The strategy: To understand what's going on in China.
Are you trying to make me depressed? It's odd, isn't it, that we're worried about the economy of a country that's still growing by 7.5 per cent a year? But the slowdown in Chinese growth has come at the same time as its leadership transition, its latest outbreak of hostility with Japan, and with falling global commodity prices. The combination has raised concerns about where China is heading and how that will affect the Australian economy and share prices.
Should we be worried? In the longer term, probably not, the head of investment strategy at AMP Capital Investors, Dr Shane Oliver, says.
He says China is simply making the transition from double-digit growth to more sustainable growth of 7 per cent to 8 per cent a year.
''In a broader sense, the Chinese economy is fine,'' he says. ''It doesn't have debt problems and it's still a very poor country with huge catch-up potential. It's unlikely the new leadership will take it in a radically different direction - and 7.5 per cent is still a strong growth rate.''
Oliver says China still has plenty of scope to stimulate its economy if it needs to. But having overreacted in 2008, which led to inflation and a surge in housing prices in 2010, the Chinese leadership is unlikely to be as gung-ho this time around.
Once the leadership is settled, he says providing there are no surprises, things should start to settle down. He says the leadership will probably provide some stimulus and the economy will pick up as we go into next year, but growth will be in that 7 per cent to 8 per cent range.
And it's not just China. Oliver says we've just come through a period where strong growth all over the developing world has sparked strong demand for commodities, and while growth in these areas is still strong, ''the edge has come off a bit''. Predictably enough, this is happening at the same time as the supply of commodities is picking up due to strong mining investment, both here and overseas. Basic economics tells us that lower demand plus increased supply equals pressure on prices.
Hence the talk that the mining boom is over and scare stories about the Australian economy. There are fears that if China collapses, unemployment will rise, which will trigger falling house prices and put pressure on our banks, leading to a European-style scenario.
So how much have prices fallen? The all-important iron-ore price has fallen from a peak of $180 last year to about $110 last week. That's a big fall and has led some miners to abandon planned projects and lay off staff. But to put it in context, Oliver says that while the spot price was high in 2008, most Australian miners were getting only about $70 a tonne for iron ore. So prices are still higher than they were before the boom.
Are resource shares still a good investment? Oliver says that if actions by Europe and the US, in particular the quantitative easing in America, help turn around those economies, commodity prices may rise again. Otherwise, mining profits will come under pressure.
But he says an easing in the mining boom may have benefits for the broader economy. If it took some of the heat out of the economy, he says, it would allow room for the Reserve Bank to lower interest rates and take pressure off the Australian dollar, which could bring other sectors of the economy back to life.
''Sure, national income grew on the back of the mining boom, but not too many consumers enjoyed the benefits of that,'' he says. ''Australian consumer confidence is at the same levels of some European countries.''
