Energy stocks hit by China fears, but hope remains

Energy stocks have taken a beating today as investors embark on a global share selloff sparked by fears the Chinese economy is weaker than expected and a plummeting oil price.

But with real estate and commercial construction expected to make a resurgence in China, analysts say the concern could be premature.

The ASX200 sunk to an 18-month low this morning, down 4 per cent at the close.

Energy and materials indices were worst hit. Energy stocks fell more than 6 per cent during today’s trade, more than any other sector.

Gas miners Santos and Senex saw some of the biggest falls of the day, down 13.7 and 9.6 per cent respectively.

The cause of the stock run-out is investor angst over the Chinese economy’s strength as growth estimates are revised below the 7 per cent mark for 2016 and the government’s decision to devalue the yuan.

The Shanghai Composite Index closed more than 4 per cent down on Friday, topping off a turbulent week for investors, which saw the index fall a total of 12 per cent.

It came after the Chinese government in early August opted to devalue the yuan in an effort to bolster in-country business activity and exports. The government trimmed its currency’s value against the US dollar by more than 3 per cent.

Meanwhile, crude oil prices fell to a seven-year low last week, to below US$40.

The yuan’s devaluation won’t impact Australian gas exporters, according to Shaun Rein, author and founder of business intelligence firm, China Market Research Group.

He said while the yuan’s devaluation will have an immediate impact on Chinese imports of natural resources from Australia, the currency change is not the biggest issue.

“Obviously, China’s purchasing power has been hit by the devaluation and that will inevitably translate into changed conditions for importers of Australian resources,” he said.

“It is a very negative economy right now, but I do think people are being too bearish, hard on commodity market especially as the Chinese housing and commercial construction market is poised to pick up.

“But that said, in the grand scheme of things, I really do not think the yuan’s devaluation will be that much of a problem. The much bigger issue for Australia is the slowing Chinese economy as a whole.

“I think the Chinese economy is much weaker than what a lot of people think. But I do believe that infrastructure spending and real estate spending is going to pick up again over the next 18 months. There is a lot of pent-up demand in real estate, especially, as there have been very few new housing starts over the last three years. The Chinese people still want homes.

“So I actually think that the construction business will keep up China’s demand for hard commodities, but it may be that there will be weaker prices than what was expected.”

Eddie Morton is the associate editor of Gas Today: emorton@gs-press.com.au

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