Australian Markets Ignoring China Risk

The Australian market seems to want to ignore looming risks, like China’s credit-crunch induced slowdown. Yesterday, the Reserve Bank of Australia kept rates on hold but basically said they stand ready to cut further if the economy continues to weaken. The market liked the sound of that and had its strongest day in 18 months.

But it’s changed its mind somewhat today, giving back more than half the gains so far. All this volatility just tells you that there are very divergent opinions in the market. The bulls think that lower interest rates will support asset prices while the bears think that the market will eventually have to recognise the poor economic fundamentals. It’s a daily arm wrestle between the two views.

We’re with the bearish camp, and we’ve found a couple of investments that should do well if the bearish theme continues to play out. Click here to find out what they are.

The reason why we remain bearish on the Australian market is the absence of value given the risks involved. China’s economy is in a spot of bother from an out of control credit bubble that has only just started to deflate.

The Communists are getting edgy about it too. China’s Ministry of Propaganda, or whatever they call it, issued a directive to the country’s media outlets this week telling journalists to tone down the ‘cash-crunch’ talk and start letting everyone know the Chinese financial system has plenty of money.

Perhaps Julia Gillard could be in for some consulting work. One of her final speeches as PM railed against journalists writing, like, negative stuff about the economy. Because we wouldn’t want the plebs to know what the pollies have really gone and done would we? That would just create fear and a lack of confidence, and people wouldn’t go out and spend borrowed money…which is what the economy needs to get back on track…

Borrowed money, of course, is part of the problem, not the solution. And Australia has borrowed a fair chunk of it to fund its lifestyle over the years.

This is where the bullish interest rate story becomes a little murky. By far our largest borrowers are the banks. They need to borrow offshore to fund Australia’s insatiable demand for mortgage finance. When the Reserve Bank of Australia cuts rates, our foreign creditors don’t really care. They lend money based on perceived risks, not the RBA’s cash rate.

Australian banks still have a very good reputation amongst global creditors. But in the past few weeks (no doubt based on China’s nothing-to-worry-about credit crunch) the cost of borrowing for the big four has picked up. If this continues as China’s nothing-to-worry-about credit crunch gets worse, then foreign creditors will ask for a little more return to compensate for the risk.

So even if the RBA cuts rates further on concerns over economic deterioration, you can bet our creditors won’t be as sanguine as the stock market bulls currently are. They’ll ask for more, so the big banks probably won’t be able to pass on any cuts in full.

Anyway, the cuts to record lows haven’t had much of a stimulatory effect so far. The Reserve Bank of Australia’s measure of housing credit growth remains around all-time lows. It seems the Australian property Ponzi scheme is in need of new money to keep the game going.

But with another Ponzi bursting a few oceans away, this could be a forlorn hope…

Greg Canavan+
for Markets and Money Australia


From the archives…

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Bernanke Fumbles, the Market Tumbles, Markets and Money Grumbles
29-06-2013 Nick Hubble

How The Power of Tweets Saved Tesla Motors
28-06-2013 Sam Volkering

The Best Way to Invest in a Volatile Market
27-06-2013 Kris Sayce

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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