How the Trade War Could Benefit Australia

How the Trade War Could Benefit Australia

Is US President Donald Trump gifting Australia a short-term windfall?

It certainly looks that way right now.

If nothing else, Aussie gas producers might start watching Trump’s Twitter feed a little more closely now.

On Friday China’s State Council threatened to put tariffs on another US$60 billion worth of US goods, including American LNG.

This could divert Chinese buyers to source gas from elsewhere — think Australia, Papua New Guinea and Qatar.

It could also give a bullish kick to Australia’s big energy players like Oil Search, Santos and Woodside — as well as the Aussie dollar as exports rise.

But don’t let me over-egg the pudding: The tariffs are a threat to Australia for now. Only time will tell how this plays out.

Yet it reiterates why you need to watch commodity markets. There are a lot of potential opportunities to profit from here.

Aussie gold industry cashed up and prepared to spend

These opportunities are not limited to just natural gas. The Aussie gold sector is abuzz with talk of increased mergers and acquisitions (M&A) activity across the industry.

We might find out how likely that is sooner rather than later. That’s because the famed Diggers & Dealers conference is currently taking place in Kalgoorlie. Perhaps a few drinks will get things moving.

In any case, the main reason for all the M&A talk is that gold grades and reserves are declining worldwide.

What’s more, Aussie producers find themselves in a position of strength. Margins and cash hoards are strong while their North American counterparts languish with a dismal US dollar gold price.

That sets the stage for Australia’s gold miners to acquire US or Canadian assets while their values are depressed.

Yet there’s another reason this M&A development is important: It helps us place where we are in the share market cycle.

Mergers and acquisitions activity traditionally heats up towards the end of a cycle, signalling that we’re close to the top. But it doesn’t seem particularly greedy or big enough here in Australia for us to start worrying about this possibility.

That’s why investors with a medium-term holding frame are best advised to stay long the Aussie market.

Most likely, the US will lead the way on mergers and acquisitions anyway, as it does with most other things.

That’s certainly the case with earnings, as US companies continue to smash the ball out of the park. Profits were up an estimated 23.5% in the three months to June, according to the latest data from Thomson Reuters.

The ‘trade war’ is unlikely to dampen this trend as it currently stands. Exports only account for about 8% of GDP in the US$20 trillion US economy.

In fact, China’s exports to the US are so slim they need to find other ways to hit back at Trump’s threats.

Either way, to gauge the health of the US economy, I prefer to watch what’s happening with the big US banks.

US market peak? Not yet

The Wall Street Journal reported on the weekend that the KBW Nasdaq Bank index is on track for its first positive quarter this year.

Profits and revenues are increasing thanks to rising interest rates and loan growth. Banks have also been buying back shares and increasing dividends after passing the Fed’s requirements.

This is one sector of the US market with a lot of room to grow over the next 12 months.

It’s hard to believe that the US economy and share market still show vital signs of life after nine years of expansion, but that’s exactly the way it stands. Of course, it’s a testament to the severity of the preceding downturn too.

However, we must temper this outlook with the reality that nothing lasts forever, and there’ll come a time to seek shelter in cash.

It’s a delicate question of timing. Often the last legs of a bull market are the most profitable.

Consider the 1920s in America. Two of the best years in US stock market history were 1927 and 1928. The preceding recession finished in 1921.

And it wasn’t until October 1929 that the stock market truly broke. By that stage the stock market had completely lost touch with the economic reality on the ground.

US stocks were floating on a sea of unsustainable credit.

That didn’t save poor Irving Fisher, an esteemed economist at the time, from declaring US stocks had reached a permanently high plateau. He lost his reputation and squandered a $100 million fortune.

Odds-on that some comment like that will mark the end of this great bull market. Perhaps Trump’s egotism might lead to some similar sort of remark.

Yet nothing about the current market feels like a historic top yet.

The way I see it, the market is still shaping up for one last great leg higher.

Ride it up while you still can.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia