Just when you thought it was plain sailing ahead for mining stocks…
On Friday, China unexpectedly raised interest rates for the first time in six years, widely seen as an attempt to moderate the pace of credit growth.
Last year, writing in the Fairfax media, Matt Wade said Australians were ignoring a bigger crisis than Brexit: a Chinese corporate debt binge.
The Reserve Bank of Australia even rang the alarm bells, saying…
"The potential for a disruptive adjustment in China remains pronounced, given the ongoing increase in debt."
Higher Chinese interest rates will slow economic growth in China, something that has the potential to impact Australia in many different ways… and none of them positively.
Lower commodity prices are the first casualties — and the share prices of mining companies like BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals (ASX: FMG) are taking it on the chin today — but after that we also have potential slowdowns in tourism, education, non-mining exports (think baby milk formula and multi-vitamins) and critically, local house prices.
Property investors have been snapping up Australian apartments in almost total disregard for any sense of value.
Tell me if you've ever heard a friend or colleague say "house prices never fall." Just like the Australian economy "never has recessions." The average 45 year old Australian has NEVER experienced a recession in their working life.
As you think ahead — because it's the future that matters, not the past — picture this…
— Australian wage growth is virtually non-existent.
— Household debt is equivalent to 185% of annual household disposable income, a record high, and up from around 70% in the early 1990s, according to the Reserve Bank of Australia.
— Gross rental yields are at record lows, recorded at just 4% across the combined capital cities. Sydney dwelling values have doubled since the GFC, with Melbourne property prices jumping 85% higher over the same period.
— Last month, ratings agency Fitch downgraded its outlook on the banking industry, citing rising household debt and concerns over higher potential loan losses.
— Last year, global banking giant Citi said it believes time is nearly up on Australia's apartment building boom, with a glut of supply over the next two years likely to trigger a drop in prices.
— Last month, the AFR reported Chinese developers snapped up three-quarters of development sites in Melbourne in the last five months of 2016.
How do you fancy buying an investment property today?
Or owning those big four Australian banks, as so many SMSFs seem to do?
Make no mistake, lower house prices will hit the banks, and hit them hard.
Right on cue, today National Australia Bank Ltd. (ASX: NAB) reported a 1% fall in its first quarter cash profit, citing a challenging operating profit, elevated funding costs and intense competition.
And that's with household debt at record levels and house prices riding high… about as good as it gets for a lender.
Yet, the NAB share price has jumped higher today, up 2% to around $31. Over the past three months, following Trump's election win, the NAB share price has soared 19% higher.
Although many Australians disapprove of the man and his policies, many SMSFs should arguably be cheering Trump's pro-growth and reduced regulation agenda all the way to the bank.
Earnings and dividend growth is what ultimately drives share prices higher — something decidedly lacking at NAB and the other Big Four Australian banks.
Adding the potential slowdown in China to all the local headwinds, it's hard to make a compelling argument for buying the big four banks.
Still, that hasn't stopped popular investment company Argo Investments Limited (ASX: ARG) from saying the big four banks should be reasonably safe bets for investors over 2017.
According to the AFR, Argo has 21% of its $5.3 billion share portfolio invested in banking stocks. It said NAB was the best pick because it offered the best dividend yield.
When looked purely through the lens of dividend yield, NAB certainly looks a compelling investment. Its fully franked dividend yield of 6.5% grosses up to almost 9.3%.
Argo has a wonderful long-term investing record, including paying a dividend every year since it was established in 1946.
Who am I to suggest they are wrong now with the banks?
To be fair, Argo are not exactly suggesting it's all plain sailing ahead, saying that after a good run for global stocks following the US election, markets leave "room for some disappointment in the future."
Recent Argo purchases have focused on small and mid-sized company opportunities, including oOh!Media Ltd (ASX: OML) and Speedcast International Ltd (ASX: SDA).
Both stocks have hit some speed bumps in recent times, with the oOh!Media share price down 18% over the past six months, and the Speedcast International share price off 25% over the past year.
The value investor in Argo probably saw that as an opportunity to pounce, even though both stocks are still trading at elevated multiples.
According to Commsec, oOh!Media and Speedcast trade on P/E ratios of 27 and 21 respectively — not the sorts of multiples you expect to see in a typical value investor's portfolio.
Given its size — Argo manages $5.3 billion across ASX stocks — it has virtually no option but to invest in the likes of the big banks, miners, supermarkets and Telstra Corporation Ltd (ASX: TLS).
And therein lies YOUR competitive advantage when it comes to investing in the stock market.
Argo's investments in smaller growth stocks represent around 10% of its overall portfolio. As such, big gains in any one investment are unlikely to significantly move the radar on Argo's overall returns — not in the short-term, anyway.
By contrast, YOU can allocate meaningful portions of your portfolio into smaller, growing companies.
My SMSF's investment in Webjet Limited (ASX: WEB) — a recommendation in our Motley Fool Hidden Gems service — is one such example.
Its shares have gained over 340% since the team at Motley Fool Hidden Gems most recently recommended Webjet as a buy, helping power my SMSF to new highs.
And the gains may not be done yet, with Microequities Asset Management boss Carlos Gil saying in the AFR that Webjet "still has tremendous growth available to them."
The same can't be said of the big four banks — and that's before any China slowdown potentially impacts on local property prices!
