A tell-tale sign that we’re at the logical frontier of monetary policy in a fiat money system is that central bank rate cuts no longer produce stock market rallies. For example, the People’s Bank of China (PBOC) cut interest rates for the second time in a month last week. And stocks? Nothing.
The PBOC’s rate decision came on the heels of 10-month low in the HSBC Purchasing Managers Index. China’s economy is cooling. The National Bureau of Statistics reported last week that Chinese electricity production grew by just 1.7% year over year in April. Electricity production has grown at a 12% annual clip for the last decade.
This is yet another sign that the world is not going to get more growth until it writes off bad debt and rebuilds its balance sheet. Of course ‘the world’ won’t do this. It comes down to households, businesses, and governments doing it. Households and businesses ARE deleveraging. Governments are re-leveraging.
What does this mean for Australia? The global debt binge fuelled China’s rise. That fuelled Australia’s economic boom time. It’s now set to work in reverse. Sally Patten provides the grim proof in today’s Australian Financial Review. She writes:
‘The risk for Australian funds is that the local market accounts for just 2 percent of global stock market capitalisation and is dominated by two sectors: banks and resources. Mining behemoths BHP Billiton and Rio Tinto account for more than 15 per cent of the S&P ASX/200 index. The 10 biggest companies make up 53% of the blue-chip index… This makes Australian fund members highly vulnerable to a slowdown in the Chinese and Indian economies or a sharp drop in credit growth or a spike in bad debts.’
The ‘risk’ Patten wrote about is Australia’s underexposure to foreign stocks. This isn’t just an Australian problem, by the way. Most investors (and financial planners) have a ‘home country’ bias. Your portfolio tends to be overweight companies in your country. Granted, you’re more likely to understand a company that operates in your home country. But this can leave you exposed to just one or two sectors.
This is exactly the point Greg Canavan makes in his new presentation about China. Greg put it this way:
‘China’s previous policy has been great for Australian resource companies.
‘And because resources make up such a huge part of the Aussie market, this boom in Chinese demand has been great for investors too.
‘But it’s also exposed just how dependent our share market is on one or two sectors.
‘Take a look at the six companies below and you’ll see what I mean. These are amongst the largest companies on the ASX 200:
|Commonwealth Bank Australia…||Financials|
|Westpac Banking Corp…||Financials|
|ANZ Banking Group…||Financials|
|National Australia Bank…||Financials|
‘The combined value of these companies makes up 43% of the entire Aussie stock market. In other words, BHP, Rio and the Big Four Banks don’t just make up the market…they practically are the market.
‘And their profits — and consequently your investment returns — rely on China’s continuing growth.
‘But let me ask you this…
‘If some of China’s biggest importers don’t make money…how much longer can Aussie resource companies continue to enjoy big profits?’
Don’t miss the answer, which can be found in the full story on China’s Bust.
By the way, we’ll know more about the magnitude and severity of that bust in the coming weeks. China will report consumer and producer price indices in the coming week. GDP figures will follow. Not that any of these can be trusted (all government statistics should be treated with suspicion). But the markets may begin to realise that China can’t magically save Australia from the global contraction.
for Markets and Money
From the Archives…
How to Survive Inside China’s Financial System
06-07-2012 – Greg Canavan
China’s Economic Policy of Denial
05-07-2012 – Greg Canavan
The Question China Has To Answer Fast to Save Its Economy
04-07-2012 – Callum Newman
How Investing in Commodities Can Prevent a Personal Financial Crisis
03-07-2012 – Dan Denning
Wouldn’t it Be Nice to Not Lose Money on the Australian Share Market?
02-07-2012 – Dan Denning