Why The ‘Asia-Zone’ Crisis Makes Australian Stocks a Buy…

It has been one crisis after another over the past five years.

The US debt crisis…the Eurozone crisis…the credit crisis…the subprime crisis, and so on.

But perhaps now the crisis has come closer to home. Five years ago people once more dubbed Australia the ‘Lucky Country’ due to the closeness to China.

China – many thought – was Australia’s saviour. Forget about the ‘Old Country’ and those dunderheads in America. The action is in Asia.

Remember, we’re lucky. We’ll benefit from the 50-year boom in commodities.

How quickly things change…

Now, don’t get us wrong. We’re not saying that China won’t be the world’s most powerful nation within the next 50 years. That’s entirely possible – probable even.

What we’re saying is that economic growth doesn’t advance in a straight line without problems.

You only have to look at the economic growth of the United States in the 19th and 20th centuries. They suffered countless recessions, depressions and panics on the way from colonial backwater to the world’s most powerful nation that at one point made up 50% of global GDP.

And so knowing that problems do arise from time to time, you have to be prepared to deal with it.

That’s Not a Stock Market Bubble

And the best way to deal with it is in the Australian stock market right now.

With the big rally from the middle of last year through to July, many investors, commentators and analysts think the Australian market is in bubble territory.

And with the recent 500 point drop on the S&P/ASX 200 index, many of the same people think the Australian market could fall further.

But they couldn’t be more wrong.

The Australian market closed last Friday at 4,738 points. That’s 17.6% above the May 2012 low point. Although that may be a bigger percentage gain than the long-term average annual gain for Australian stocks, it’s far from being a bubble-sized gain.

But let’s go back further, to March 2009. The main index has gained 50.7% since the low point following the 2008 financial meltdown.

Is that a bubble? No, not really.

It’s an average annual gain of 12.7%. Sure, it’s a good return, but it’s hardly bubble territory. And if you look at the chart you’ll actually see that since 2010, the Australian market has been mostly flat.

In fact, if you started investing in 2010 the only gains you’ll have made would be from dividends. We don’t know about you, but to us that hardly looks like Tulip, South Sea or Dot-Com bubble type gains:

Source: Google Finance

But that’s not all. Even though the main index is up 17% over the past year, one group of stocks has gone through the wringer over the past two years.

Market Bubbles Don’t Look Like This

Last week our old pal, Diggers & Drillers editor Dr Alex Cowie, showed us a research report from Canadian-based broker Canaccord.

The research included analysis on 139 Australian resource stocks. These stocks covered the full range. They include gold, copper, iron ore, nickel, rare earth, oil and gas.

You don’t need a Harvard degree to know it has been a tough time for resource stocks. But what’s even more amazing is that according to the Canaccord research, of the stocks analysed the average fall from the top of the resource cycle to the bottom is 78.1%.

The poor performance of resource stocks is a major reason why the Australian market has performed so poorly compared to US and European markets.

But that’s not the only reason.

For most of the past five years the financial markets have focused attention on the multiple US and European debt and currency crises.

But now the focus is on the Asian time zones (notwithstanding the US Federal Reserve’s money printing woes). There are now serious worries that the Chinese economy is slowing fast.

Add to that the issue about Japan’s enormous debt position. Suddenly, being close to Asia is more of a risk than a benefit.

You could say we’re now in an ‘Asia-Zone’ crisis.

And yet, this isn’t new news. Greg Canavan has warned about China’s structural problems for the past two years. And here in Money Morning, Murray Dawes has told you to keep an eye on Japanese bond yields for the past couple of months.

So to our mind stock prices already have much of the downside risk baked in. The market knows China has over-stimulated its economy, and it knows Japan has a huge debt problem.

Beaten Down Value in Australian Resource Stocks

While we can’t guarantee stocks will soar from here, we can say there are many more potentially profit-making opportunities on the ASX than most in the mainstream would have you believe.

The numbers from Canaccord show that. After leaving resource stocks alone for most of the past year, we’ve tipped resource stocks in two of the past three issues of Australian Small-Cap Investigator.

And as someone who’s constantly on the lookout for value in a beaten down market, it’s hard to look past Australian resource stocks right now.

In short, while others see the past few weeks of volatility as a reason to ditch stocks, we take the other side.

If you’re looking for a chance to buy what is still hands down the best way to build wealth – the stock market – this is a great time to think about shifting more of your asset allocation from cash into stocks.


Join me on Google+

From the Port Phillip Publishing Library

Special Report: The Sixth Revolution Has Just Begun

Markets and Money: How to Play ‘Spot the Stock Market Bubble’

Money Morning: Money Weekend’s Technology FutureWatch 22 June 2013

Pursuit of Happiness: Calming a Property Market Storm

Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia