What a $55b Australian Share Market Rout Means for You

I woke up yesterday to the headline, ‘ASX wipes $55b in savage sell off.’

As a good investment analyst and editor it isn’t the kind of headline that you want in order to wake up to. It’s a pretty significant fall though. The S&P ASX 200 was down 4%. That’s crazy-town.

It’s the kind of volatility that used to be thrown about within 2008 and 2009.

First I had to see why, during the night, ‘$50b’ was wiped off the ASX. After that try to figure out what it means for you. That’s the really important part.

It wasn’t hard to find the trigger stage for the selloff. Glencore PLC [LON:GLEN] was down around 28% in the UK on Monday. We knew this before We went to sleep. But I didn’t think it would drag on the actual ASX so heavily. After all it’s just one stock.

However, Glencore is a headline maker. Even though there are plenty of bigger and more important mining companies, this fall had a bit of sting in the tail.

I also didn’t expect what I found with bit of further research. Apparently the reason for the 28% drop in Glencore was an analyst statement. Just one analyst asking a fair question. The question was, is actually Glencore a viable company if resource prices stay at current amounts?

The short answer is no, most likely not.

It’s a fair question. And I can see why it would impact Glencore’s share price. But to suggest that one expert report can subsequently produce tens of billions in stock market falls around the world is near on insane.

Don’t get me wrong, analyst research can have positive and negative impact on individual stocks. But if you believe it impacts an entire market, or can wipe $50 billion off the ASX, then you’re a buffoon.

Prophetic talks online

I’ll tell you what caused the actual $50 billion selloff on the ASX yesterday.

Fear. Plain and simple, investor fear. And a little bit of panic thrown in for good calculate.

One of the more amusing commentaries We heard on Tuesday was, ‘Glencore’s drop is the Lehman Brothers moment for resource stocks.‘

I had a bit of a chuckle over that one. It is nothing like Lehman Brothers. Besides, in the event that Glencore does fail, it would be a good result for the likes of BHP or Rio.

If Glencore fails the boards from BHP, Rio Tinto and Vale SA will rejoice. When a major competitor fails this benefits direct competitors. Any major assets Glencore own will either shut down or sell for cents on the dollar.

I was talking online to a source of mine in the mining industry about Glencore last Friday. We were chewing the fat regarding resource stocks. Glencore came up within conversation and he said this particular to me,

‘Ahhh [Glencore is] old news. Respectable, Glencore and Trafigura can only survive upon cheap debt and with high costs.

‘We’ve known for some time Glencore was in trouble because they’ve already been shopping their assets around the market to sell off.‘

To be honest, resource stocks aren’t something I have been particularly bothered with over the last three years. But it was interesting to hear his views on Glencore. He or she even questioned if Glencore would still be around in 6 months’ time.

Maybe they will, maybe they won’t. Maybe the likes of BHP, Rio and Vale will benefit without Glencore in the market. Should you worry about it? I don’t believe so.

It’s time to look at Australia’s ‘new economy’

Right now the last place you’d want to invest is resource stocks. Commodity prices are on a continuing downwards trend and some of the planet’s biggest companies are suffering. Will there be a reversal? Yes, I think so. Eventually, but not at this time. And not for a long time.

That means at this time you should be focusing your attention on another industry. Particularly you want to look at an industry which Australia needs to lead this to a prosperous future. You have to look at Australia’s ‘new economy’.

I’m talking about services industries. High-tech, high growth, high skilled industry of the future.

That includes companies that make consumer and commercial products. Companies that manufacture equipment for high tech application. Software program and online companies that have a product which fits an untapped area of the market.

These industries are vital with regard to Australia to turn around its fortunes. To be globally relevant in a decade Australia has no choice but to look with other industries to generate growth in the economy.

I’m pretty sure the new federal government recognises the need for a high-tech long term. Maybe they can help it happen. If they do — and it’s a big ‘if’ — these ‘new economy’ industries could see a boom like resources experienced through the early-mid 2000s.

There’s a pretty sizable risk to make if you’ve got the risk urge for food for it. Do you sit aside and wait it out, and maybe miss the boat around the upside? Or do you have a punt on the industries that will generate Australia forward again?

Tough call. But my view would be to play the long game as well as take the punt.

Cheers,

Sam