Weekly Wrap by Pythagoras Investing: We are Here

Ongoing relations with China

We may benefit from bringing in migrants from Hong Kong but at what cost.  The trade tensions continue with more antagonistic noises from China in response to Australia involving itself in Hong Kong and other matters.  The time is rapidly approaching for us to stand up to for what is best for Australia – and that is trade.  For us to get our economy going we need jobs therefore the importance of China is therefore paramount. 

We are currently caught between our largest trading partner, our security partner, and our investment partner.  The economic coercion and penalties are the way of China.  Arguments of standing up for ourselves and protecting ourselves from China through innovation, missiles, being America’s deputy sheriff etc are foolhardy when the answer is to work collaboratively in Australias best interest. The last thing Australia needs is a full blown trade war with China.

We have been pondering why Chinese stimulation has not really featured.  Perhaps it is because the impact on raw materials (commodities) would drive prices higher at a time where producers can’t increase volume.  Given China’s reliance on commodities to grow its economy, it would be detremental to China to have more expensive commodities. 

Second Wave

Pauses and delays in the reopening of the economy (worldwide) are causing the markets to be more cautious.  Investors who banked on getting back to growth assumed a linear path – but this isn’t going to be the way of the world for a while.  Victoria is now in lockdown due to outbreaks which led to a massive testing regime relative to the population.  There will be flareups across the nation as undetected cases spread.

Governmental relief has been geared more towards 3-6 months whereas it’s now more obvious that it will be needed to be extended a little more.  We can’t have governments getting bailout fatigue just yet as the need is still massive.

We are here … Phase 3

Our typical pattern for a correction.  The first phase is panic selling.  The second phase is the snap-back.  Phase three is a resetting of company forecast earnings and expectations of the economy. We are here now. 

Earning season begins in the US now.  Reporting is often known as confession season.  In Australia it begins in August.  In many ways we are at the maximum of earnings uncertainty for most companies.  Those who give guidance or upgrade earnings during this earnings season will be rewarded handsomely. 

Stock picking and timing of trading is critical as there is still a lot of uncertainty.

Online brokers have increased their new accounts by 60-80% during the last 6 months.  These new investors have traded considerably during the period.  They are a new factor to consider in the coming months.