Given how Australian investors love to own resource stocks there must be a lot of worried investors out there right now. Increased murmurings about the state of the Chinese economy and an iron ore price which is now officially in bear market territory – iron ore has fallen around 30% to under $100 per tonne – has left many resource stocks struggling.
Despite the potential for a fallout from a slowing Chinese economy, there’s no need for investors to move to cash and risk missing out on a market which could very well keep on rising. Rather careful portfolio positioning can be used to minimise downside risks.
1) Be a contrarian. While a slowdown may be occurring that doesn’t mean it isn’t already factored into the share price of certain China-exposed stocks. For example Fortescue Metals Group Limited (ASX: FMG) and Arrium Ltd (ASX: ARI) are down 22% and 47% respectively this calendar year. While the iron ore price may briefly head lower, assuming the average price remains above each firm’s breakeven point then these stocks could eventually bounce back to reflect their continued profitability.
2) Buy domestically focussed blue chips. Certain stocks such as Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS) have defensive streams of earnings and should continue to provide solid earnings to shareholders regardless of global macro events. While capital gains may be limited, capital losses should be too.
3) Small cap, niche players can do well no matter what! While higher volatility is common amongst smaller stocks, the underlying businesses of some companies can avoid a slowdown if carefully selected by investors. Lifehealthcare Group Ltd (ASX: LHC) and Capitol Health Ltd (ASX: CAJ) are two possible examples.
Australia’s reliance and dependence on China as a major trading partner shouldn’t be dismissed, however investors also need to keep in perspective that many domestically focussed companies should perform reasonably well regardless of China’s growth rate.