Bloomberg :: CLSA `Massively Underweight' Australia, Says India's Outlook is Attractive

CLSA `Massively Underweight' Australia, Says India's Outlook is Attractive 
Australian equities will be the biggest losers in the Asia-Pacific region this year as a slowing Chinese economy cuts demand for commodities, according to CLSA Asia Pacific Markets.

“We are massively underweight Australia,” Christopher Wood, the second-ranked Asia strategist in Institutional Investor magazine’s annual poll, said in an interview yesterday in Shanghai. “Australia is perceived as an economy that is geared to China on the commodity side.”

Australia’s benchmark S&P/ASX 200 Index fell 1.5 percent today after rallying 20 percent in the past 12 months as Chinese expansion fueled demand for the nation’s exports, including copper and iron ore. BHP Billiton Ltd., the world’s largest mining company, has risen 13 percent in that time and Rio Tinto Group, the third-biggest, gained 32 percent. Both are based in Melbourne.

The S&P/ASX 200 has fallen 11 percent since reaching an 18- month high on April 15. Losses accelerated after the government said it will impose a 40 percent levy on the profits of raw- materials producers including BHP and Rio Tinto as part of the broadest overhaul of its tax system since World War II. The stock index had risen 11 percent between Feb. 9 and April 15 after posting a 7.5 percent retreat to start the year.

China, Australia’s biggest export market and purchaser of iron ore, began unwinding stimulus measures this year to avert asset bubbles. China International Capital Co. cut its estimate for China’s economic growth this year on May 10 to 9.5 percent from 10.5 percent, citing property tightening measures and overseas “uncertainties.”

Mortgage Rates

The Chinese government raised mortgage rates and down payments in April to curb property price gains, while the central bank this month ordered banks to set aside more deposits as reserves for a third time in 2010.

“The impact of tightening is starting to affect other markets such as commodities,” said Hong Kong-based Wood, who is CLSA’s chief equity strategist.

Copper and aluminum for three-month delivery have slumped about 10 percent in London this month, while zinc has lost 16 percent and nickel dropped about 18 percent.

The S&P/ASX 200’s valuation has increased to 14.4 times estimated 2010 profit at its companies, trailing only Japan as the highest among Asia-Pacific developed nations with more than $1 trillion in stock-market value, Bloomberg data show.

Indian equities have the most attractive outlook in Asia this year, Wood said. Annual growth may accelerate to 9 percent over the next five years, allowing the nation to overtake China as the world’s fastest growing major economy, if the government maintains its pledge to rebuild infrastructure, he said.

Debt Fund

India said last week it’s planning to set up a 500 billion rupee ($11 billion) debt fund to build ports, roads and bridges needed to drive economic growth. The nation doubled its target for infrastructure spending to $1 trillion in the five years starting 2012 to narrow the gap with China.

The economy, Asia’s largest after Japan and China, probably expanded as much as 7.5 percent in the fiscal year ended March 31, and may grow 8 percent in the current year, Reserve Bank of India Governor Duvvuri Subbarao said April 27. The International Monetary Fund estimates India will expand 8.8 percent this year and 8.4 percent next year, more than it projected in January.

“India will grow faster than China over the next five years if infrastructure development happens,” Wood said.