Contagion is a dirty word these days. But while many people are focused on the problems of sovereign debt in Europe, the contagion of a China slowdown is also a big concern for the global economy.
The China slowdown is pretty well-documented, most recently in the latest earnings reports for Chinese corporations. But investors should also understand the sluggishness that is spreading over into Australia as a result.
Take the consumer front down under. Economists expected a rise in retail sales this month, but wound up with a seasonally adjusted .8% decline instead — the biggest dip since late 2010.
Interest rate cuts have masked some of the pain in recent months, but central bank moves have worn off — and now Australian retailers want the Reserve Bank of Australia to take action as sales dip.
Australian corporations also posted dropping profit for a third straight quarter, sending the Aussie dollar to a five-week low.
As Mish Shedlock points out in a recent post on his blog, Global Economic Trend Analysis, Australia is also facing more retail and food store bankruptcies and seeing jobs in retail and fashion disappear. He cites women’s fashion chain Ojay and a ready-to-eat food manufacturer that have been put into “administration”, threatening hundreds of jobs nationwide. (In Australia only individuals can go bankrupt — companies get their own terminology).
This is just the latest trouble, since the fear of an Australia housing bubble bursting has been real and present for months now — with some like the bearish Marc Faber saying the real estate market is already starting to crash. For more on the topic in easy-to-read form, check out this awesome infographic from the Aussie website DebtConsolidation.
I warned of trouble in Australia a few weeks ago, but it’s important to note that this region remains very troubled. And it’s unfortunate not just because of the slowdown in related Australian companies but because of what it means for other China dependent regions and businesses. There’s a lot at work here, but there’s little doubt that Australia’s pain is amplified by its important trade relationships with the People’s Republic to ship raw materials there. After all, energy and mining are a huge part of the Australian economy.
Traders may be lulled into a false sense of security since the iShares MSCI Australia Index Fund ETF (NYSE:EWA) is outperforming the Dow year-to-date and has come roaring back 9% in the last three months or so. But, really, things are not looking up — so tread with caution in this region.
I remain convinced that Australian banks are nice long-term investments, even if they are a bit overbought right now. Of particular note are Westpac Banking (NYSE:WBK), Australia and New Zealand Banking Group (PINK:ANZBY) and the Commonwealth Bank of Australia (PINK:CBAUY), which all have strong dividends to hedge against any short-term volatility. (Read more about Australia bank stocks here.)
But it must be noted that, while Australia is one of the world’s strongest economies and weathered the Great Recession better than many regions, investors need to be judicious to avoid buying in at a bad time.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.