Trying to catch a falling knife is going to end badly. The end of a boom can have similar consequences
Yesterday we highlighted a report by advisory firm Variant Perception. The three conclusions from that report weren’t pretty:
- Chinese demand will slow
- The Australian dollar will fall
- The house price bubble will burst
That’s a pretty ugly trio. So what does that mean for Australians?
Home owners and buyers
If the report’s conclusions are right, house prices are likely to be low – or lower – for a while to come. That’s not pretty for a country used to rising house prices making us feel richer.
On the flipside, it’s pretty good news for Generation Y who have been struggling to buy their first homes.
A falling dollar is bad news for consumers used to getting cheaper electronics from overseas. The combination of rising demand and a higher dollar has made computers and televisions cheaper over the past few years, but that’s at risk if the Australian dollar drops.
It’ll also make overseas trips and products bought on overseas websites more expensive – perhaps 10 – 20% moreso, depending on how far it falls!
Much of our recent economic prosperity – yes, despite what some may say, we’re the envy of the world – has come from the mining industry soaking up the jobs that have been lost elsewhere. If that trend reverses – because demand for our minerals falls, or because some mines become unprofitable if prices fall too far – we’ll have job losses from the mining sector.
Without a sudden upswing in other parts of the economy, that might mean a jump in the unemployment rate in the medium term – and that’ll make economic recovery just that little bit harder, as well as putting more pressure on retailers that are already suffering from low consumer confidence.
If Chinese economic growth does slow, resources – particularly minerals – prices will fall. Falling resources prices are obviously bad news for miners, as their profit margins get crunched. The likes of Fortescue Metals Group (ASX: FMG), Rio Tinto (ASX: RIO) and Atlas Iron (ASX: AGO) are in the firing line as iron ore prices fall.
Fortescue CEO Nev Power yesterday called the recent price fall (iron ore has fallen by around one-third in the last month!) an aberration. Whether the current fall is an aberration or not, the report suggests it could well turn into a longer term problem.
The good news
A falling dollar would be good news for our exporters, who will get higher prices for their goods or who will simply be able to be more profitable at the prevailing global price.
It’ll also be good news for local companies who are competing with importers. Steel manufacturers will relish the higher price of imported steel, and local tourism will get a boost from Australians spending more of their leisure time (and money!) at home. That’s good news for tourism operators, including Flight Centre (ASX: FLT).
By definition, a boom is an unusually prosperous period (after all, if it wasn’t unusual, it wouldn’t be a boom).
Some end with a bang, others slowly deflate. Economies more easily adjust to changes when those changes happen slowly. We can only hope that’s the case.
For investors, buying (or holding) shares in mining companies at these prices requires faith that the boom will continue – and that prices will stay high.
Now might not be the time to have a portfolio full of mining stocks – or large debts!
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Scott Phillips is an investment analyst with The Motley Fool. He’s very happy not to own shares in any iron ore miners (including those in this article) at the moment. You can follow Scott on Twitter @TMFGilla. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691).