The world was notified by China on Thursday that they are expecting their GDP growth rate for 2015 to slow to 7.0% from 7.4%. Almost 40 years of exceptionally strong economic growth appears to be re-aligning itself with global growth activity. But the impact on Australia could be much deeper.
China is Australia’s largest trade partner. Our economic dependence is deeply intertwined. China is Australia’s largest trading partner in terms of both imports and exports. 25% of Australia’s manufactured imports come from China, while 13% of its exports are thermal coal to China.
The Australian government has identified that there is potential for slowing exports of natural resources to China. Economic policy for China evolves around what is referred to as the “Five-Year Plan”. They are currently in their 12th Five Year Plan which ends in 2015. The change from infrastructure development is apparent in the current plan, which highlights the development of services and measures to address environmental and social imbalances. Setting targets to reduce pollution, to increase energy efficiency, to improve access to education and healthcare, and to expand social protection.
Where Australia has experienced a Resources Boom on the back of selling Coal, Iron Ore, and other key natural resources to China over the last several years, demand for Australia’s resources has already started to moderate and this will only continue through 2015 and into the 13th Five Year Plan as focus shifts away from infrastructure expansion into services and the environment.
Think about it. If one of our largest exports to China is Coal and a key focus over the next 5-years will be reducing pollution, then Coal Power stations and other industrial facilities will need to change. This is evident by the number of planned Nuclear Power stations in development.
According to the World Nuclear Association, China has 23 nuclear power reactors in operation with 26 under construction. Additional reactors are planned including some of the world’s most advanced facilities. This will increase nuclear capacity by 3-times current levels. Clearly this will reduce demand for Coal, and therefore affect Australia’s Coal exports.
Change in investor focus
Where key resource companies such as BHP Billiton (BHP), Rio Tinto Limited (RIO) and Fortescue Metals Group Limited (FMG) have been darlings of the market over the last decade, the future for this sector might not be so bright. Certainly India, which is shifting towards the next Emerging Market for economic growth, may provide opportunity for a resource boom. But this might not occur for another decade.
Australia will have opportunity for exports of complex goods and services such as Medical Devices, Human Resources, Education and even Tourism. But will this be enough to offset the loss from the Resources sector?
Opportunities will certainly develop in the Banking and Consumer Discretionary/Staples sectors. The signing of a Free Trade Agreement between Australia and China late last year, has helped cement our economic relationship.
In the short to medium-term, the Australian economy will be impacted by decreasing demand from the Resources sector. Not only will revenue’s decline for mining companies, but the Australian government national budget is interlocked with Resources.
Focus for investment strategies in 2015 and beyond will result in less exposure to Resources. That doesn’t mean opportunities won’t exist in this sector. BHP and RIO, for example, are two of the world’s largest miners, and this sector has certainly been well aware of the potential of China slowing in demand for resources. While these companies may go through ‘softer’ periods of growth, the opportunities for specific strategies to benefit from a consolidation in stock prices will still remain.
Growth will come from the Banking and Consumer Discretionary/Staples sectors, as previously mentioned, while premium return will still be available from the large Resource players such as BHP and RIO. Hence, the Covered Call (or Buy Write) strategy will still remain pivotal in our outlook for 2015.
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