The most important thing

The most important thing

Earlier this year Australia’s population crossed over 27 million, and the latest figures (soon to be updated) showed an increase of 660,000 people, of which 520,000 were net migrants.

In the last quarter (September 2023) the total increase was 160,000, with only 37,000 new dwellings built.

This wasn’t an explicit policy that any politician campaigned on, and it’s certainly not one anyone voted for.

Nor is it something that seems planned, unlike say in the United States, where decisions on open borders have apparently come from the very top.

Rather, it’s a technical consequence of immigration settings that were set by both major parties.

Putting aside the politics, this has very clear investment implications:

Get Long!

Whether it’s real estate, retailers, insurance or banks, the 500,000+ people coming into the country each year are new customers for all of them. This is a wildly positive for the great Australian duopolies.

Whether this is good or bad… it really depends.

Speaking of my own friends, most of which are mid-career professionals and generally doing quite well, there’s a sudden realisation that most of us can’t afford to buy on the streets we grew up on, let alone the houses we grew up in.

A working professional couple no longer cuts it, you need a liquidity event.

Of course, all this real estate was owned by someone, so the wealth creation has been spectacular, particularly given the typical leverage applied to housing. To the delight of their occupants, houses bought for peanuts an hour from the CBD are now worth millions.

But the gains are uneven, and frankly unAustralian.

Without intending to, we have landed in a society where to buy a home in the nation’s largest cities you need to be a successful couple and have the support of multiple land-owning parents (or have serious entrepreneurial success). And for those who can’t pay, there are plenty of new residents happy to bid with wealth of unclear provenance.

There’s plenty of land, and plenty of blocks that could support more dwellings.

Policy suggestions to fix the problem are usually either counterproductive or politically toxic.

Offering subsidies would lift prices and make the problem worse. And removing tax incentives is a deal-breaker for the large minority who own the real estate, and the additional minority who hope to inherit it one day.

Housing is a topic where thinking is particularly muddled. There’s a misconception that higher density will lead to strain on resources, buses, infrastructure and the like, whereas reality shows the opposite.

Higher density allows for more buses, and justifies greater investment in infrastructure. The best public transport is in cities like London, New York and Tokyo, not sprawling suburbias like Perth.

There are solutions. Relaxing regulations and allowing easier development on existing plots would increase the value for current (lucky) land owners, while increasing supply and lowering overall prices for everyone else.

In the meantime, with incremental unplanned demand across every industry, you know what to do.

Clarity

Clarity Pharmaceuticals closed a solid raise last week, collecting $121 million at $2.55, with the stock trading at $2.78 a few days later.

Typically, fund managers know which companies need to raise money and can turn a quick profit shorting the stock, knowing they will be covered by a generous allocation from grateful brokers shortly after. And for those who don’t short, there’s little need to buy until after the raise when the dilution has been digested and the fast money has sold.

This can turn into a toxic dynamic and is facilitated by brokers (love you all), who insist that their best clients get full allocations. The best client for a broker is very different to a long-term investor.

An active small long/short book that plays these games generates significantly more revenue than a much larger fund that doesn’t short, barely trades, and worst of all, demands tight brokerage and still complains about it.

Some funds have built entire businesses by being the best payers on the street, and in return receive the lion’s share of these discounted allocations, while being the very last funds you want to see on the register of a company you own.

There’s nothing intrinsically wrong with this. We need more, not less, liquidity on the ASX, and the most liquid markets like the United States invariably end up with the most dynamic companies, that could only exist with so many varied market participants facilitating the whole thing.

But when a local company raises money, their interest in building a long term register is directly opposed to that of their advisors, who need to reward their highest-paying clients.

This is a long way of saying that Clarity’s leadership managed a difficult process well, and raised more in a day than the company was worth not so long ago, and the stock handled it like a champ.

Michael