Stocks that could boom when this ‘pretty nasty dispute’ ends

Tuesday, 30 October 2018
Melbourne, Australia
By Bernd Struben

  • Why you should keep an eye on Buenos Aires
  • ‘Border Chaos! Thousands of Migrants Invade Mexico’

Despite what you may have heard, the US is not engaged in a trade war with China.

It’s a trade dispute. Albeit a ‘pretty nasty’ one, according to Donald Trump.

No worries, though. The US is going to win.

From The Australian Financial Review (AFR):

“We are in the middle of a pretty nasty dispute. We’re in a trade dispute – I want to use that word because it’s a nice, soft word – but we’re going to win,” Trump said on Saturday at an event in Indiana. “You know why? ‘Cause we always win.”

I have no doubt Trump’s right about the eventual outcome of the US’ trade dispute with China.

Not because the US always wins. That’s ridiculous. Though undoubtedly it played well to Trump loyalists at the Indiana rally.

But the US is simply in a much stronger bargaining position.

First, the US imports almost four times as much from China as it exports to the Middle Kingdom. That gives Trump a lot more firepower in their mutual tariff exchanges.

Second, unemployment in the US is at 50-year lows. And the economy is roaring along…for now.

Yes, China’s economy is growing even faster. But not nearly as fast as they’d like.

China, after all, is playing catch-up. They’re growing from a much lower income base. And Trump is throwing a spanner into their growth plan. A plan which would see China surpass the US as the world’s largest economy.

That puts Chinese President Xi Jinping in an awkward position.

More after the markets…

Markets

Overnight the Dow Jones Industrial Average closed down 245.39 points, or 0.99%.

The S&P 500 fell 17.44 points, or 0.66%.

In Europe the Euro Stoxx 50 index finished up 20.04 points, or 0.64%. Meanwhile, the FTSE 100 gained 1.25%, and Germany’s DAX closed up 134.86 points, or 1.20%.

In Asian markets, Japan’s Nikkei 225 is up 260.94 points, or 1.23%. China’s CSI 300 is up 0.96%.

In Australia, the S&P/ASX 200 is up 67.45 points, or 1.18%.

On the commodities markets, West Texas Intermediate crude oil is US$66.65 per barrel. Brent crude is US$76.75 per barrel.

Turning to gold, the yellow metal is trading for US$1,229.44 (AU$1,739.94) per troy ounce. Silver is US$14.50 (AU$20.52) per troy ounce.

One bitcoin is worth US$6,286.36.

The Aussie dollar is worth 70.66 US cents.

Why you should keep an eye on Buenos Aires

China’s Xi Jinping has been busily accumulating power, including earning the right to rule for life. But I suspect his authoritarian grip isn’t nearly as ironclad as the Communist Party would have the world believe.

If China’s economy begins to splutter, unrest in the rapidly urbanising country of 1.4 billion people could grow quickly. And Xi could find himself out of a job…his legacy in tatters.

That’s why Trump can confidently play hardball. As indeed he continues to do.

From the AFR:

The US is preparing to announce by early December tariffs on all remaining Chinese imports if talks next month between presidents Donald Trump and Xi Jinping fail to ease the trade war, three people familiar with the matter said…

The US this year has already imposed tariffs on $US250 billion in trade with China. Ten per cent tariffs on $US200 billion in imports that took effect in September are due to increase to 25 per cent on January 1.

If Xi doesn’t blink soon that will see the US imposing tariffs on more than US$500 billion worth of Chinese imports. (Last year’s imports to the US were worth US$505 billion (AU$714 billion)).

The ramp up of tariffs from 10% to 25% on AU$283 billion worth of Chinese goods is also going to sting…badly.

That’s why you should keep an eye on what happens during the Group of 20 summit in Buenos Aires.

The summit takes place on 30 November and 1 December. And though still in the planning stages, Trump and Xi are intending to meet on the sidelines.

Now I don’t expect either leader to make major concessions in Buenos Aires. But the timing of this meeting is no coincidence.

