|Investment Research Group|
Politicians are particularly vulnerable to this and I worry that Australia’s proposed tax on mining companies is a classic ‘top of the cycle’ move.
After several years of fabulous profits – and commensurate tax payments into state and Federal coffers – the politicians want to fleece the golden goose (to mix my metaphors).
Those who are recommending the resource tax obviously believe that conditions of recent years, with rising raw materials demand from places like China, will continue.
They may be right, and we all should hope they are, but it is quite likely they are not.
One doubter is British hedge fund manager Hugh Hendry who believes China is in the midst of a credit bubble that will cause its economy to contract and trigger a global crisis.
He notes China has made US$1.9tr of new lending in the past 16 months, most of which is going into infrastructure projects.
"There are striking parallels with Japan in the 1920s, when ultimately the whole system collapsed. China could precipitate a much greater crisis elsewhere in the world," he told Bloomberg recently.
Those who think China will continue to do well by selling consumer products to the USA had better think again, if Hendry’s forecast is correct that America’s economy will shrink from US$14.6tr last year to US$10tr within the next decade.
Of course, if China slumps then so will demand for, and prices of, resources. This will put Australian miners and probably the whole economy into a funk.
Australian shares will be the biggest losers in the Asia-Pacific region this year as a slowing Chinese economy cuts demand for commodities, according to broking and investment advisory firm CLSA.
"We are massively underweight Australia," an Asian strategist with the company, Christopher Wood told Bloomberg in a separate interview. "Australia is perceived as an economy that is geared to China on the commodity side."
Even on a best-case basis, China’s economy will slow as the country is already trying to keep a lid on rampant property prices.
The Chinese government raised mortgage rates and deposit requirements (at both banking and house purchaser levels) to try and limit property price gains.
Wood notes the effect of these curbs is already affecting resource prices.
Price for copper and aluminum for three-month delivery have slumped about 10% in London in recent weeks, while zinc has lost 16% and nickel is down by 18%.
The one bright spot is India, which may pick up some of the resource demand being given up by China.
GDP growth in India may rise to 9%, in line with China’s growth rate of recent years, over the next five years. If it does, India will overtake China as the world’s fastest growing major economy.
I still believe the macro trend for countries like China and India is positive and this will keep resource prices buoyant for many years to come. Once you give people the idea they can lift themselves out of poverty by applying themselves, it is very hard to stop them.
Shorter term, however, a correction could occur, especially if Europe’s debt problems lead to economic slowdown there, which appears likely.