Rob Coyte's Blog

Over the last decade no doubt the story has been China, India and other emerging nations and I agree with the fundamentals  behind this story and these areas will provide outstanding opportunities over the next 20-30 years.

In the last 5 years we have seen a commodity boom (up until recently) as a result of this China story. However, it must be kept in mind that in the decade previous there was a massive underinvestment in resources due to low commodity prices which stifled investment in projects. Then China’s explosion in demand for these commodities saw a massive undersupply which lead to a boom in commodity prices and profits for those fortunate enough to be able to dig them out of the ground. However, with higher prices and increased profits this encouraged existing players to develop more projects and even new players to come into the game, Andrew Forest and the Fortescue Metals Group is a good example of this. Once these new projects come online the supply increases dramatically and any disruption to demand will see the prices and profit margins fall just as quick, this has been the concern over the last 12 months. China is now holding out in its negotiations with regards to iron ore pricing as they want reductions in price of some 30-40% in contrast to the year before where the iron ore companies demanded huge price increases as demand was greater than what could be supplied.

Another example of late has been the Perth Office market where vacancies have risen from a record low of 0.3 percent last June to about 6 percent. You could not get space in Perth which meant high rents for landlords and this encouraged massive investment in the construction of new buildings. To maintain the financial returns, rents need to be maintained at current levels which means that all the new supply needs to be absorbed by companies demanding space. The above reversal of the commodities boom has proven to be the undoing of the Perth property market with demand now decreasing in a period where supply has risen sharply. Lee Walker, at Sydney-based forecaster BIS Shrapnel said vacancies in Perth will jump to 16 percent by mid-2010, peaking in 2013, with average prime rents dropping to A$360 ($286) per square meter from current price of A$720 now.

As investors we need to be taking long term views and we need to understand the fundamentals of our assets. Market movements are usually a result of short term sentiment which changes more frequently than Melbourne weather. History is full of examples of markets getting carried away with “this time it’s different” . Booms never last neither do busts. We tend to place little emphasis on sentiment in making strategic decisions as it usual leads to the destruction of long term wealth not the creation of it.