Have the data crunchers over at Moody’s been reading Profit Watch?
Here’s the story. We stuck our stake in the ground back in September and advised caution on buying into the Indian ‘growth’ story.
And shiver me timbers! Moody’s rating agency has come out and cut the country’s growth outlook to ‘negative’.
They cited the ‘deepening’ slowdown and insufficient government action.
Here’s the key part from the latest Financial Times report1:
‘Growth has been curtailed by a severe liquidity squeeze, prompted by an intensifying crisis in India’s enormous shadow-banking system and bad loans at its public and private banks.’
That’s perfectly in accord with why I said to steer clear. The only place where the thesis isn’t holding up is where it counts: the stock market!
Indian stocks haven’t sold off heavily yet…
Nothing is going to make me turn bullish until I see these credit and real estate issues resolved.
It’s a reasonable theme to follow for the next 12 months.
Contrast the shaky financial system of India with what is transpiring in China…
Alibaba’s infamous Singles’ Day promotion is off and racing for 24 hours.
It began with a scorching start too — US$16 billion in sales in the first 90 minutes! Surely it can’t all be bad over there in China?
But let us return to these shores. We spent most of last week picking over the issues around the banks.
But there’s more to Aussie stocks than the financial sector. We also have to keep an eye on natural resource stocks on the board as well.
BHP makes the news today…
Miner trials and tribulations
The company’s president of operations is due to reveal how the big Australian miner can turn around the decline in its oil production.
It’s 50% down on what it was in 2013.
Oil and gas accounts for around 14% of BHP’s gross earnings, according to the Australian Financial Review, and comes with better margins than coal or copper.
The only way BHP can produce more oil is to invest capital in developing new projects.
The bigger question is whether the financial resources of the firm should go in that direction?
A dollar spent on producing oil assets is a dollar that is not flowing elsewhere, either to the other three big divisions of the firm (copper, iron ore and coal) or back to shareholders via capital management.
Should BHP keep its unusual straddle across both mining plus oil and gas?
One would think these days there’s some sort of case to be made to selling off the energy divisions completely to divert the inevitable activism, and possible higher taxes, a big firm like BHP could attract because of its fossil fuel earnings.
Mining as a sector may indeed come under increasing pressure from environmental issues in general.
Water shortage to hit miners
The Australian reports that the drought in New South Wales is threatening the operational viability of mines in the affected area.
Government restrictions on water use is causing them to try and source alternative supplies. Some of them could shut down completely.
Here’s one thing we can infer. It’s hard not to think, looking five years out that the Australian index is going to look very different in 2025 than it does now.
Right now banks and miners dominate a good chunk of it.
Both of these industries are under pressure for different reasons, none of which are unlikely to resolve themselves soon. I don’t think the next titans of the index will come from here.
The Aussie sectors to invest in on the ASX…
That’s not to say you can’t make a buck from them now, or in the future. But the heady, free-wheeling days of growth have plenty of roadblocks stopping them from forming again.
Technology will remain the sector to focus on over the long term. The market always hunt new growth by nature.
But new industries and sectors won’t bring the same legacy issues as these. For my money, the next great fortunes on the ASX will be minted in new industries like genetic editing, and space travel and exploration.