FYI | Jul 29 2015
By Peter Switzer, Switzer Super Report
The biggest threat to our stock prices going higher this year won’t be Tony Abbott’s policies but it will be government policies that could easily make or break our portfolios — Chinese Government policies!
Regrettably, the investment bank Credit Suisse last week peeled back its near-term forecast for our stock market’s S&P/ASX 200 index from 6500 to 6000. This was disappointing but still tells us that, if the experts paid to put out these notes think our market goes from the 5550-level that it is now to 6000, then we can make around 8% plus dividends. So we’re in for over 10% for sticking to stocks.
China doll
Sure, Greece was a worry but few experts thought it would cripple European growth that is gradually getting better. No, the big worry is China and it not only is making some economists mark down their global growth forecasts, but hot shot hedge fund managers, such as Ray Dalio of Bridgewater Associates in the US, have started to publicly doubt an economy and an investment play he strongly supported.
Of course, Ray could be trying to influence the market to make money but let’s assume he’s making honest observations. So how do we play the potential China shock to our stocks?
The latest reading on Chinese growth was 7% and this was the slowest in six years, when the GFC was then in full swing. Some skeptics even doubt the number, but they always query Chinese stats when they’re better than expected but never when they’re worse than expected.
The IMF says China will grow by 6.8% this year and 6.3% next year. But world growth won’t be hurt badly, with the IMF saying world growth will be 3.5% and 3.8% over this year and next. So, there is progress if they’re right, even with China growing under 7%.
I watch China’s growth rate because it consumes 47% of the world’s base metals (in 2000 it was only 13%), and so the 44% slide in metal prices in recent years is linked to China’s slower growth.
Okay, all this make sense, but we knew this stuff and still the Chinese stock market grew by 150% in a year, before a 30% slide. This spooked the government into putting in trading halts and to be frank, they have worked, so far.
China believers think the government will ramp up more stimulation of the economy and so do I. The mob at Credit Suisse has to believe this too so it gets down to your punt on China. Ray Dalio is now a doubter but two weeks ago Platinum’s Kerr Nielson was still backing China to make a later year comeback. I will be following up with Kerr.
Against this, Bloomberg’s metals expert, Kenneth Hoffman, who recently came back from China, argued that its demand for metals is diving and rail freight information is not positive. But this could change, if the Chinese authorities change their game and I expect they will.
Production practices
Oil and iron ore prices have slumped but it’s not all China. China’s slowing growth has been important but so has oversupply of both commodities — blame OPEC, BHP, Rio and Vale — at a time when world demand is on the weaker than wanted side. We are in the rough patch now, but as world demand picks up, and maybe OPEC and the big iron ore miners change their supply game plans, we could see higher commodity prices.
I have told you before that Morgan’s chief economist, Michael Knox, thinks the oil price will beat $US100 a barrel within two years, and this has to be a bet on world demand spearheaded not only by China but the US, Japan and don’t forget the faster growing India. Also throw in a better Europe as well.
How might a price spike happen? Well, taking oil for example, because the oil price is so low, many oil producers are not increasing capacity so when demand does rise, they won’t be able to easily respond and prices will rise. These commodity markets are always a demand and supply issue.
All this infers that the turnaround in commodity prices and China’s growth could be slower than we might like but it implies that a longer term investor could be staring at a buying opportunity when it comes to commodity stocks. The buying time is probably not now but there will be a time in the not-too-distant future when you will kick yourself for not scooping some of these well known stocks at these low prices.
It’s why I watch global growth forecasts and when they start ratcheting up, the share prices of the likes of BHP and Rio will respond.
So, is my guarded optimism shared by others? On July 21, Focus Economics, which surveys a panel of top economists, had this to say about China:
“The main downside risk to the economy in the short-term is the sharp correction in the stock markets, which could translate into financial turmoil and dampen growth. That said, this year’s bold monetary policy easing, fiscal stimulus and a sizeable current account surplus promise to fuel growth. Although the economy is foreseen slowing gradually in the coming years, it will continue to be strong by global standards. Panellists maintained their GDP projections for 2015 at the previous month’s 6.9%. Next year, the panel foresees growth at 6.7%.”
On top of that, industrial production and retail sales spiked nicely in June, so it’s not all bad news on the China front.
The game plan
So how do you play stocks given the China concerns?
I’d only be buying BHP and Rio at these low levels, if you are happy to wait for stronger global growth and that’s when oil and iron ore stocks will pay back your patience. Right now, I’m searching for stocks below the top 30 that pay nice dividends. We’re in the period where industrial stocks that benefit from a lower dollar, or faster local growth, will do well and so all of us here at the Switzer Super Report will remain on the hunt for those sorts of stocks.
That said, if BHP goes much lower I could be tempted, as I am a long-term investor.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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