28 October 2012

Export lows and dollar woes may not be all bad news

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A year-long slowdown in Chinese imports of iron ore and coal had resulted in lower prices long before the Eurozone debt crisis escalated. Obviously these setbacks must affect the Australian economy – but how serious and long term will the impact be?

China’s demand has slowed, but not stopped

Jin Liqun, Head of China’s Future Fund, explained that the country’s economy was deliberately slowed down over the past year to reduce inflationary pressures and a domestic property bubble. However, there is now some concern that the slowdown went further than expected because the Eurozone crisis shrunk China’s European export markets, prompting predictions of a government stimulus package.

Of course, the Chinese economy remains impressive – even in a slow period. In the first quarter of 2012, its growth dropped to a low of 8.1%, compared to 2% for the US and 1.7% for Germany.

Miners continue to invest in Australia

Both iron ore and coal prices have dropped in the past year, but at the same time our biggest miners continue to invest heavily in Pilbara iron ore and Queensland coal and both Rio Tinto and BHP believe the iron ore market will be strong for the next decade. While reinvestment of profits is a sign of the health of an industry, for the country it means a continuation of our two speed economy.

Both the Australian dollar and interest rates are down

The Australian dollar continues to dance around parity with the US dollar, but has fallen from its recent highs, and the Reserve Bank has dropped the official interest rate – both largely outcomes of Eurozone instability. The lower Australian dollar may be bad news for local online shoppers, but it is certainly good news for our exporters, including the miners and for our tourist industry.

Similarly, lower interest rates should please commercial lenders and industrial borrowers, but will not be welcomed by investors who sought shelter from the financial storm under a fixed interest umbrella.

Income investors who are feeling the pinch may wish to explore alternatives such as managed bond funds that include higher interest corporate bonds, or even a cautious return to the share market via dividend stocks with fully franked tax benefits.

If you would like to discuss these or any other current issues, please contact us.

The author is an employee of Verante Financial Planning in Castle Hill, Corporate Authorised Representative of Magnitude Group Limited, Licence No 221557, Magnitude Group Limited ABN 54 086 266 202.

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