Magazine cover indicator screams Aussie dollar sell

Ah, the magazine cover indicator, a contrarian analyst’s dream come true, and when we examine the Barron’s article itself if gets even better:

“The strength in the Aussie is something that you can’t totally ignore. Its failure to break down dramatically earlier this year was possibly a sign that things weren’t as bad as people feared at the time,” says Shane Oliver, chief economist and head of investment strategy at AMP Capital, one of Australia’s largest money managers. “It’s certainly a sign the world is not going to fall apart and the commodities story is trying to bottom, even if it’s not going into a new bull market.”

…THE KEY TO WHETHER the Australian dollar can power higher and commodities can levitate above their lows rests in the hands of seven men in Beijing. The Politburo Standing Committee, the apex of Chinese policy making, has decided that it’s time to stimulate growth again, if lending data from March are any indication. Total social financing, the broadest measure of new credit, rose to 2.34 trillion Chinese yuan ($360 billion) in March from CNY780 billion in February. China’s banks, the main policy lever through which the government modulates growth, made new loans worth CNY1.37 trillion, surpassing analysts’ expectations of CNY1.05 trillion.

The injection of cash pulsing through the arteries of China’s economy is great news for commodities producers, at least for the moment. The easy money is fueling a new wave of euphoria in the property market and a surge in speculative futures trading. Meanwhile, steel mills that remained in business thanks to low iron-ore and coal prices have ramped up production, despite concerns about excess capacity, as steel prices march higher. Rebar, used in construction, has climbed 58% since its December low.

…“The best proxy for Chinese economic growth is commodity prices, and they’re looking pretty good from the low point that we had just three months ago,” Stephen Koukoulas, managing director of Market Economics and previously a senior economic advisor to former Australian Prime Minister Julia Gillard, tells Barron’s. He argues that the recovery in key economic indicators, such as purchasing manager indexes (which measure manufacturing activity), retail sales, and housing prices, shows Beijing’s commitment to putting a floor under economic activity and ensuring that growth remains on track to meet its target of an average 6.5%-7% annual expansion through 2020.

…A LONG-TERM DRIVER OF DEMAND will be China’s ambition to construct a new Silk Road through the One Belt, One Road initiative linking the Middle Kingdom to Europe via Central Asia. While aggressive checkbook diplomacy will buttress China’s growing geopolitical influence, it also provides an outlet for the excess capacity that haunts many industries, such as steel and cement.

“China is doing a lot of work to continue its urbanization process; you have the Asian Infrastructure Investment Bank and One Belt, One Road, and that looks to me like a clever way of developing future customers,” Nev Power, CEO of Fortescue Metals Group (FMG.Australia), the world’s fourth-largest iron-ore producer, tells Barron’s. “If you can accelerate the development of your neighbors, then you’ve got customers for steel, manufactured goods, and construction.”

…Indeed, the waning of the mining-investment boom in recent years underscored the need for a more diversified economy. Whereas Australians used to lament the so-called tyranny of distance from markets in the United Kingdom, the Lucky Country is well-positioned to profit from its proximity to Asia’s fast-growing economies. Asia’s rising economic giants are contributing more to global growth as Western economies falter. Hundreds of millions of middle-class Asian consumers are hungry for food that’s safe and high quality, and that’s underpinning hopes for an agricultural renaissance.

The transition from mining-to-dining is underscored by the massive gains in stocks of companies such as organic baby-formula producer Bellamy’s Australia (BAL.Australia), vitamin maker Blackmores (BKL.Australia), and Capilano Honey (CZZ.Australia). Concerned with food-safety issues and contamination of infant formula, many Chinese look to Australia for organic food or simply for food not grown in polluted air and soil. And Capilano’s manuka honey is prized for its medicinal qualities. All three stocks look like good long-term bets, but investors may want to wait for a pullback before buying.

The weak Australian dollar also fired up tourism, with record numbers of Chinese visiting Down Under. Education is also booming, as Asia’s middle classes send their children to Australian universities. Australia is also a major supplier of thermal coal and is poised to surpass Qatar as the largest exporter of liquefied natural gas.

…“If you’re a fund manager sitting in Tokyo, Hong Kong, Boston, or London, and you’re saying, ‘Where in the world am I going to put my money?’ Australia looks attractive in terms of yield, policy common sense, and low levels of government debt, and you would say, ‘I need to have some money in there because it’s a relatively good story,’ ” says Market Economics’ Koukoulas.

While acknowledging that it’s unlikely that the Aussie will return to parity with the greenback, he reckons that “we’re more likely to see parity than sub-60 U.S. cents.”

…AMP’s Oliver says the selling of the big Australian banks’ stocks had gone too far. “A lot of the negative sentiment we saw a couple of months ago has been way overdone, and short positions in some of them had been built to extreme levels,” he says. “We didn’t subscribe to the ultrabearish view on banks, and I think that provided a bit of an opportunity when they were sold down so heavily.”

Oliver, Kouk, Power, Capilano Honey…I’ll take the other side of that bet with both hands.