What will happen when China’s property bubble bursts
When China’s property bubble bursts, what will be the consequences for BHP and RIO? In the first part of his appearance on Your Money Your Call with Nina May Roger Montgomery also discusses Centennial Coal (CEY), Mortgage Choice (MOC), Virgin Blue (VBA), Santos (STO) and Woodside (WPL). Unfortunately none of these companies make Roger’s A1 grade. Watch the interview.
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.
Chris
:
Roger,
China aside, there is another threat to BHP, CEY and RIO that we all know about.
Listening to ABC 891 on 5 May 2010 at 8.40am, the PM said that a ‘super profit’ was defined as being one that was in excess of the return from a 10 year Australian Federal Government bond – currently around 6.5%.
As far as I see it, this would mean that any company (assume no debt whatsoever) with a ROE in excess of 6% is therefore, ‘making a super profit’ and would wave goodbye to 40% of that straight away.
BHP is a great example – ROE in excess of 20% (from memory).
If you add debt into the mix and assume that taking on this leverage actually works and makes a profit (so, what RIO should have got right, but didn’t), the picture gets worse because you also have a debt to service.
It becomes even lousier if you consider that if the debt doesn’t work (hello RIO), but you still make a profit in excess of that 6%, (BTW, 6% is lousy by my standards.
When you consider that 6% is sort of ‘guaranteed’ (and the sharemarket return isn’t), you are actually getting a real hammering because you also have to service the debt load from out of the reduced, meagre profit you’ve made.
It kind of heavily punishes taking on debt (which is expensive enough right now anyway) and making a profit through it, slightly lighter punishment for those who make a profit from reduced or no debt and rewards speculation in explorers, those in development of a resource and those who are in the infancy of production – time to bail out there and then before the profit figures come through.
It has been a very ill-conceived idea overall, if it is implemented in the existing form. It also hammers the very stocks that most super funds hold anyway, which is daft – because the super funds are the intended beneficiaries from this tax ! Give with one hand and smite with the other ?!
BTW, some of the time, there are nuggets of information in what some people on themes such as China’s property market, e.g. Chanos, Schiff, Soros, that we can learn from.
I really don’t like commentators who are ‘super-bullish’ or ‘super-bearish’ on any asset market or theme, and just for the sake of being so or to be ‘trendy’ – unless there is a real reason and logic why.
Anyone can shout “China will implode” or vice versa, and given enough people who join in to shout or believe – eventually, someone’s opinion will be right.
Remember the article by Warren Buffett on coin tossing and the way that those who ‘made the finals’ were cheered and raved about ? I’m drawing parallels with that right now.
admin
:
Great stuff once again Chris. Thank you for sharing those thoughts, which I am sure will get everyone thinking – as most of your posts do.
Graham
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As an MOC shareholer, I was interested to hear your comments on the business. As MOC are brokers rather than non-bank lenders I’m not sure I concur with your comments about people avoiding using them, as MOC provide an easy opportunity for them to compare all the big banks in one go. I agree that things have changed but I still believe MOC, if bought at current prices, will offer above average returns in the long run.
admin
:
Hi Graham,
You must be referring to an answer I gave to a question on TV. The great thing about the stock market, is that it offers an opportunity for both of us to be right at the same time but for different reasons and to still do well if we act sensibly over long periods of time.