Luckily, iron ore and coal are traded in longer-term forward contracts compared with the real-time pricing of crude oil futures so there will be a delay, but the currency markets will not wait for such a confirmation. In 2008, the Australian dollar went from 99 to 60 U.S. cents in a couple of short months as the markets anticipated a bigger Australian economic slowdown than it actually occurred given the resilience of the Chinese economy at the time. The Australian dollar is tradable via the Currency Shares Australian Dollar Trust (NYSE:FXA), where options are available.
The coming correction in Australian equities might prove quite the buying opportunity for long-term investors interested in China investing proxies in more friendly jurisdictions. (One problem with many Chinese equities is that many companies in the country are not run for the benefit of shareholders, but for the benefit of social stability. This is why a developed market like Australia may offer superior ways to play China.)
The MSCI Australia Index Fund (NYSE:EWA) is an index product for long-term exposure to the Australian economy that is 45% weighted in financial and 24% in material stocks. The large financial sector weighting in the ETF gives leveraged exposure to the rising influence of the China over Australian economic growth.
The large international mining conglomerates that trace their roots to Australia — Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP) — also are more targeted ways to play the intensifying Aussie-Sino trade entanglement centered on iron ore. Rio holds 23% of global seaborne iron ore trade (Australia in total holds 41%). BHP has the better part of the rest of Australian iron ore output, but it also has major operations in Brazil in partnership with Vale (NYSE:VALE).
The above three players are the heavy hitters in the iron ore market, where the macro winds are shifting in favor of those with Australian operations as output there is growing faster — estimated to rise to 50% of seaborne trade — thanks to less stringent mining regulations and closer proximity to China.
Whether Aussies like it or not, the increasing influence of China over their economy has made their country a leveraged proxy for Chinese economic growth — on both sides of the market.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds a position in BHP Billiton and Rio Tinto for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities.