Australian recession ends as China relations worsen

Blog
Friday 4th December 2020

Australian recession ends as China relations worsen

Blog
Friday 4th December 2020
Written by Chris Lioutas

Markets:

  • In local stock news, Treasury Wine Estate’s share price fell sharply and trading in the shares were suspended after China followed through with their threat to impose significant tariffs on Australian wine in retaliation for the Australian government calling for an inquiry into the origins of Covid-19. The company said it would redirect some wine intended for China and cut costs.
  • Macquarie Group has announced it will buy one of the oldest asset and wealth management companies in the USA in a deal worth $2.3 billion. Upon completion of the deal, Macquarie will sell the firm’s wealth management business for $300 million and retain the asset management arm with $68 billion in assets under management.
  • Iron ore miners saw their share prices rise sharply after Brazilian iron ore major Vale said it would not meet its production forecast this year. Given increasing demand from China as their recovery strengthens, that means more ore will need to be sourced from Australian miners.
  • The oil producing cartel OPEC+ has yet to reach agreement on whether to delay January’s oil output increase. Without agreement to delay, oil output will increase January potentially pushing the global market into surplus which would likely put an end to the recovery in the oil price.

Economics:

  • The Reserve Bank of Australia made no change to the 0.1% Cash Rate whilst maintaining their other support measures. The Board recognised that economic data has improved quicker than expected, whilst maintaining that the recovery is still expected to be uneven and drawn out. Their next meeting is held in February.
  • Australian economic growth rose strongly in September quarter, ending our first recession in 29 years. Economic activity rose 3.3%, the strongest quarterly growth since the 1970s. Household spending drove the economy, rising almost 8% due to increased spending on goods and services, no doubt assisted by government stimulus payments and relaxed Covid restrictions. Net exports and business investment were a drag on growth.
  • Australian company profits rose by 3.2% in the 3rd quarter, largely the result of continued stimulus payments provided to businesses by the government. Wages and salaries rose in all industries, except for transport, largely reflecting a recovery in the number of jobs.
  • Australian private sector growth was flat in October, and up by 1.8% over the year, according to the RBA. Credit for housing rose by 0.4%, largely supported by owner occupier credit, whilst personal and business credit continued to fall.
  • Australian dwelling prices across the 8 capital cities combined rose by 0.7% in November. Smaller cities posted the strongest gains, with Melbourne and Sydney lagging. The major headwind to property price gains is a reduction in demand coming from the sharp slowdown in population growth given no immigration.
  • Building approvals rose by 3.8% in October and are now up by more than 14% versus the same time last year. Approvals for new houses have lifted sharply since the middle of the year. October saw strong growth for both units and houses.
  • Australia’s trade surplus narrowed in the 3rd quarter, driven by the goods side, with falls across all major categories apart from iron ore and beverages. Coal and LNG exports fell sharply as prices and volumes both fell, with coal also coming under pressure from the Chinese refusing delivery. Rural exports were down, also at the hands of the Chinese. Exports of services also fell, with education exports the main pain point.

Politics:

  • Just as PM Scott Morrison was trying to mend relations with China, the Chinese government slapped significant tariffs on Australian wine which would effectively wipe out wine exports into China. The Chinese government then went all out “war” tweeting a doctored image of an Australian soldier holding a knife to the throat of an Afghani child. PM Morrison was ropeable and rightly so. Some have argued that the PM almost invited the attack given the investigation into potential war crimes by Australian soldiers has been conducted in full public view.
  • Australia’s parliament is set to pass legislation given the federal government power to veto any agreement struck between Australian states, councils, or institutions and a foreign government. The move was expected following the controversial 2018 deal between Victoria and China.
  • Britain has become the first Western country to approve Covid vaccines for emergency use, taking steps to bypass European Union authorities. Vaccine producer Moderna filed for US FDA approval. This should see distribution of a vaccine before the end of the year. In other virus news, new evidence has shown that Covid-19 was in the US significantly earlier than had been reported, with a study finding infections in blood samples collected in late 2019.
  • The first ever joint European Union stimulus package remains tied up and headed for a showdown as Hungary and Poland are refusing to approve the deal. The Union has tied disbursements of the stimulus to upholding the rule of law (ie. loss of additional sovereignty) which both Hungary and Poland are against. A unanimous approval is needed by all 27 governments.
  • Some positive news out of the US on the stimulus front as the current round of stimulus gets closer to expiry. The US Treasury Secretary and the Federal Reserve Chair agreed on the need for more aid for small businesses. At the same time, a bipartisan group of US lawmakers put forward a $1.2 trillion relief bill aimed at breaking a months-long deadlock between Democrats and Republicans.
  • The US House of Representatives passed a bill that threatens to delist Chinese companies from US stock exchanges. Both Democrats and Trump’s fellow Republicans echoed the President’s hard line against Beijing. Joe Biden also confirmed that he would not immediately cancel the trade agreement that Trump struck with China nor take steps to remove tariffs on Chinese exports if he were to become President.

Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972


Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a factual nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concerns.