Is China’s Economy Slowing?

It’s 4 July. Happy Independence Day to all of our US readers!

I’m a little shaky on US history, but better on the Aussie stuff. And today marks the 100-year anniversary of the Battle of Hamel, an exclusively Australian affair (with a little help from the Yanks) which took place in France in the First World War. Incidentally, it was the first time in history Australian and US soldiers fought side-by-side.

Australia’s John Monash devised the blueprint for the battle. For the first time, he used artillery, tanks, airplanes, and infantry together in a coordinated attack. The planning was in stark contrast to the insanity of the previous years’ battle plans. Monash predicted it would take 90 mins to secure the village. He was close. In the end it took 93 minutes.

Monash used the same blueprint for the much larger Battle of Amiens, one month later. It turned the tide of the war. For the next three months, Australian forces spearheaded the attacks that eventually ended the war.

Anyway, there’s your ‘on this day in history’ lecture…

What’s been happening on the global markets?

Moving onto the markets now, and US stocks faded into the close, losing around 0.5% in the last hour of trade, after being up all day. Clearly, there is a lack conviction in holding stocks with a holiday coming up. This is a sign of nervousness about the ongoing trade biffo between the US and China.

So far, China looks like it is getting the worst of it. Chinese stocks are down heavily over the past few months, while the US stock market is still holding it together.

More recently, you’ve seen sharp falls in China’s currency, the yuan, leading some to question whether this means capital outflows will cause a liquidity crunch in the debt heavy Chinese economy.

That is conjecture at this point. As a managed economy, it is impossible to know whether currency moves are the will of the market or the will of the government.

One way to check on the health of China’s economy is to look at some key Aussie resource stocks — specifically iron ore stocks. When I think of iron ore I think of Rio Tinto.

Its share price chart (below) still looks strong. It remains in an upward trend. But yesterday’s sharp 3% decline, the lowest price since early May, is perhaps cause for just a little concern.

 

MoneyMorning 04-07-18

Source: Bigcharts
[Click to open new window]

 

 What about Fortescue Metals Group Ltd [ASX:FMG], a pure iron ore miner? Its iron ore is not as good as Rio’s. It’s therefore more sensitive to iron ore price movements and the health of the Chinese economy.

As you can see below, Fortescue’s share price peaked in August last year. It’s been in a downtrend ever since and is approaching the lows reached in April. Fortescue’s chart tells you China’s economy is slowing down.

MoneyMorning 04-07-18

Source: Bigcharts
[Click to open new window]

How will the Chinese economy impact Australia?

But is it slowing enough to impact the Aussie economy? The market says no. Not yet, anyway.

PS: The growing Chinese middle class could translate into a massive investment opportunity for Australians. Get the details here

Let me explain…

Australia is a derivative of China. If China’s growth is strong, foreigners will continue to lend to us, and we can continue to swap houses with each other and get ‘rich’.

Given this view, the health of Australia’s banking system is the ultimate indicator of the markets’ view of the Chinese economy.

And on this score, things look OK. Below is a chart of the ASX 200 Financials index. Thanks to a big shift in thinking on interest rates in recent weeks (as in the market now thinks they will stay low for a long time), the banks have rallied strongly. The index is now back above an important line of support/resistance.

MoneyMorning 04-07-18

Source: Bigcharts
[Click to open new window]

The question is whether it can hold this level and move higher, or whether it will resume its downward trend.

The message from the charts (the market) is that China’s economy is slowing. However, the prospect of prolonged easy money in Australia is enough, for now, to offset these concerns.

Free Report: Discover four red hot ASX profit plays for 2018. Read Now.

I should also point out the message (and the benefit) coming from the Aussie dollar. The decline from over 81 US cents in January to under 74 US cents today is an indication of the decline in capital flows coming into Australia.

It’s another message from the markets telling you that China is slowing. But the currency is a shock absorber. It’s doing its job. With the near 10% decline in the Aussie dollar, Aussie assets are now 10% cheaper in the eyes of foreign investors. That helps the banks when they need to borrow in offshore markets, which in turn supports property prices.

This is why the trade war biffo is such a concern for markets. China’s economy is clearly slowing. Tariffs, which act like a tax on the economy, will only make that worse.

How much worse?

Ignore peoples’ opinions and focus on what the market is saying. Watch the iron ore miners and the banks, they will tell you all there is to know.

 

Regards,

Greg Canavan,
Editor, Crisis & Opportunity


Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:


Leave a Reply

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

Money Morning Australia