(WEDNESDAY 19TH OCTOBER - JAMES GERRISH - 7.44am)..The DOW JONES added +180pts overnight while the S&P 500 was up +2.04%. European mkts were mixed (FTSE down, DAX up, CAC down) while locally, the SPI FUTURES mkt is pricing a rise of +55pts when trading kicks off here this morning.
Yesterday, the S&P/ASX 200 lost -88pts to close at 4186 which in a normal mkt is a pretty decent move but in today's environment, seems fairly normal (+ we should rebound this morning).
The miners took it in the neck yesterday and it was interesting to watch the varying levels of pressure that was applied to BHP, RIO and FMG. It seemed that the more Iron Ore exposure a company has, the more it was disliked by investors (FMG -9.2%, RIO -5.29%, BHP -3.32%) following the Chinese GDP print which came in at 9.1% v 9.3% consensus.
Thats the slowest pace of growth in China in 2 years but still a phenomenal rate. The Chinese nay sayers will get on their soap box and claim that it's a clear indication that the Chinese economy is slowing more than we thought, but thats not really what the data is telling us. It's telling us that measures put in place over the last 12 months or so to bring growth inline with more manageable levels are working and we should be seeing this filter through into inflation readings which look like they may have peaked.
The issue for the Aussie Miners (and Iron Ore plays in particular) is that China is now in an unprecedented position. At no other time in history have we seen an economy grow so quickly, for such a prolonged period of time on such a large scale. We're effectively in unchartered waters so invariably there will be some uncertainty about whether or not such growth can continue.
Personally, I think it will but from an investment perspective, my view isn't as important as what the broader mkt thinks. Because the broader mkt includes some China sceptics and China is still taking steps to slow growth and manage inflation, the data is likely to show a slow down in their economy in the months to come providing fuel for the sceptics. This means that companies directly exposed to Chinese growth will be more volatile and are likely to see some large swings directly related to Chinese data prints.
We wrote about Chinese growth & Fortesque (FMG) in particular back on the 3rd October and I think its worth reviewing.
**Written 3rd October
GROWTH IN CHINA
I read a fairly alarming stat last week provided by the Bloomberg Global Investor Survey. 59% of those surveyed (1100ish fund managers/traders) thought that China would be growing at under 5% PA by 2016. (currently >9%)
I was on SKY BUSINESS on Friday and mentioned it but everyone thought I was mad. I don't necessarily believe it myself and I don't think the evidence is there (yet) to support the claim but it does prompt some questions about what this would mean for some Australian mining companies.
Fortesque Metals (FMG) reported strong production figures on Friday and are on track to ship 55 million tonnes of Iron Ore this year. They have plans to increase this to 155 mtpa by 2014 en route to 350 mtpa.
The Iron Ore price currently sits around $160 a tonne while FMG is getting the Ore out of the ground and shipping it for about $50 a tonne. To put this into context, it mines about 100,000 tonnes a day worth about $20 million. A cash cow you'd call it and if Iron Ore prices stay at these levels, FMG at $4.42 looks massively cheap.
But what if Iron Ore doesn't stay at these levels? FMG is only exposed to the one commodity and has one export destination (at this stage). It has about $4 billion in debt and the expansion plans will dramatically increase this amount.
If China does slow to 5% growth, demand for Iron Ore will fall at a time when production has been ramped up aggressively. FMG is not alone with its expansion plans, RIO TINTO is even keener to grow earnings from Iron Ore while BHP is also in the mix.
I want to make it abundantly clear, that I am a believer in the growth in China and other emerging nations. I personally think that Iron Ore prices will stay at elevated levels for some time (al- be- it probably lower than where they are today), and that Australian resource stocks will prove to be a good investment over time.
My main point here though is that its essential to understand to possible risks of an investment. I would be reluctant to put a clients retirement next egg in a company with such reliance on a signal commodity and growth story, that is going to dramatically increase its debt position.
If China slows, Europe's debt issues escalate and debt markets seize, FMG is not a company I'd like to own.
Food for thought!
RATE CUTS??
From the Minutes of the last RBA meeting that were released yesterday, it seemed fairly clear the RBA were positioning themselves for a cut next month or at the very least in December. CLICK TO VIEW MINUTES HERE . We spoke about the Consumer Discretionary sector earlier in the week that generally out performs during a rate cut cycle so we added JBH at the close yesterday.
MODEL PORTFOLIO UPDATES
Telstra (TLS) - appears in the Pension Performers Portfolio - shareholders voted for the company to participate in the federal government's plan to roll out high speed internet around the country in a deal worth $11 billion dollars. The company confirmed its dividend of 28cps for the next 2 years and also mentioned the possibility of a share buy back. Any buy back will improve the valuation we have on the stock (currently $3.20) while the 56c dividend + franking over the two years provides a pretty solid floor in the stock.
JB Hi-Fi (JBH) - we took a position in this stock in the Pension Performers Portfolio. We also added Wesfarmers (WES) in the Portfolio yesterday
In the Emerging Growth portfolio, we have SOLD HUNNU COAL (HUN) given it was now trading near the bid price of $1.80 a share.
All updates to the portfolio's are provided on the website, www.mymarketview.com.au
We're now getting to a point in the portfolios that we're around 70% invested (broadly speaking).
AUSTRALIAN DUAL LISTED STOCKS
In New York, News Corp rose by US$0.26 to US$17.19, equivalent to A$16.76, A$0.06 above its last close on the ASX.
ResMed rose by US$0.57 to US$30.23, equivalent to A$2.95, A$0.03 above its last close on the ASX.
In London, Rio Tinto fell 142.5 pence to £31.60, A$2.18 lower in Australian currency terms.
BHP-Billiton fell 16.0 pence to £18.94, A$0.25 lower in Australian currency terms.
Henderson Group Plc fell 4.7 pence to £1.19, A$0.07 lower in Australian currency terms.
