Financial markets in Australia present something of a paradox. On the one hand, owing to Australia’s geographic position as the largest economy in Southeast Asia, Sydney joins Singapore as one of the only two major financial centers in this region of almost 700 million people. As a result, there is a relatively high number non-Australian companies listed on the Australian Securities Exchange (ASX). However, the Australian Securities Exchange (ASX) is only the 17th largest stock market operator worldwide – much lower than one might expect given that: the Australian dollar/U.S. dollar is the sixth most traded currency pair in the world, the country enjoys a very high gross domestic product (GDP) per capita, and that Australia is the 12th largest economy in the world by GDP.
Mining – Australia’s primary industry
A look at the most important sector of the Australian economy – mining – provides some answers to this puzzle. Australia is home to the second largest mining industry in the world, with the two largest mining companies in the world – BHP and Rio Tinto – being both Australian. Australian dollars are therefore often needed to purchase the coal, metals, and minerals exported from Australian mines. However, both BHP and Rio Tinto are dual listed on the London Stock Exchange, meaning much of their value sits on the UK financial market. Regardless of where shareholder wealth flows, the strength of Australian mining led to Australia being one of the only countries not to suffer a recession from the 2008 global financial collapse. This stability led to consistently high levels of foreign direct investment in Australia. The majority of this money was invested in fixed, physical assets that do not directly contribute to financial markets.
Compulsory private pension investment
Another important feature of Australian financial markets is the country’s somewhat unique system of compulsory ‘superannuation’ payments, whereby all employees must invest 10 percent of their salary into retirement savings. As a result, Australia has one of the highest ratios of pension assets to GDP in the world. Much of these funds are handled by Australian banks – one of the reasons they comprise five of the ten largest publicly listed Australian companies. Around half of Australian pension fund assets are invested in equities – a figure higher than in other comparable countries. However, as these funds are handled by professional investors and subject to very few investment restrictions, often these portfolios will contain significant investments in international securities.
