Weekly Wrap by Pythagoras Investing : Decoupling or Boycotting

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Decoupling or Boycotting Australia

China wants the US to accommodate a different political, economic and values system.  But the US believes China wants to erode free-market norms and democracy.  America has wanted to protect itself from and terms of trade imbalance with China.  Beijing has a recent goal to shift towards its “domestic” economy to become more self-reliant.  Neither side is yielding.

Who says one system is really right and the other wrong.  Democracy hasn’t exactly worked!  The critical question for the two nations is whether they choose conflict or cooperation as both see each other as a real threat. 

If conflict results in decoupling of America and China -it is easier said than done.  Decoupling is not just about trade.  It is also about investment, manufacturing and supply chains.  We doubt it will occur.

And now for the next move …Wine

The Chinese believe that becoming the dominant power in the world is only a matter of time.  More than anything this path is what is creating tensions.  The Chinese are asserting themselves everywhere.  They don’t make idle threats.  They have acted under the guise of “technicalities” on barley (costing Australia $1.2bn in exports).  Then beef.  Then on Chinese students in Australia.  Then Chinese travel to Australia.  Now preparations are underway for an antidumping case on Australian wine exports into China … $1.2bn of exports. 

Our Minister in charge finds it “very disappointing and perplexing”.  It is disappointing.  It is not perplexing.  We have thrown sand in their faces for months.  It is far from perplexing – the Chinese even told us what “could” happen if we continued supporting the US over China.

Exports of dairy, seafood, oatmeal and fruit are at risk.  Whilst we don’t see iron ore being affected in the near term, it would be the biggest damage China could do to Australia.  We know China has been building the capacity to accept bigger ships from Brazil and Africa.  This opens greater capacity and price competition when Brazil overcomes its mine collapses and coronavirus.

China is restricting trade to economically weaken Australia and to retaliate for our diplomatic errors. It is the same strategy they used on USA.

Trump is winning the propaganda war

We have been fooled into acting as America’s sheriff in the region and we are paying the price in trade.

Trump will almost certainly pile on the provocations on all fronts between now and the election. Chinese leaders may delay engaging to wait to see if Biden will roll back some of Trump’s actions.  Biden should be able to reopen many of the communication channels that Trump has closed.  But no matter who is President, the White House will continue a tough line against China.  This is not going away.  Tensions will continue though.

Market Strength

Fund managers have been very late to believe in the market rally from March.  This has been the most hated rise in markets by professional managers.  Ultimately the strength created by the new investors has caused fund managers to need to be invested and has brought broader support to the stock market. 

The reporting season so far has shown that broker forecasts have been very cautious allowing for stocks to be uprated at their results where confidence can be gained about the outlook.  Some of the retailer’s stock prices are hard to justify.  As a point of comparison post WW1 there was a period of hedonism and frivolous spending which ultimately lead to the Great Depression.  We do not want to see a repeat of this logic post coronavirus.  However, there are worrying signs showing with spend of items.

Currently deep cyclical stocks are being sought as professional money moves from low risk to riskier assets.  We believe their presence will place a floor under the market. 

Superannuation withdrawals from retail accounts have sucked $30bn from superfunds. That impact has now ended.