Is the slowdown in China “priced in”?
In 2008, China implemented a massive economic stimulus program focused on fixed assets, with a concentration on construction. This program may have been necessary for stabilisation, but led to significantly increased capacity, particularly in China’s steel and cement industries. Annual capacity growth in recent years has been double or triple China’s economic growth.
Australia’s material stocks were beneficiaries of strongly rising demand for coal and iron ore, and many were at or near record share price highs in the first half of 2011.
Meanwhile the Shanghai Composite Index at 2100 is at the lowest level since the GFC lows of late-2008.
The consensus view is for increased infrastructure spend from China over the foreseeable future to boost demand and prices. If correct, one might conclude that the slowdown is already “priced in”. However, we have been examining the interim results of Chinese cement, steel and shipbuilding companies. We are seeing severe earnings downgrades across the board: capacity is exceeding production, utilisation is declining, demand is restrained and inventory levels are rising. Excess steel production is being exported and many global steel and material companies are also seeing their earnings severely cut.
While the Chinese command economy might continue building the odd ghost city or expressway into the Gobi Desert, the transformation from fixed asset investment to consumption is less steel intensive. Until the severe downgrade of the Chinese (and international) material stocks becomes consensus, Montgomery will continue to keep our powder dry in this area.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
