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Cape Town - With China accounting for over 50% of total global demand in iron ore, steel, copper, zinc, aluminium, and nickel, the slowdown in the Chinese economy from 10.4% per annum in 2010 to around 6% to 7% per annum will more than likely keep resource prices depressed for much longer.
The short term Monetary Policy easing and Fiscal Stimulus may well provide China with the needed short term stimulus, but the Chinese economy is changing structurally over the long term.
The drive behind the current Chinese growth is the construction industry, which is currently slowing down across all property sectors, especially the residential sector, which accounts for 70% of total Chinese construction.
The demand for residential property is decreasing due to a decline in population growth which peaked in 1987. The decrease in the demand for residential property has led to investors stepping in and propping up the market. Around 80% of all residential property sales are for investment purposes.
With a slowdown in residential prices, these investors will search for higher yielding investments, leading to an oversupply in residential property fuelling the continual downward trend in the construction industry as a whole.
The latest devaluation of the yuan is an attempt to further stimulate Chinese exports which will make Chinese imports of steel and other resources even cheaper in dollar terms.
Shares to watch following the events in China:
Kumba Iron-Ore [JSE:KIO]
Having dropped from R326 in July 2014 to below R100 more recently, Kumba has caused a lot of pain for investors.
Despite some green days here and there, it has generally followed a downward spiral. With iron ore prices continuing to fall due to the global oversupply, some downside might still be possible.
As mentioned above, the slowdown in the Chinese economy is a big factor in the drop of the iron ore price. With the advanced economies of Europe and the United States picking up, some of the price drop might be negated.
However, the economic recovery in these economies isn't robust enough to keep iron ore prices from falling further.
AngloGold Ashanti [JSE:ANG]
With investors running to safe haven assets in times of uncertainty, gold shares like AngloGold Ashanti have seen big jumps in their share price on days of negative news.
With AngloGold Ashanti down 85% from its 10-year high, trading in the mid-R80 range, the share might offer value for those investors holding the belief that the world economic recovery is not as robust.
With the recent currency devaluation announcements by the Chinese central bank, gold shares jumped as fears of an economic slowdown increased.
With a strike in the South-African gold sector looking unavoidable, it would make sense to hold the physical rather than the share.
Naspers [JSE:NPN]
Naspers has been one of the star performers on the JSE for the last couple of years. The multimedia giant is heavily invested in China via its stake in the internet company, Tencent.
With 85% of Chinese internet users preferring to use their mobile devices over their desktop PCs and laptops, Tencent places Naspers in a great position to take advantage of the shift in trend.
With the Chinese economy moving from a construction led economy to a consumption led economy investors are paying a hefty premium for Naspers. It is trading at a price earnings ratio of 96.
The recent currency devaluation by the Chinese government has left investors with some short term uncertainty as a weaker yuan will lead to a drop in earnings in rand terms.
ArcelorMittal SA [JSE:ACL]
The South African steel giant has had a horrid time of late. Steel prices have been declining with the Chinese dumping their cheap steel onto the rest of the world, hurting Arcelor Mittal's market share.
With the currency devaluation aiming to boost Chinese exports, along with the slowdown in the Chinese construction industry, we can expect more cheap steel to flood the local market.
The South African government, with its National Development Plan, Medupi, and Kusile projects has also not sourced local steel but has preferred to make use of imported steel from China.
If the industry is unsuccessful in its bid to lobby for import tariff protection from the government, one can expect more downside.
Richemont [JSE:CFR]
Richemont is a Swiss luxury goods group who has a stake in various luxury brands such as Montblanc, Cartier, Van Cleefs & Arpels and various others.
Richemont generates over 30% in sales from Asia specific countries of which Hong Kong and mainland China provides the bulk of sales. With the Chinese economy shifting towards a consumption led economy, Richemont is looking to take advantage of it.
As with Naspers, investors will be paying a premium for this growth as Richemont is trading at a price earnings ratio of 31.
The impact of the currency devaluation will likely lead to a drop in sales in China as it will become more expensive for the Chinese population to import these luxury items.
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* Kirk Swart is an analyst at Overberg Asset Management (OAM), an Authorised Financial Services Provider (No. 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: The above article does not constitute financial advice and is not a recommendation. Investors must always seek the advice of professionals and trade with caution. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
