The Australian share market has underperformed most global indices as slowing growth in China has put pressure on the country’s resources sector. The ASX200 is up 12% this year but this is below the NZX50’s 16% rally and the SP500’s 14% recovery. With Chinese 2012 year growth now expected to be 7.5% down from over 8.0% forecast earlier in the year, what is the impact on the Australian economy and what stock sectors offer opportunities?
Slowing Chinese growth and lack of stimulus measures by Chinese authorities have put pressure on commodity prices. Iron ore, Australia’s most important export, has fallen from over $180/t last year to $90/t earlier this month. It has recently rebounded to $104/t but remains at weak levels. Coal prices have also plummeted and are currently showing no signs of a recovery.
With weaker commodity prices mining companies are deferring or cancelling projects. BHP Billiton, the world’s largest mining company, last month deferred the $30b Olympic Dam expansion in South Australia and the Port Hedland outer harbor development in Western Australia. Just last week it also cancelled plans for a $3b coal mine development in Queensland. While Australia is currently growing strongly as billions of dollars are spent on mining projects, growth will slow if the current projects are not replaced with new ones. Share prices of a number of mining service companies have fallen by 40% or more as investors fear the mining capex boom has come to an end.
However a slow down in mining related capex has its positives and does provide opportunities. The Australian OCR has been cut from 4.75% to 3.5% which has helped defensive stocks rally. The ASX Property index is up 25% this year while telecoms are up 26%, returns more than double that of the ASX200. Lower interest rates reduce interest expenses for defensive stocks which typically hold debt. Investors also seek these stocks for their sustainable dividend yields which become more attractive as bank deposit rates fall. If growth slows in Australia then the RBA will have room to cut the OCR further which may support defensive stocks for some time yet.
Resource stocks have also been sold off aggressively so any sign of a turn around in China may lead to a sharp rally in these stocks. The key events to watch in Australia are the RBA OCR decisions next Tuesday and in November, and data on the Chinese property sector.
William Curtayne
Senior Analyst