Aussie Markets at Turning Point as China Slows Further

Latest data out of China shows factory activity shrinking for the fifth consecutive month in March, heightening concerns that this could be the turning point for Australia's resource plays and currency as chances increase of a protracted slowdown in the world’s largest consumer of commodities.

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One analyst told CNBC on Thursday that he was thinking of reworking his Australian portfolio keeping in mind a slowing China.

“The numbers are showing us that there is slowing down, we will therefore construct portfolios with less expectations that growth from China will drive,” Jeremy Hook, Investment Director of TMS Capital, an advisory firm based in Sydney, told CNBC.

“Therefore some of the domestic (Australian) stories, some of the beaten-up cyclicals such as brick works and the building sector, which have been terrible here. That might be the better place to invest where nothing is expected rather than the resource sector where a lot is expected and we could end the year being a bit disappointed,” Hook said.

Australia exported A$64.8 billion (US$67.9 billion) worth of goods to China in the last fiscal year that ended June 30, 2011, out of which iron ore and concentrate shipments to China made up almost 62 percent, according to data from Australia’s Department of Foreign Affairs and Trade.

Therefore any slowdown in its biggest export market, will have a ripple effect on Australia’s mining sector say market watchers, who forecast commodity prices will trend lower because of an expected decline in Chinese demand.

“There’s a sense that there’ll be weakness in the first half and that will weigh on soft metals,” Peter Hickson, Global Commodities and Basic Materials Strategist at UBS, told CNBC.

BHP Billiton, the world's biggest miner, also said on Tuesday it was seeing signs of “flattening” iron ore demand from China.

Aussie to Hurt

The Australian dollar fell to a two-month low on Thursday on news that new factory orders in China sunk to the lowest level in four months, according to HSBC’s preliminary measure of manufacturing activity.

According to Jonathan Barratt, CEO of Sydney-based commodity market research and analysis firm Barratt's Bulletin, the Aussie dollar could potentially fall to parity against the U.S. dollar if the Chinese economy continues to show weakness.

“We have seen a lot of news concerning the economy slowing and this just adds to the frustration,” he said. “The Australian dollar looks weak. If we see a break of US$1.04 on a daily chart this will potentially see US$ 1.0170 and even parity,” Barratt said.