How the uncertain economy will impact Australia’s yearling market in 2023

While the broader global economy is going through volatile times, the global bloodstock industry continues to invest with confidence. Is the thoroughbred industry immune from economic headwinds?

The stock market and the yearling market share more similarities than you might think. (Photo: Digitally altered image/Getty Images).

The post Covid-era global economic reality can best be described as complex. The developed economies world survived the turmoil of the heart of the pandemic remarkably well. But the future is less certain as inflation threatens to pull the handbrake on growth heading into 2023.  

While the broader outlook is cloudy, the bloodstock industry goes from strength to strength. Just recently, the Tattersalls and Arqana breeding sales celebrated record trade, while all aspects of the Australian bloodstock industry appear in rude commercial health.    

Emboldened by a strong local racing industry, which continued during Covid lockdowns, resulting in a surge in wagering and continued growth in prize money, the Australian thoroughbred industry has sailed through the past three years.  

However, heading into 2023 racing authorities in Australia are sounding notes of caution. A globally complex environment, with inflation pressures complicated by geo-political turmoil and for added spice, the recent meltdown in cryptocurrency markets, makes it hard to suggest wagering, the monetary lifeblood of the thoroughbred industry, can continue to grow.

The Australian economy is under pressure and as a result, the All Ordinaries, the index which tracks the performances of the top 500 listed companies in Australia, has ridden a roller coaster. It dropped sharply in June and September but rose just as quickly off the back of those lows. It jumped as high as 7570 on December 1, five per cent shy of its historical high, but 13.7 per cent higher than what it was two months ago.

How is this relevant to the bloodstock market? Because there is a significant historic correlation between the performance of the Australian stock market and the investment in the Australian thoroughbred industry.

We plotted data back to 1997/98, looking at where the All Ordinaries stood at the start of the racing season and compared it to the total spend on yearlings at public auction in Australia at that time. As the place where most of Australian bloodstock investment is concentrated, the yearling market is the most accurate guide of the relative confidence in the market.

Notable individuals with a history of investment in both the financial markets and bloodstock, such as Arrowfield chairman John Messara, have commented on this connection before. Thoroughbred investment is an asset class, like property, shares and bonds, all of which are key drivers in the financial success of Australia’s top companies.

Not only do broader economic factors influence the success or otherwise of these companies, they also impact investment in the bloodstock sector as that investment is often from the same pool of people.

If someone’s financial investments are performing well, then they are more likely to invest more in their bloodstock. So, should the All Ordinaries rise, then we should expect that so too should bloodstock investment. But the correlation between the two, in terms of trend, is quite remarkable.

What of other factors/asset classes? Data from the past decade indicates that investment in housing stock and bloodstock both grew significantly. However, they have grown in different cycles, as seen below.

Comparing yearling spend in Australia to the overall price of gold is another interesting exercise. They tend to move in opposite directions in times of change, which follows on from the age-old perception that people go back to physical assets such as gold during times of uncertainty and then to invest in more ‘risky’ propositions when the outlook is more positive.

Of course, bloodstock investment is not just impacted by external factors. The better the commercial health of the industry itself, the better the returns are, and the more likely people are to invest.

Prize money in Australian racing has surged significantly in the past 10 years, going up 85 per cent, and this has been mirrored by an even greater jump – 126 per cent – in yearling spend. However, looking back over the past 25 years, we can see that prize money has tended to rise constantly, whereas yearling investment tends to rise and fall.

There was a point around 2007/08 when total prize money and total yearling investment in Australia was the same at $370 million, but the global financial crisis saw yearling investment fall by $128 million in 2008/09, while prize money grew by $71 million. The $200 million-plus difference between those figures has existed ever since and grew to as much as $350 million in 2018/19.

That data tells us a couple of things. Firstly, yearling investment is much more discretionary and impacted by outside factors, while prize money is often used as a bulwark against those outside influences. Secondly, prize money may be an incentive, but in itself does not drive bloodstock investment.

So what does this all tell us about the likely sentiment of the Australian yearling market in 2023? Using the historic benchmark of the All Ordinaries, as it stands in December 2022, things are more positive than they may have been a couple of months ago.

But the economy is volatile, and cost-of-living pressures, which are at levels not seen in over 50 years, may mean the ‘mum and dad’ horse owners that have driven a lot of the investment from syndicators and trainers in the bottom and middle market, become harder to find.

It could result in a two-tier system, where the select sales, such as Magic Millions and Easter, continue to surge, where the other state-based sales, which rely more heavily on the depth of the buying bench, may see a drop, particularly in clearance rate.

That volatility may also mean that the broader economic factors that hold sway at the yearling sales on the Gold Coast in January, may not be of such influence when the breeding sales are held at the same venue four months later. Where uncertainty persists in the economy, history tells us it will be a factor in the bloodstock market.

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