Both US & Local share markets have had a very strong start to the year. This is mainly due to strengthening commodity prices and solid news out of the US such as falling unemployment and strong retail figures.
We all know that China is a critical component of both Australian and global growth. This is because China accounts for 13.3% of global domestic product, 18.6% of the world’s population and 50% of the world’s steel production. That proportion is similar for Cement, Aluminium, Nickel, Copper, Zinc, Tin and Lead. These numbers highlight the importance of China’s growth & demand.
One other statistic to acknowledge when looking at Australian investor behaviour is that 80% of direct shares held by Australians are in financials and 70% of their net worth is in residential property. The good news about this is that our banks are the strongest in the world, and property has booming and the outlook is that at worst, housing prices will plateau over the next few years.
When talking of China and it’s important, this clearly relates to our mining companies.
BHP and Rio Tinto both have extremely strong balance sheets and BHP has not made a loss since Pearl Harbour! Their dividend yield is higher than it has been since the seventies but importantly their price to book valuations are at 35 year lows. This would suggest that they are good buys, with a long term investment horizon.
So with our financials looking solid and mining presenting great value, a sound outlook for the Aussie share market is predicted. I would suggest a 7-8% return for the year. The problem is, the local market has grown strongly over the first quarter and we may be looking at a less impressive second quarter. Therefore a HOLD position is recommended.
Much has been made of China’s slowing growth. The fact of the matter is that it has deliberately slowed and it is impossible for such a large economy to grow at the rate it has been of 7-7.5%.
Realistically we can expect a 5 – 5.5% growth rate over the next decade. It is fair to say that any other country would take that in a heartbeat.
Summing all this up a BUY position is recommended for international share funds along with large domestic mining companies.