Company Interview / China’s stimulus sparks shift

Key points:

Rotation from banks to resources post-China stimulusNotes positive outlook for Australia's resources sector in 2025Highlights challenges and signs of stabilisation in the housing market

Martin Lakos from Macquarie Bank emphasises a significant rotation out of banks and into resources, driven by recent China stimulus. He indicates that while the Chinese market shows some recovery signs, more robust stimulus could enhance economic growth further.

Martin notes a slight rebound in Australia's resources sector, including top miners like Fortescue (ASX: FMG), suggesting a positive outlook for 2025. He observes a strategic shift from institutions reallocating funds away from overvalued banks to undervalued resources, particularly in bulks and energy.

The discussion covers varied economic factors, including job vacancies, inflation data, and housing market dynamics. Martin suggests that while house construction faces challenges like skill shortages and high building costs, there are signs of stabilisation in building approvals, with potential growth towards late 2025.

Full unedited transcript below:

0:00

And certainly one of the big themes of the day is this rotation out of banks into resources after the hefty China stimulus. Is it enough? Let's get more insights from Martin Lakos, division director at Macquarie Bank. Big rally yesterday, in particular in some of these miners, is that stimulus from China, though enough to to boost these miners? Well, the market is certainly now taking a view that going into next year, we, you know, starting to see some better a better view around global growth. And that's certainly Macquarie's view as well, that 2025 will be better. But we would also contest that. We don't think the Chinese authorities are doing enough for the Chinese economy because you're still you've got retail sales, you've got the property market, you've got construction are all really still on their knees at this stage. And so we would have a view that we'd like to see more stimulus and the sorts of things that we think the authorities can do. We think they can shift some debt from provincial governments and state owned enterprises into the so-called federal

0:59

government and alleviate those restrictions. And that would then allow those those. Some more stimulus to come through. They're clearly focusing a bit on the housing market. They're both easing restrictions on where people can live. Uh, so there are, you know, restrictions around that. And they're trying to encourage people to have, you know, maybe to own more than one property. Uh, we're also seeing, you know, cash rates coming down. But again, you know, talking about cash rates coming down. It was I think it was 0.2 of 1%. So not huge stimulus. And so we think the scope to do more. And it just does appear the authorities are being just a bit timid, uh, to really, you know, open up in that respect. Having said that, the outlook for next year is better, as I mentioned. And that's starting to get reflected in our market, particularly in the resources sector, which has been down. It's been the underperformer, hasn't it? Well, it has. And you look at the likes of some of the big miners like Fortescue that fell something like 40%. So looking like the rotation is on, does that necessarily mean that money comes out of the banks into the minors? Or how do you

1:59

see it? It looks for the moment anyway, that the banks have run really hard. They've actually done better than most would have anticipated. We're pretty much neutral to underweight the banks based on valuations. Um, having said that, they've rallied pretty hard. So the institutional investors are saying, well, what sector has done really well, we can take some money off the table, and we're going to rotate into where we think is going to be the sector to be for next year, and that would be resources, particularly bulks and particularly energy. So again, I think that's probably where the rotations started with. It continues in a broader sense across the market. We're yet to see that. But at the moment that's been the one that has really stood out taking some money off the table, off the more overvalued bank sector and into an undervalued sector. Let's talk about some of the data was saying here too. We had job vacancies data. We've had inflation data this week and the like. You made an interesting point about the move in seek today despite that job vacancies data. Yeah. Um. And can't match the

2:59

two up. Um, job vacancy data is down. Touch on to 6%. Uh, for the for the last quarter. And you would normally think that would mean a lower level of, uh, job ads in volume terms. And yet Seac is up quite strongly today, so it may well be the market's looking past this data. And let's put in to some extent a lot of the data, particularly employment related data is is historical. It's well behind us. And so maybe the market is looking ahead of us that we might start seeing a pick up in the economy going into next year. And if you look at the makeup of Australia's GDP, our economic growth, you know, there's an expectation that actually is going to be slightly better. There's definitely obviously a component of that improvement is coming from public spending. So government spending uh, some might argue that that is too strong. But equally so, you know, we've we've seen business investment, although down, is still better than what we would have thought after 13 interest rate rises here

3:59

in Australia. And then, of course, the market is probably looking forward to interest rate cuts when they may occur. Now Macquarie's view still is. It's a February March timeframe for cuts and the cost cycle will be fairly modest. And I think that that to some extent could be pushed out even further. A lot of economists pushing out to Q2 potentially, when you hear how hawkish in some sense Michelle Bullock is compared to her peers. I was interested today in the RBA Financial Stability Review, saying that when cuts do start to happen, really urging people not to borrow beyond their means in case we see a boom bust cycle, is there a concern that could happen? Well, not so much a concern because when you actually look at overall, um, impairments in in mortgage lending, it's still very low. But there's absolutely no doubt there are parts of the community are doing it really, really tough and the high interest rates are impacting them. We can't forget for a moment, Julia, that we've seen a significant rally in house

4:59

prices. So any buyer is now borrowing more money. So not that the cash rate is, you know, out of control in terms of historically we've seen much higher cash rates. But given we've seen cash rates go from 0.1 of 1% to 4.3%, that's having an impact on these higher level of borrowing. So it's absolutely very sensible. The reserve Bank is saying, let's just be cautious when rates come down and money is a bit cheaper. You know, let's not go overboard in terms of borrowing and borrowing capacity. So I think that that's a very good cautionary stance by the reserve Bank. And every other regulator would be of the same view as well. There was a cautionary stance too, from the new CEO of brickworks, I think, Mark Ellery, I just want to confirm against my notes that I want to get his wrong name. Mark. Eleanor, um, I'm saying that the uptown upturn, rather in the housing construction market, may not occur until late 2025. So similarly along this theme, perhaps we have not seen housing

5:58

construction hit a bottom yet. Where do you see potentially the plays in some of those stocks? Well, I think we've got to some extent maybe put that commentary in some perspective because, you know, it's hard to see housing really take off from a construction perspective until we resolve a couple of key issues. One of those is skill shortages. Yeah. Secondly, we're still going through this cycle where quite a few builders and developers are actually, unfortunately, still going into administration. And thirdly, you know, when we think about the cost of building, you know, building materials are still is still quite elevated. So it's hard to see a dramatic rise in, in construction activity. But it does look like to us that maybe the building approvals process is now bottoming out. But the time frame by which you get an approval to when you actually get a building start at the moment could be anywhere between 18 months and two years. So again, that commentary is probably, you know, into some extent in that in that context we're building, I think it's about 168,000 homes at the moment

6:58

today, given the population growth we've experienced. We need to be putting in excess of 200,000 homes. We've got a lot of catch up to do. So it may well be that at the end of 25 or into 26, we start to see signs of that. Picking up a couple of things that are worth noting. We're definitely seeing a pick up in inquiry in investment lending for housing, and we're definitely seeing a pickup in activity, particularly when we watch the the money flows of foreign investors looking at properties. Well, and that that really was coming down quite dramatically since 2017. Again, it looks like it's bottoming out. So a couple of factors. There may be a bit more positive for for the building market, but there's no instantaneous, uh, you know, uptick or relief coming that we can see, you know, certainly not into next year early into pass next year.