corp and 21st Century Fox. Meanwhile, his 40-year-old brother, James, becomes co-chief operating officer of 21st Century Fox.

The appointments follow decades of speculation about which sibling would control the empire once Murdoch snr, now 83, steps back. Lachlan Murdoch was previously considered the most likely, but after a series of frustrations in his earlier management roles at News Corp, he returned to Australia in 2005 to concentrate on his own projects – most noticeably buying the Nova radio network and a stake in TV with the Ten Network. At the time, he said he had no plans to return to News. 

James Murdoch’s flame dimmed after his 2012 resignation as chairman of BSkyB during the British tabloid phone-hacking scandal, but presumably his new role puts him back in the race, albeit less prominently than Lachlan.

This article was first published in the print edition of The Saturday Paper on Mar 29, 2014 as "Too many hot spots puts paid to spending". Subscribe here.

Kirsty Simpson
is The Saturday Paper’s business editor.

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