By PAULINA DURAN
Investors are positioning themselves to benefit from a potential economic stimulus package in China, but Wilson Asset Management says gains will be limited to key iron ore stocks as it is unlikely the measures will lift global economic growth.
Local shares rose to a three-week high on Friday with energy stocks among the best performers, helped by higher oil prices, after Chinese officials committed to accelerating consumption-boosting policies.
Amid increasing signs China’s economy is losing steam, such as declines in business investment, high levels of youth unemployment, and a downturn in the real estate market, its central bank last week cut interest rates for the first time since last August.
And there are growing expectations of additional stimulus measures in coming weeks, aimed at revitalising struggling sectors, particularly the property industry.
“There’s been a big pivot in the last two weeks from the Chinese government,” said Matt Haupt, who leads WAM’s Leaders $1.7bn portfolio.
“They didn’t want to stimulate the property market, but it looks like they are going to be forced to do it so they can stabilise people’s net wealth and hope that unleashes the consumption side of the economy.”
On Thursday, The Wall Street Journal reported Beijing is planning major steps to revive the country’s economy, including the possibility of $US140bn ($204bn) of new infrastructure spending.
Mr Haupt said commodity-related companies and the big Australian miners would be key beneficiaries of the measures, but warned its broader impact was likely to be limited.
“It’ll really help the big Australian mining stocks in particular, because they are so leveraged to infrastructure and property in China,” he said. “It will be beneficial at the increments to other materials too like copper and aluminium, but the big impact will be felt in iron ore.
“We’ve already seen the iron ore price in China pick up dramatically over the past week or so in anticipation, so that’s the more direct play.”
Ahead of the impending move, the fund had significantly increased its positions on BHP and Rio Tinto, and “we purchased Fortescue for the first time in a little while”, he added.
The companies’ big customer, China, only produces about 20 per cent of its iron ore requirements, meaning most of its demand for iron ore – essential for steel production – relies on imports from countries like Australia and Brazil.
“Iluka Resources has also done well when the Chinese property market has done well,” he said. “We have a big overweight relative to the index on that one too.”
But Mr Haupt says the measures are unlikely to lift many other industries.
“Normally, when China stimulates its economy, it really helps pick up global growth – that’s what has happened in previous cycles. But I think this time it’ll be more domestic-focused,” he said.
“It won’t have a significant enough impact to pick up global growth and help the manufacturing cycle. Its impact will be limited to commodity stocks, particularly those miners and oil to an extent.”
WAM Leaders’ portfolio targets “high quality” Australian companies and has returned 13.9 per cent before fees per year since its inception in May 2016.
Its highest sector exposures are to materials (27.8 per cent) and financials (20.2 per cent).
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