From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
Trade War escalating
Prior to 9am this morning, I’d have thought the escalating rhetoric around tariffs had potentially found some equilibrium. Though the Chinese returned fire earlier in the week with a clap-back of its own on $50bn of US exports to China, the feeling as the week drew on was that both countries would sit around the negotiation table over the coming month and work out a compromise that would alleviate much of the market fears surrounding trade protectionism.
Trump’s new economic advisor Larry Kudlow as good as confirmed it in his remarks, and with that, the S&P500 spent the better part of Wednesday and Thursday rebounding 3% or more from its lows.
Circle forward to 9am this morning and the headlines roll that Trump has instructed his trade representative to consider the appropriateness of an imposition of tariffs on a further $100bn of Chinese imports to the US in response to China’s response.
Get all of that?
I am sure Trump thinks this grandstanding is all a part of his negotiation, or the secret ‘art of the deal’, but he is dealing in infinitely higher stakes than New York real estate.
For context, the US imported around US$433bn of goods from China in 2017, meaning his remarks above signal the potential for tariffs on well over 30% of Chinese imported goods into the US.
Putting aside the trade spat above, equity markets look a little better than they have done in some time, aided by the pullback and the steadying of bond markets too.
Since we warned in early March of the propensity for greater volatility and less attractiveness of equity markets, Australian share-markets have underperformed bonds by around 5%. Not a big deal in the overall scheme of things, but a demonstration at least that the going is getting harder.
Interestingly, share-market valuations have improved significantly with the pullback and the ongoing earnings momentum driven by economic strength. Both the ASX200 and S&P500 forward earnings multiples are back to 2-year lows – the ASX200 on 15.5x P/E and the S&P500 on 17x.
This ongoing earnings and economic momentum is constructive, and helps to protect the market on the downside in precisely the same way that Trump and his trade brinkmanship, and the ongoing constriction of global liquidity by central banks serves to cap the upside.
I still see the ASX200 as having its best chance of support still 100pts lower than where we are today (5650-5700) and I would think there is every chance we get there, it’s just a question of when. That said, markets are down almost 400pts from their highs, so quite a bit of the downside work has played out. But don’t for a minute let that fool you into thinking all is in the price.
This market is a jumpy one, and nothing will change that anytime soon.
I actually see the market as looking a lot like 2007. Back then there was writing on the walls, but the market managed to hold in OK, without making any further gains. Only in the middle of 2008 did it all go south.
Some things look good, others less so
In that context, some things look worthwhile, while others don’t.
Aussie big cap still remains on the outer. Banks are facing earnings headwinds on so many fronts, not least of which are an absence of loan growth (courtesy of APRA) and margin pressures both from funding cost increases and rising competition for market share.
Rising costs from the Royal Commission don’t help.
Miners are still on the outer for me. Iron ore prices still seem to carry significant risk given inventories, and the ongoing slowdown in Chinese property construction.
Wesfarmers (WES) and Woolworths (WOW) have little appeal at current multiples, and as much as I happen to think Telstra (TLS) is an out and out steal at $3.10, few people have the ability to add to positions there for the bounce.
The small-cap market is around 14% of the Australian market, so a weight to this fund of 8-12% of Aussie equity portfolios sounds about right, and then we can top up the small cap exposures by way of ownership in preferred companies such as Afterpay Touch (APT) and APN Outdoor (APO).
APT has been slammed from $8.00 to $5.50 and we think its great buying ahead of its investor update next week, and then more news on its US business strategy in August at full year results.
Quick Economic Update
On the local stuff, the industrial economy is going gangbusters. Manufacturing sentiment in March hit a record high, new orders across both service and industrial businesses continue to grow, and employment gains remain as good as we have seen in a decade.
The household budget is stretched and housing prices will continue to drag on consumer sentiment, but the bottom up improvement of the productive economy (in other words, not housing) is actually pretty good.
I happen to think the Federal Budget announcement on May 8th will be a positive one. The government are running about $7-8bn ahead of their planned budget deficit for the current year, and I would argue that gives them some leeway to be a little more proactive.
Make no mistake, this will be an election budget, and perhaps for Malcolm Turnbull even a ‘leadership budget’. That should be a small assistance for local shares in the coming month.
Have a great weekend!
Friday 10am values
|S&P / ASX 200||5789||+30||+0.5%|
|Property Trust Index||1316||+14||+1.1%|
Thursday Closing Values
|U.S. S&P 500||2663||+23||+0.9%|
Key Dates: Australian Companies
|Mon 9th April||
Div Pay-Date – NABPD
|Tue 10th April||
Div Pay-Date – MCP Master Income Trust (MXT), Sonic Healthcare (SHL)
|Wed 11th April||
Div Pay-Date – Regis Healthcare (REG)
|Thu 12th April||Div Pay Date – Brambles (BXB), Cochlear (COH), QANTAS (QAN), Rio Tinto (RIO)|
|Fri 13th April||Div Pay-Date – SEEK (SEK), CSL (CSL), Flight Centre (FLT)|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.