Cross posted from Henry Thornton:
In early March of this year, Henry was sufficiently concerned to spend several hours quizzing the man who manages his equity portfolios.
Key assumptions were as follows. The US economy is recovering but not yet strongly; Europe is mired in recession and could yet trigger a major global setback; China is slowing, with some non-trivial chance of a slowdown sufficient to dampen Australia’s mineral boom to an extent that even the mining sector is hit hard and mining stocks take a beating; and the US and other major central banks have flooded the world with liquidity that is almost certain to create serious inflation when USA and European economies are again growing strongly, and perhaps sooner.
We further concluded that the Australian dollar is high and may go higher but then will correct, perhaps to a level well below parity.
Caveats about the major resource and banking stocks included concern about the time to improve results from four very large acquisitions/development plans recently announced by BHP Billiton. In the case of a hard landing in China, or even a soft landing that reduced China’s growth to, say, a ‘mere’ 5 % per annum, BHP Billiton and other resource company share prices would suffer powerfully, and a case to lighten up on even the old faithfuls was noted for further consideration.
The Eurozone crisis has worsened, justifying generalised caution. The US recovery has stumbled. China’s slowdown has proved to be significent, but not yet totally worrying.
Henry and Mrs Thornton’s decision to increase cash in their investment portfolios, and to put more money offshore, has so far been proved to be sensible.
Yesterday’s announcement by BHP Billiton’s Chairman, Jac Nassar, that $80 billion of expansion has been postponed or cancelled is good news but also potential bad news. The Australian reported:
‘BHP Billiton chairman Jacques Nasser has used a luncheon speech to press the government for greater industrial relations and taxation certainty ….
‘Management at the mining giant have been rethinking its capital expenditure plans laid out last year “every day,” as the global economic climate and uncertainty within the Australian mining sector cloud the outlook, chairman Jacques Nasser said in Sydney today.
‘Asked whether the miner still plans to spend the hefty $80 billion over the next five years it had previously estimated, Mr Nasser said: “No”.’
“When (BHP chief executive Marius Kloppers) talked about that $80 billion … the environment was different,” Mr Nasser told reporters after an address to the Australian Institute of Company Directors (AICD).
The good news is that BHP Billiton is no longer overly committed to extrordinary (indeed risky) expansion plan.
The bad news comes in two parts. Part one is that this announcement was made by the Chairman, not the CEO. Chairmen need to be seen to be saying things that are sensible, or at least not mad. But making a speech that corrects the most recent statement by the CEO on a major strategic issue suggests at best unhappiness about the CEO’s performance.
Part two is the news that the so-called ‘big Australian’ has decided that the global situation is less than supportive to its earlier, frankly excessive, expansion plans.
The report by The Australian is worth continuing:
‘Rather than the world settling down, we will face increasing volatility and uncertainty,” Mr Nasser said. “It is really going to feel as if the ground is shifting under our feet,” he added.
‘Nasser described the 2008 global financial crisis as a structural shift and said ongoing developments in the euro-zone were a short time ago “almost unthinkable.”
‘Mr Nasser also said the Australian mining industry was “fighting for our survival” during negotiations with Julia Gillard’s government over the mining tax in 2010.
“It would have meant the effective nationalisation of the resources industry in Australia,” he told the AICD luncheon.
‘Mr Nasser said BHP was still evaluating the impact of the carbon tax, which comes into effect on July 1.
“It just makes it more difficult,” he said’.
Shares in BHP Billiton were down $1.37, or 4.05 per cent, to $32.49 at the close of trading on the Australian Stock Exchange this afternoon.
