Two Sectors Ignoring the Trade Spat

Two Sectors Ignoring the Trade Spat

Every morning I pick up the paper, I get more bullish on the outlook for Australia. World events somehow keep the global winds at our back.

I believe this is likely all going to show up as very strong earnings in the stock market at some point. We’re talking one sector in particular: natural resources.

Take the energy market. There is a quiet boom happening in coal. Newcastle thermal coal prices have doubled since their low in 2016.

Most of this demand is coming out of Asia. However, The Australian reports that export prices from South Africa and import prices from Europe are at their record highs, too.

If you happen to live in any of the coal-producing regions of Australia, do drop me a line and let me know how much better things seem than two years ago.

Things are looking very good for the next 12 months.

Aussie exports boom at record highs

Ironically, this morning, Rio Tinto Ltd [ASX:RIO] announced its plan to return approximately $3.2 billion to its shareholders by way of a buyback. That cash came from selling its Aussie coal mines. That exit doesn’t seem quite so compelling anymore. But I doubt many shareholders will be complaining.

That’s one thing. Now, we have the United States handing Australia a free gift by way of the trade war. China’s retaliation against the latest US moves is a 10% tariff on US LNG. It could go up to 25% next year.

This allows alternative suppliers like Qatar and Australia to be more cost competitive. Chinese firms are likely to bias their purchases away from the US in general, too. Supply risk from the US is now firmly in play.

And, even before this Chinese announcement, LNG prices for Queensland’s LNG exports are at record highs. This is a combination of a strong demand, a weaker dollar, and high oil prices.

Don’t forget iron ore, either. On Tuesday, the price hit a six-month high of US$69.82 a tonne. It could go higher.

That’s because the chief executive of Brazilian iron ore giant, Vale, said it may not raise its production above its current annual rate. Some of the gloomier iron ore pricing forecasts were expecting the opposite to happen.

All this is giving Australia’s income a huge boost. LNG, coal and iron ore are our top exports. And yet, people continue to take a negative view of the future.

It’s a mystery to me. The resilience of the Australian economy isn’t just showing up in the pages of the Daily Reckoning Australia (the ones I write anyway). It’s showing up in the earnings announcements of shares as well.

Clues to the Aussie economy are here

Kathmandu Holdings Ltd [ASX:KMD] is a retailer of high-end outdoor gear. It put out its full year results yesterday. It’s posted record sales and profitability. I’m not suggesting this makes the stock a buy.

However, we’re continually told the Aussie consumer is tapped out with high mortgage debt and high energy prices. Kathmandu’s results suggest otherwise.

Of course, after we’ve been told the Aussie consumer is racked with debt and financially spent, it’s usually followed with an Aussie property crash scenario thrown in for good measure.

We might be waiting a while longer for that, too. Westpac Banking Corp [ASX:WBC] is aggressively cutting its lending rate for new borrowers.

The big four banks are likely to push hard for new business shortly. The worst of the Royal Commission is behind them now. And they need to grow their loan books. They’ve walked away from a lot of business in recent years.

Investors and developers are switching to the ‘non-bank’ financiers to get access to credit. This is because the major banks have become very careful when it comes to property finance lending.

But the credit demand hasn’t gone away. It’s just gone somewhere else. This why I have yet to give much credence to the idea of a major credit crunch hitting Australia. There’s a lot of intuitional money and high net worth types ready to finance property deals.

Strong exports and reasonable credit markets combine to make any dip in the Aussie share market a buying opportunity. I’ve said that all year, and nothing I see suggests changing my strategy.

After all, for all the ink spilt on China and US trade relations in 2018, look at the US stock market. It’s a breath away from bursting into all-time highs again. The weight of the market is suggesting a trade war is not something to lose sleep over.

Such is the excitement around the North American marijuana market right now, one company that listed two months ago is up 1,150%.

All told, there are abundant opportunities in the market the world over.

Every day, we have the same choice: worry about the mainstream headlines or focus on the opportunities in the world. I’m shortly launching a new free service to help with this.

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia