Antares Equities fact-finding trip to China

Funds Management

by Jessica Amir

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Antares Equities Portfolio Manager Nick Pashias talks about the Chinese housing market, infrastructure, production cuts and the impact on the Australian market.

Jessica Amir: Hi I’m Jessica Amir for the Finance News Network. Today I’m with Antares Equities Portfolio Manager, Nick Pashias. Hi Nick.

Nick Pashias: Hi Jessica.

Jessica Amir: Thanks for having us in Melbourne again.

Nick Pashias: Great to be here.

Jessica Amir: You’ve just returned from China, another rounded visit. Where did you go and who did you meet with?

Nick Pashias: We visited about five cities in China, over five days and we met with about 20 different companies. From the steel making, construction and real estate sectors, to get a feel of what’s happening in China at the moment.

Jessica Amir: What are the key takeaways?

Nick Pashias: We came away with about five different insights from China. The first one is the winter cuts. So last year if you remember, China cut a lot of its production during winter, to alleviate the emissions and the smog over the big cities. This year we got the feeling that the restrictions weren’t as harsh, as what they were last year. So steel mills were still allowed to operate, but also the pollution was a little worse than it was last year. And we’ve done some analysis since we got back to Melbourne and the charts validate that thesis. That the pollution is actually quite bad compared to last year. So not as many cuts and that means more steel is going to hit the market, over the next few months. So that was our first takeaway.

The second takeaway was that house prices in China, we think are about to start falling in value. So we did some analysis when we got back from China. You can see in the last couple of data points that prices are starting to fall. It’s still early, but we think they will continue to fall. And we think the reason behind this is because developers have to pay back the bank, and they’re strapped for cash at the moment. So they will sell down their inventory in order to pay back the bank. And they’re going to have to sell at lower prices, so that will put pressure on house prices in China. And that is again, a risk for the steel-making sector in China, the steel prices and obviously iron ore as it relates to Australian companies.

The third takeaway relates to the volume of cars and trucks that are being sold in China at the moment, as well as white goods. So things like refrigerators, air conditioners, these types of products. The demand for these products is actually starting to decline year-on-year. So in terms of cars, car sales are down 10 per cent year-on-year. So this year they’re down 10 per cent on last year, which is a negative demand indicator, from the Chinese consumer. As are refrigerators, as are washing machines and air conditioners. So we get a sense that the Chinese consumer is perhaps getting a bit fatigued. He’s a bit worried about making these large purchases and again, it’s a negative signal for the Chinese economy.

The fourth takeaway is a little bit more complicated, but I’ll try and explain it. And it relates to the profit that the steel mills are making at the moment. The steel mills are actually making only a very small profit at the moment. They’ve made a very healthy profit over the last 12 months, but right now where steel prices are, they have fallen. So their margins are very skinny at the moment. And this is a negative for iron ore demand, because we feel that they won’t be able to pay such a high price for iron ore. And again, we’ve done some analysis when we got back to Melbourne that’s presented here. And you can see that the steel mill margin leads the iron ore price, by a couple of months on our analysis. So we would expect the iron ore price to fall over the coming months.

The fifth takeaway is the hope for the Chinese economy and that relates to infrastructure spending. So over the last few years, the Chinese Government has spent an enormous amount of money on infrastructure. So this is things like building airports, roads, trains, environmental plants for treating water. They’ve spent a lot of money on this and again, the market is hopeful that they will re-engage and re-spend over the coming months, to shore up demand. It’s what they’ve done previously and it’s what some are hoping for. We don’t think that’ll be enough to get the Chinese economy going. We don’t think the amount of money that they’re going to spend, is going to have a material impact on the overall Chinese economy. So again, we remain cautious.

Jessica Amir: You’ve brought back a lot of insights. So how do you think all of this will impact our market?

Nick Pashias: We get a sense that the Chinese economy broadly is slowing, which is generally bad for global growth to begin with. But certainly as it relates to our market, we feel that the demand for our commodities will be less, over the next few months at least. We need to wait for that period to pass and I guess we’ll be going back to China, sometime in the New Year and to see whether demand has picked up, or not. But that’s our current thinking.

Jessica Amir: Lastly Nick, since returning back home to Australia from China. What changes have you made to your Elite Opportunity Fund, which you manage?

Nick Pashias: You can see our bottom up feedback is negative on the Chinese economy. So that’s one aspect of it. But as it relates to the Australian market specifically, it is a bit negative with regard to demand for our resource stocks and the demand for their products. So we have reduced our exposure to the sector. But again, we’ll be back up in China in the early New Year, to see whether things have turned around. And whether this provides an opportunity to re-weight back into the sector.

Jessica Amir: We look forward to your feedback in the New Year. Thanks again for having us, Nick Pashias.

Nick Pashias: Great appreciate the opportunity to talk, thank you.


Jessica Amir

Finance News Network
Jessica joined FNN in January 2017 after having worked in financial advising for seven years and in TV journalism for seven years, specialising in finance, equities and analysis. She has interviewed former Prime Ministers of Australia, Tony Abbott, Julia Gillard and Kevin Rudd and ex Treasurer Jo Hockey. Jessica has worked as a journalist with Sky News Business, ABC 1, ABC's The Business, ABC24 and has also been a regional Channel 7 and 9 TV reporter with Prime7 and Win News.