Australian Resources a Bubble Waiting to Burst: Fund Manager
Australia's resources sector, which has experienced a multi-year boom, is a bubble waiting to burst, according to one fund manager.
"It's been so good for so long, and commodities are called commodities because for the vast bulk of them, they're not rare, and there's nothing to distinguish them, they're simply price takers," Simon Marais, Managing Director at the investment management firm Orbis Australia told CNBC on Thursday.
"There are also periods where they do extraordinarily badly as the 15 or 20 years before that, and it's always dangerous to buy these things once they've done well for 5 or 6 years," Marais added.
Marais believes the industry is undergoing a period of over-investment, which will lead to an eventual collapse.
"Everybody is pouring money into increasing capacity; Fortescue's going to triple capacity, Rio Tinto's going to double iron-ore capacity, BHP's going to be up 70 percent. And what happens eventually, is the excess capacity overwhelms the demand."
Marais says the most likely catalyst for a reversal would be a drop off in demand from China but he admits it's very difficult to time such a move. He believes iron ore and coal face the gravest risk of overcapacity, while gold and oil are less risky.
"Even with the valuations of gold where they are, you haven't seen a big spike in gold production," Marais said. "Secondly, the annual production of gold relative to the pool of gold out there is less than 2 percent so that's a much smaller factor."
Marais said instead of chasing the resources boom, investors should bet on safe-haven sectors such as Australian utilities. According to him, the sector pays dividends of 8 to 9 percent per year that are linked to inflation, and the returns would likely increase if public spending were to rise.
"So you got all this protection against irresponsible government, and you get 9 percent real, relatively modest investment, makes you the richest person in Australia in 150 years, or your heirs at least."