Nor, I believe, is the timing of Xi’s latest sabre rattling over China’s ‘regional security’, aggressive rhetoric clearly aimed at the US.

From Business Insider:

“It’s necessary to strengthen the mission … and concentrate preparations for fighting a war,” Xi said. “We need to take all complex situations into consideration and make emergency plans accordingly.

“We have to step up combat readiness exercises, joint exercises and confrontational exercises to enhance servicemen’s capabilities and preparation for war.”

According to the China Daily, Xi told troops they were “constantly working at the front line, and playing key roles in protecting national territorial sovereignty and maritime interests”.

“I hope you can fulfil such sacred and solemn missions.”

If the prospect of a shooting war between the US and China frightens you, join the queue. Australia would find itself with a front row seat. And not as a spectator.

But I wouldn’t lose any sleep over it yet. It sounds like Xi is taking a page from Trump’s book. Upping the stakes before their planned meeting in Buenos Ares.

That will provide an opportunity for the two leaders to shake hands and show the world they’re not enemies. They’re merely looking out for the best interests of their own countries.

It’s a face-saving opportunity for both sides. And it’s the last chance the Chinese president has to schedule new high-level trade negotiations before the US moves to further hamper China’s economy.

In short, Xi can’t afford that. While Trump, possibly looking at only two more years in office in either case, can weather any fallout from US companies griping about higher import costs.

Xi must know this. Which is one of the reasons China has shown such restraint in their responses to ever-rising US tariffs. They’ve been careful not to escalate matters. And over the past months they’ve made repeated offers to negotiate.

What they’re only recently learning is that negotiating with Trump is unlike any negotiations they’ve carried out before.

Just look at NAFTA, now the US-Mexico-Canada Agreement (USMCA).

We saw a litany of threats and name calling until…right at the wire…a new deal was reached. If you were following along with the Port Phillip Insider in the lead-up to that deal, that conclusion should have come as no surprise.

And whether you call it a trade war or a ‘nasty trade dispute’, I believe we’ll see something similar play out with China.

China won’t give in to all of Trump’s demands. But there will be enough concessions to allow Trump to declare victory back home. And as we head into 2019, this should all be old news.

That, in turn, will be good news for Australia.

Any uptick in China’s growth outlook will be welcomed by Aussie universities. As reported by The Sydney Morning Herald, 41,000 of the 167,000 student visas granted in the second half of 2017 were to Chinese nationals.

This presents a massive, and growing, industry. And education stocks like Navitas Limited [ASX:NVT] could be among the winners if Xi and Trump can reach a trade agreement this year. NVT’s share price was down 7.55% year-to-date as of market close yesterday.

Australia’s miners are also closely tied to China’s growth. China, as you likely know, remains the top destination for Aussie iron ore.

If China’s economy heats back up Fortescue Metals Group Limited [ASX:FMG] could be among the stocks to benefit.

The $12.6 billion miner is currently trading at a fairly modest price to earnings (P/E) ratio of 10.18. The share price is down 20.89% year-to-date. Though it’s up 4.10% in intraday trading today.

But it’s not just the miners. Agricultural stocks should also rise on news of a resolution in the ongoing trade ructions.

Graincorp Limited [ASX:GNC] is one stock to watch.

The $1.85 billion company is down 3.85% this calendar year as of market closing yesterday. It hit negative territory following last week’s string of losses. But I expect it could see a good bounce if Trump lifts his bruising China tariffs.

Please do note these are not official recommendations, just some stocks to watch. Always do your own research before investing any of your hard-earned money.

That’s all for today.

Don’t forget to check out the latest from The Australian Tribune:

‘Border Chaos! Thousands of Migrants Invade Mexico’

One of US President Donald Trump’s campaign promises was to build a “big beautiful” wall along the Mexican border. And he pledged Mexico would pay for it.

Trump, of course, was talking about the US border with Mexico. And Mexico scoffed at footing the bill for the wall along its northern border. But the nation may well be rethinking the plan for its southern border.

Border fences, as Trump…

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Cheers,
Bernd