It won't last, Costello warns
AUSTRALIA'S longest serving Treasurer, Peter Costello, took the rare step of dispensing investment advice to local investors yesterday. He warned them not to rely too heavily on hot resource stocks because the minerals boom would inevitably come to an end.
This comes just weeks before the Government decides if the market can stomach the sale of its 52 per cent stake in Telstra - which Mr Costello labelled a "shocking investment" just two weeks ago.
The Government will be relying heavily on Australian investors to front up and buy more of the stock they acquired at $7.40 a share in the T2 selldown - nearly double its current price.
Mr Costello told a Committee for Economic and Development of Australia lunch in Sydney yesterday that the surge in commodities prices driving the Australian sharemarket to record highs may only have a couple of years left to run.
He said Chinese economic growth would ensure demand for commodities remained strong for an extended period but the supply of raw materials from exporters across the world would grow quickly. This will eventually hit resources prices and the profitability of resources firms.
"This boom has been going already for about two or three years … we think there is a couple of years left in it but it will not be permanent," he said.
If his minerals boom speech was an attempt to entice small shareholders away from the latest hot stocks and warm up enthusiasm for T3, it appears to have worked.
Telstra shares jumped more than 2 per cent yesterday, gaining 8c to close at $3.75, with 62 million shares traded.
Goldman Sachs JB Were, one of the banks planning the T3 sale, attributed the jump to bargain hunters.
Mr Costello may be hoping for more of the same following yesterday's cautionary speech.
Those investing in resources stocks could end up being burnt, like those who invested heavily during the global information technology boom in the late 1990s, he said.
"When you get into the middle of these booms - the property boom, the tech boom, the resource boom - the tendency is always to think it will last forever, but none of them do," he said.
"This boom, like all booms, will come to an end. If you put all your eggs into resource companies you will be in as bad a situation in a couple of years' time as people who put all their eggs in the tech basket."
Mr Costello said that at the peak of the global tech boom in 2000, the Australian dollar slumped because of a perception that Australia relied too heavily on "old economy" industries like mining.
"Now some people are saying reverse that and put all your eggs in the mining basket," he said. "It's not the time to do it. You have got to resist these fads.
"As you all know a balanced portfolio, a balanced economy, is the best way to go."
Goldman Sachs JBWere does not appear to be as cautious as Mr Costello when it comes to predicting an end to the latest boom market. "Movements in the market … only confirm that this [minerals boom] is not running out of steam in a hurry," the broker said.
Why is he trying to direct us not to invest in natural resources?