What a turn of events.
Over the past six weeks the Aussie S&P/ASX 200 index has fallen 6.8%.
At the same time the US S&P 500 index is up 1%.
It doesn’t help when the likes of Qantas [ASX: QAN], QBE Insurance [ASX: QBE], and Oz Minerals [ASX: OZL] all released news that disappointed the market.
Add to that falling consumer sentiment – according to the Westpac-Melbourne Institute Index of Consumer Sentiment – and it’s a recipe for falling stocks prices.
But hang on a minute. That’s bad news right? Isn’t bad news supposed to be good news for stocks?
If there’s one phrase we’ve hated more than any other over the past five years it’s the one that counters every warning about the Australian economy with, ‘It’s different here.’
Well, in this case it seems as though it is different here. But not in the way most investors hoped.
Worldwide, investors have feared that the worse things get economically, the more the central banks will print money, and stocks will go up – bad news is good news.
On the other hand, the better things get economically, the less chance there is that central banks will print money, and stocks will go down – good news is bad news.
That’s how things have worked overseas. Stock markets have soared on the back of it. So, are things really that different here? Or is the Australian market suffering a simple case of the blues?
The Importance of a ‘Comparative Advantage’
Whatever the size or shape of an economy, it’s important that economy has a ‘comparative advantage’ over another economy.
‘Comparative advantage’ is a term coined by economist Adam Smith in Wealth of Nations.
It’s a fancy way of saying that one economy has an edge over another economy. That could be due to cheaper manufacturing costs, such as with the Chinese economy. Or it could be due to the quality of precision engineering, such as with the German carmakers.
The good news for much of the past 10 years is that that Australia had a comparative advantage too. This advantage wasn’t necessarily due to skill or innovation. It was as much to do with luck as anything else.
Australia’s comparative advantage was the resource industry. And it still is. It certainly isn’t the car industry – although the Australian economy is playing an integral role in one game-changing car industry innovation.
If only Holden had gotten in on the act, it could have spared a lot of tears.
But even a comparative advantage doesn’t guarantee success. The ongoing disaster that is the Aussie liquefied natural gas industry is a classic example…
Still Waiting for the LNG Boom
Two news reports from the Financial Times provide a clue about the ineptitude of Australia to speedily capitalise on the natural gas boom. First this story, which highlights the extent of the opportunity for firms and economies that can exploit the boom:
‘Natural gas will overtake coal as a global energy source in the middle of the next decade, in part because of the environmental benefits it offers, according to ExxonMobil, the world’s largest oil and gas company.‘
We know ExxonMobil has a vested interest in that happening. But even so, we completely agree. Natural gas is a no-brainer in terms of it becoming the dominant energy source.
If ExxonMobil is right, it will be great news for the Aussie economy. Well, it should be great news. Only, things aren’t quite going to plan. As the second report from the FT notes:
‘Gorgon, the world’s largest liquefied natural gas development, has slipped further behind schedule and over budget, admitted Chevron, the oil and gas company leading the Australian project.
‘The plant’s expected cost, which was estimated at $37bn when it was launched in 2009, was raised to $52bn last year, and has now been increased again to $54bn.‘
Based on the potential reserves, experts have forecast that Australia is set to become one of the biggest natural gas producers and LNG exporters in the world. The potential is so great that forecasts suggest it will only be second to Qatar in terms of production.
That’s a huge opportunity. Trouble is, due to high costs and red tape, it’s just not happening.
Is it Time to Sell?
The LNG sector is one of the sectors we’ve followed closely over the past few years. There were all sorts of plans for Gladstone in Queensland to become a major export terminal for four different projects.
Like Gorgon, the Gladstone projects are all running behind schedule and over the initial cost projections.
When the resource sector is a country’s supposed comparative advantage, it makes it pretty tough for the economy when firms can’t exploit that advantage (which is not all their own fault of course).
And when that comparative advantage relies on digging up a resource and then selling it abroad, the old ‘bad news is good news’ hasn’t translated to the Australian share market…hence the collapse in Aussie resource stocks.
But in our view that creates an opportunity. As we’ve long said, there will always be a demand for natural resources. The demand for copper, iron ore, oil and gas isn’t about to fall to zero.
What’s happening right now is the ‘bust’ part of the boom and bust cycle. This is when speculators need to start looking for opportunities in the resource sector and place selective ‘bets’ on the market.
As for the rest of the Aussie economy, well, that’s simple. The story is similar. You see those low interest rates? That’s not changing. The Reserve Bank of Australia will keep rates low, and that will feed through to the Aussie services economy.
The Australian share market has fallen for six straight days; today could be number seven. Does that mean it’s time to sell stocks? Not at all. The market has seen worse moves than this over the past five years. As we’ve said throughout 2013, this kind of price action is just what you’re after if you want to buy stocks on the cheap.
We may be a lone voice on this. But that’s fine with us. This is still a buyers’ market.
Cheers,
Kris+
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