Riding off China's coattails

Published in the Finance News Network, July 2011 by Rebecca Richardson

With new data emerging creating an energy about China's demand for Australia's resources, it is hard not to get caught up in the buzz of the commodities boom.

But some investors have admitted to riding the wave with no real idea of what is lurking underneath.

Investor responses to surveys by the Australian Investors Association (AIA) and by FNArena have revealed an overwhelmingly cautious undertone.

Of 460 respondents to an AIA survey, 21 per cent said they were bullish about the market, 27 per cent bearish and 52 per cent neutral. The AIA said commentary that accompanied the responses was overwhelmingly cautious.

AIA president Alison Harrington, said investors point the finger at political instability in parts of the world; natural disasters; and an uncertainty about debt levels in most of the developed countries for their cautiousness.

Senior analyst from Wealth Within, Janine Cox, said she was surprised at how some people can be in the market for a long time and still not understand its cyclical nature.

In her opinion, managing risk is the primary objective when investing, and making profit is the secondary.

"Smart investors see the bigger picture long-term," she said.

"There's just too much information out there. The smart investor would have a few fundamentals that they would look for, just to keep themselves in touch with what's going on, rather than news being a driver for their decision making on a day-to-day basis."

In the aftermath of the global financial crisis, financial planners and investment advisors copped blame from some investors. 

Ms Cox said this was because investors didn't have enough understanding of what they were investing in, a failure that made it easy for them to point the finger elsewhere.

"There's a bit of realism that needs to come into it, and investors, I think, actually underestimate their ability to help them mould their own plan and I think by handing it over to someone else, they're divorcing themselves of the ability to do that. 

They need to trust themselves so that they can make some decisions when these things happen."

With about a quarter of Australia's exports going to China, and 70 per cent to Asia, there is no ignoring that we are an exporting country.

"Therefore we will ride on the coattails of these countries," Ms Cox said, "whether they are doing well or not."

Although there is a hive of economic news out each day about China, Ms Cox has recognised patterns in the news. 

Those patterns can be the key to an investor's solid understanding of what they are investing in.

"Six to 12 months ago we were told that China was going to come to a tightening bias. 

So when they [the investor] know that China's going to do that, they can expect there could be some volatility.

"But China is consuming at an amazing rate, about 80 per cent of what they produce is actually being consumed internally, so we're in a fortunate position. 

Even though we will experience some of the volatility when they do move to tighten things, we will be riding on their coat-tails."

Warnings have been openly made about a slow-down in China's growth. 

China's official purchasing managers' index dropped to 50.9 in June, down from 52 a month earlier. 

These figures, released last week, have fuelled concerns that China's economy is slowing down because of aggressive action by the government to tame inflation.

Matthew Sherwood, Perpetual's Head of Investment Market Research said China has been artificially inflated since 1997.

"Like Europe and the US, China is likely to experience softer growth over the next few years - but for different reasons. 

China has grown its economy at 10 per cent per annum for the past 10, 20 and 30 years," he said.

Mr Sherwood points to a surge in Chinese property prices over the past six years, and the government's attempt at boosting supply to ease price pressures.

"If growth suddenly turns negative, this could cripple the fragile Chinese financial system, given the US$ 1 trillion worth of bank loans to the financing arms of local government authorities. 

Chinese investment is simply growing too fast and the government has acknowledged that this needs to moderate."

He said that such a slowdown in Chinese investment is not in Australia's best interest.

But in light of this, the head of research for Macquarie Private Wealth, Riccardo Briganti, said investors need to take a step back from negative news and look to the future.

"We need to look at what the trend growth is going to be not over the next month or the next two months, but over the next year or two years, particularly if you're talking about resource companies," he said.

"It does leave you in a bit of a holding pattern," he warned. 

"The danger is that you wait to see the positive economic data, but by the time it comes, the share prices will have already started to move."

Mr Briganti's advice is to be selective with resources stocks.

"Take a barbell approach. In your stock portfolio, hold some safe, defensive stocks that aren't going to be affected by a weakness in the economy. 

By taking that barbell approach, you're protecting your portfolio a little bit," he said.

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