China’s deflationary environment – the iron-ore price and further downside?
Over the past 17 years, Chinese economic growth has decelerated from an approximate average annual 10 per cent to sub 5 per cent, whilst the Shanghai Composite Index has halved to under 2,900 points. Pressure on the Chinese residential property market and China’s ten-year bond yield at 2.1 per cent has been well highlighted, whilst the slowdown in sales from many big brand businesses is pointing to a deflationary environment, yet to be fully reflected in the iron-ore price.
- Despite the optimism for the copper price on the decarbonisation thematic, Doctor Copper has declined 20 per cent from US$5.11/lb. to US$4.08/lb. over the past two months. China is the largest consumer of refined copper consumption, with over 50 per cent global market share.
- LVMH Moet Hennessy Louis Vuitton SE (EPA:MC), the largest “brand” company in the world, has seen its share price decline 25 per cent from €873 in March 2024 to the current €655. We note the worsening sales in Asia excluding Japan, which accounts for 30 per cent of total revenue of €41.7 billion in the June 2024 half-year, with a year-on-year decline of six per cent in the March 2024 quarter followed by a decline of 14 per cent in the June 2024 quarter.
- The owner of the Gucci and Balenciaga brands, Kering (EPA:KER), did much worse than LVMH. Firstly, its share price has declined 64 per cent in three years from €792 to €283. Second, in the June 2024 half year its total revenue declined 11 per cent to €9.0 billion, however, analysis of Asia, excluding Japan, which accounts for 32 per cent of total sales, saw a year-on-year decline of 19 per cent in the March 2024 quarter, followed by a 25 per cent fall in the June 2024 quarter.
- British fashion brand Burberry (LON:BRBY), recorded a 21 per cent decrease in China sales in the June 2024 quarter. In the past 15 months, its share price has been hit by 72 per cent to GBP7.35. The company has suspended its dividend and replaced its CEO, Jonathan Akeroyd, with Joshua Schulman.
- Finally, the big one from Australia’s perspective, iron-ore, which is down 26 per cent year-to-date from US$132/tonne to US$97/tonne today. With close to 80 per cent of Australia’s iron-ore exports (and 35 per cent of our total exports) going to China, there appears to be a question mark over the pull-up effect Australia has enjoyed from China’s extraordinary growth over the past two decades. BHP Group Ltd (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue Ltd (ASX:FMG) have responded with year-to-date share price declines of 18 per cent, 16 per cent and 36 per cent, respectively.
The Polen Global Growth Fund owns shares in Louis Vuitton Moet Hennessy. The Montgomery Fund and the Montgomery Private Fund owns shares in BHP, Rio Tinto and Fortescue. This article was prepared 31 July 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Louis Vuitton Moet Hennessy, BHP, Rio Tinto or Fortescue, you should seek financial advice.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
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.
