PORTFOLIO POINT: It was resource and resource-related stocks that elevated Australia to the exclusive CARBS list.
Sydney based analyst Tony Brennan was a member of Citi’s global equity team that formulated the CARBS list. He talked exclusively to Eureka Report about the research and the stock picks.
Eureka Report: One of the first questions is in relation to your choice of stocks. We understand you are restricted from talking in depth about any stock – but thematically, it’s all resources, while your overseas Citigroup colleagues picked retailers and telcos in other CARBS markets.
Tony Brennan: Actually it’s not all resource stocks. There are some resource stocks and then some industrial companies that are integrated with the resource sector. So, for example, of the six we picked, we have BHP, Rio and Santos, which are obviously resource stocks – energy and mining – but we also have Boart Longyear, Orica and Leighton, which are more connected to the resource expansion.
Let’s look through them: Orica, through the explosives business; Leighton, through mining contracting and Boart Longyear through drilling and exploration. So, we did it that way.
This was a global exercise and I guess some of my colleagues in other markets have picked consumer stocks or telecoms and what have you, and the reason for that distinction is in Australia what we see compared with the other markets in the CARBS group is that we’re more advanced in the process of developing and benefiting from the boom.
If you examine the Australian market over the past seven or eight years, we’ve had higher rates of investment in resources than the other countries, quite strong export volume growth and we’ve had a 20-year economic expansion, which is leaving limited spare capacity in the economy. So, we’re embarking on the next phase of the boom, which has got more investment going on and it’s broadening out to LNG with an economy at full employment. That’s the explanation behind the two-speed economy. It’s putting a lot of pressure on non-resource industries.
In other markets like Russia, Brazil and South Africa, they do have elements of “Dutch disease” as well, but it’s not as pronounced, so they see upside in some of their non-resource sectors, as we saw from 2003 to 2007. (Dutch disease is an economic theory that suggests in a resource boom the non-resource sectors get drained of value as capital and labour flow to the resource boom).
So, actually the outcome of Dutch disease is that you concentrate your stock picks in resource and resource-related industries?
Yes. What you’re looking for there is volume growth because we think the easy gains from this commodity boom, where the prices rose strongly, are largely behind us. So, what the next phase will be about is a plateauing in prices and much stronger growth in resource volumes.
In participating in this ambitious exercise was there anything you learned about the resource sector that hadn’t struck you before?
I was interested to see for Australia compared with the other nations is that although we don’t have the highest resource endowments – I think we’d be third or fourth after Russia and Canada, particularly because of energy; they have big endowments there – we actually have the highest endowment per capita, which means the wealth effect for Australians has been very strong. The other thing that’s interesting when you do the comparisons is that although we don’t have the biggest endowment, we are actually the biggest producer in many commodities, which means we have got moving on investing and developing quicker than other countries.