The mainstream hasn’t talked much about the serious trouble in the ‘Lucky Country’ – aka Australia.
But I’ve had my eye on it for a while now. . .
And after the recent slowdown of China’s growth estimates – I think this is a good time to bring it to your attention.
Here’s a brief summary – Australia’s a huge country with an abundance of natural resources and a booming exporting sector.
Basically – Australia is to China what Canada is to the U.S. – a big trading partner for commodities. Especially natural gas, iron ore, copper, and bauxite.
Many aren’t aware of this – but Australia hasn’t had a recession for nearly three decades (meanwhile the U.S. has suffered three in that time span). Even the Great Recession of 2008 didn’t tip Australia into a technical recession.
That’s because Australia has hitched themselves to China’s massive growth. And as China’s done well – so has Australia. Especially with the Chinese investing hundreds of billions into Australia’s economy.
There’s even been jokes that Australia may become the ‘24th province of China’ since the Chinese continue buying up everything in Australia – from natural resource deposits to luxury properties.
But that’s all about to change. . .
As I’ve highlighted recently (read here) – China’s having serious problems in their own economy over the last year. And it’s only getting worse.
Stemming from the excessive dollar denominated debts, a relatively weaker yuan, a trade war with the U.S. And most importantly – slowing economic growth.
And now that China’s momentum is decelerating – Australia’s beginning to feel it.
You see, I believe markets are complex systems – meaning that small changes of initial conditions can have huge consequences later-on (known as a non-linear relationship).
That’s why less growth and capital from China will have big trickle-down-effects throughout Australia’s economy.
Putting it simply – the less China grows and profits, the less they have to buy from and invest in Australia.
And we’re already beginning to see this slowdown in Australia.
Take a look at the recently published Australia Composite PMI (Manufacturing Output Index). . .
As Markit Economics highlighted – there was a collapse in Australia’s service sector conditions and slower growth in the manufacturing sector.
And just like the drop in China’s PMI – this contraction in Australia’s output shouldn’t come as a surprise. . .
But the biggest red flag is the collapsing property values in Australia – effectively ending the multi-year boom in Sydney and Melbourne real estate markets.
Just look at the following chart from Crescat Capital. . .
These are huge year-over-year drops – and similar to what was seen when the housing bubble popped in 2008.
In my opinion – it looks as if the floor’s dropping out from under the Australian real-estate market.
Year-end growth for housing prices are now negative (keep in mind it hasn’t been this bad since 2008). . .
To summarize: I believe Australia’s economy and markets are highly fragile – especially since they’re tied to economic growth in China (which is souring).
Said otherwise – the Lucky Country’s facing a fundamental crisis as China’s debt-fueled growth begins decelerating.
To put things in perspective – if property prices are already collapsing throughout Australia as China’s growth has only slightly slowed down – imagine what it will look like if China’s GDP drops below 5%.
With Chinese demand for Australian commodities in danger – which is a huge headwind for the export-heavy country – I expect capital investment from China to further dry up. Adding strain to the ailing Australian housing market.
The Australian Dollar (AUD) is already relatively weak – but I expect it has further downside.
All this is why I’m looking at opening a position via long dated, out-of-the-money put options on the iShares MSCI Australia ETF (NYSE: EWA) to profit from any sell-off and weakness in Australia’s economy (for instance, the EWA is over-weight Australian banks – nearly 30% – which are directly at risk to falling home prices). These put options offer the positive asymmetry (low/fixed risk – high reward) that I look for.
I’m also looking at the same play for the Invesco CurrencyShares Australian Dollar Trust (NYSE: FXA) as a bet against a weakening AUD.
So stay tuned.
AS A DISCLOSURE: Because of the positive asymmetry (low risk – huge upside) of buying long dated out of money options. I personally purchased the $FXA Sep20’19 $67 Puts @ 0.12 for my own portfolio.
