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Monday, 9 July 2018
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Australia And The Trade War

Australia and the tariff war – Here are a few of the tariff impacts from Australia’s point of view:

The most significant issue is the “market” trend. Clearly the Chinese market has already tipped over and the risk is that the US market follows and takes Australia with it. There is no sign of it yet. The S&P 500 is still firmly in uptrend with an RSI of just 56 on both a daily and weekly basis. In other words it is not overbought. Instead it is arguably in the middle to bottom half of the trading range in an uptrend. We don’t have to worry about the markets falling over and it is pointless trying to predict it, all we need do is wait for it to happen and the message for today is that the market trend is just fine. We will make plenty of noise about it when the uptrend ends.

The most obvious consequence of a tariff war for Australia is generated by concerns about global economic growth and what that will do for commodity prices. Notably BHP and RIO were down 2.24% and 4.41% last week. This chart shows the resources sector still firmly in uptrend and the same principle applies as with the market above, don’t bother to predict the top, just wait for it. Having said that the more nimble amongst you might well be prepared to trade the range rather than the bigger uptrend and on that basis there is perhaps 10% in a trade if the sector falls from the top to the bottom of the range. BHP is currently 3361c - the bottom of the trading range is between $29-30. For RIO the bottom of the trading range is around $75 compared to the share price of 8046c now. A bit less than 10%. I wouldn’t put anybody off selling them in the short term in the hope of buying them back lower down. The risk you run of course is that the trade war disappears in one tweet, with the Chinese so opposed, dissolving trade tensions is firmly in Trump’s hands and on that basis anything could happen at any moment possibly precipitously. Resources would bounce. But for now I am neutral to underweight resources in the short term just in case things escalate and the bigger uptrend is broken. Investors need do nothing yet, they are still in uptrend.

Domestic sectors back in favour. The Bank sector bounced 2.74% last week. The CBA was +3.84%, NAB +2.01%, ANZ +2.66%, Westpac +1.64%. Domestic stocks are now a safe haven because they will weather the trade war storm a lot better than internationally facing companies and in particular the commodity sector. As you can see in the chart below the bank sector has rallied but has yet to convincingly break this downtrend. I am fully weighted (overweight) in the Marcus Today Income SMA so there is nothing to do but sit and hold, the debate is whether we buy banks in the Marcus Today SMA. Hard to justify, this is a sentiment recovery not an earnings recovery.  The growth profile is still benign. The only real motivation to buy the banks is because our benchmark holds them and we risk underperforming. I’m not sure that’s excuse enough although it might be worth a few of you looking at the CBA as well as BEN ahead of results and dividends next month, in order to collect the dividends and you might hopefully snag a share price rise at the same time. Dividend stripping only works when share prices are going up. For the last week they have been.

Telstra (TLS) is another big domestic stock that will be unaffected by trade concerns if they escalate. It bounced 6.8% last week. TLS like the banks, is in a sentiment hole. Their recent strategy day failed to impress with the announcement of lowered earnings guidance although the dividend was confirmed at 22c and will be supported by asset sales. There is no growth in Telstra, it is arguably cheap (10.1x PE and a yield of 7.8%), it is 35% down from its year high with results and dividend around the corner. Its another potential dividend strip. As you can see in the chart below, despite last week’s bounce it is still firmly in downtrend. If the stock bottomed it would be heavily chased for income. The message for the moment is that despite the bounce the stock hasn’t bottomed and is still in downtrend. No rush. You might try and strip the dividend but it still doesn't make it into a growth portfolio.

Australian dollar – A tariff war escalation should upset commodity prices and the Australian dollar. That has (perversely) positive implications for a lot of Australian stocks. We have already seen this happening. The US dollar has been rising as a safe haven currency taking the Australian dollar lower to the benefit of our international stocks like CSL, COH, ALL, TWE… The Australian dollar has broken the 2 ½ year uptrend and remains in a new downtrend started in January. Let’s hope it continues. We remain heavily weighted to internationally focused stocks in the Marcus Today SMA.

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