For all the talk China's economic problems are getting (and yes, its official PMI came just slightly ahead of expectations on Saturday printing at 50.8 with consensus looking for 50.0: after all the Politburo can't give the impression of an out of control stall), the real action continues to unfold in its primary derivative economy, that of Australia, and particularly its "China-feeder" resource space, which is a far more accurate indicator of the true demand picture in China than manipulated data out of Beijing. What is going on there, for those who have not been paying attention, is in one word, a disaster.
CLSA's Damien Kestel summarizes, "As noted in recent weeks it has been happy days for investors enjoying the highs on the S&P 500 and associated rallies across Germany, the UK, Japan and elsewhere. But that joy is a world away from the pain that has been inflicted on the majority of resource related equities and their investors. The AS39 Index on Bloomberg includes 87 mid and (now) small cap Australian resource companies. It has been smashed – just like many of its constituents. From early 2011 it has fallen >65% to now sit at GFC levels while there are plenty of examples of stocks that not so long ago had mkt caps of $800m that are now $50m. The evidence of pain in the resources space is everywhere but probably none more so than in Western Australia, the “engine room of Australia”.
Kestel goes on to compile a page of quotes from "conversations over the past week with friends and associates in the Perth mining game and it brought back memories of the Asian Crisis, Tech bust and of course the GFC."
- “We’re seeing a much sharper contraction in the Australian economy than we’d anticipated four or five months ago”. Coffey MD, John Douglas. The engineering group has seen its shares, which traded above $4 in 2007, hit 10c last week.
- “We’ve still got a lot of construction under way or committed and there’s a lot of activity that will go on for the next three years or so. I think where the question mark comes in my mind is, well, what will follow those projects?”. Western Australia’s Premier, Colin Barnett
- “Perth has the highest population per capita of self made millionaires in the world”. Extract from a list of fun facts on Western Australia. I dare say there are a few less after the recent carnage in mining stocks.
- “The current feeling on St George’s Terrace (Perth’s main business street) amongst brokers and miners is that today is worse than the GFC ever was. It’s 100% pain out there” Perth mining investor
- “I was at the Mines and Money conference in Hong Kong recently. They should really call it Mines and No-Money because no one has any and no one wants to give it to them” Mining CEO
- “By 10am, the Fitness First gym in the city is packed full of brokers who’ve had a gutful of sitting at their desk doing nothing – salary cuts are starting and next it will be jobs” Perth broker
- “Oh mate, the funding market is dead. You are now seeing a few deeply discounted rights issues for those that are reaching desperate levels ….. liquidity has completely disappeared” Perth broker
- “Private equity firms are gearing up for a multi-billion-dollar push into the mining sector, with a wave of proposed asset sales by the big miners, a shortage of competing buyers and the funding headaches faced by smaller companies paving the way for a rise in deals”. The Australian
So, bargain-basement purchasing opportunity, or just the beginning of a secular shift and much more pain to come, as the China "paradigm" finally cracks?