Three Reasons Why the ASX Is Struggling

Monday, 31 August 2020
Melbourne, Australia
By Greg Canavan
 

As I start writing today’s edition, the Aussie market is yet to open.

But futures point to a 40-point decline on the ASX 200. That’s despite yet another rise in US stocks on Friday.

I see three things holding our market back.

Firstly, earnings season. It was average. Which was to be expected. But Australia doesn’t have any major tech stock presence to bolster its indices like in the US. Investors here don’t have the opportunity to let their imaginations run wild over the future earnings of an Apple or Amazon.

In the long run, that’s a good thing. But shorter term, it means significant underperformance.

To show you what I mean, check out this chart I showed to subscribers of Crisis & Opportunity last week. The tech-heavy NASDAQ has clearly outperformed. The less imaginative ASX 200, dominated by banks and resources and industrials, hasn’t done so well.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

But if you think the current environment is reminiscent of the 1999 tech melt-up, then I’ve got good news.

The ASX 200 outperformed after that bubble burst!

You can see this in the next chart…


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

But unlike then, we don’t have the prospect of an emerging China to look forward to. Now, China is likely to be a headwind, rather than the tailwind it was from around 2002–07.

This brings me to the second drag on the Aussie market: China. Relations with China continue to deteriorate. China is using trade as a way to punish Australia. Beef, wine, barley, education and tourism have all come under China’s scrutiny in recent months, either implicitly or explicitly.

What’s next?

Who knows…

But in my view, China’s new found aggressiveness comes from a place of weakness, not strength. While it might not seem that way in the immediate aftermath of COVID, China remains fragile economically.

Its recovery is based almost entirely on state directed bank lending for infrastructure projects. The desired shift for China to move away from investment and towards a consumption-based economy is not happening.

Its debt-to-GDP ratio is blowing out to dangerous levels. In my view, this will eventually lead to a currency devaluation, as the pressures from the newly minted yuan seeking an escape into US dollars breaks the currency peg.

The yuan is getting help right now from a US dollar suffering a monetary and fiscal assault. This situation is unlikely to change at least until the election in November. But longer term, I think the pressures will return on the yuan…and the Chinese economy. You can read more detail on that here.

The weakness of China’s position also relates to the fact the rest of the world is waking up to the way it promotes its interests. One of those ways is via universities. Last week, an investigation in The Australian revealed widespread Chinese influence amongst Australia’s academia.

As a result, the government is now launching an investigation. From today’s Australian:

The Morrison government will launch an inquiry into foreign ­interference in Australian universities and how Beijing has recruited academics to a secretive program that paid ­lucrative salaries and allowed research to be patented in China.

Home Affairs Minister Peter Dutton on Sunday outlined the terms of reference for a broad-­ranging inquiry into foreign interference in the university sector in a letter to the chair of the parliamentary joint committee on intelligence and security, Andrew Hastie.

The move for an inquiry comes less than a week after Scott Morrison announced unprecedented national security laws giving the commonwealth the power to tear up agreements struck by state governments and councils with foreign powers, such as China, that may threaten Australian’s national sovereignty.

Needless to say, China’s not going to be the economic juggernaut it was at the beginning of the 2000s.

The third factor holding back the market is the response to COVID. Australia’s federation has effectively ceased to exist. State premiers are now running the show. But rather than display leadership, they are promoting fear and grabbing as much power as they can.

Borders are closed across the country. This is unconstitutional, but these petty bureaucrats don’t care. A functioning economy relies on freedom of movement…of people and goods. But border closures make this very difficult, if not impossible.

Strangely, the polls suggest the people of Australia support these restrictions. Perhaps that’s a result of 30 years of economic growth, an unending housing boom and an ever-growing nanny state? That is, we actually believe politicians are here to help and keep us safe.

It seems we’re more interested in the real estate guide than the history books.

But give it a few more months, dear reader. If it keeps going the way it is, these premiers will drive us into an even deeper recession. And if our market takes another leg lower, you’ll know why.

Under the surface though, there are still plenty of opportunities.

For example, last week, gaming company PointsBet Holdings Ltd [ASX:PBH] soared after announcing a five-year deal to become the official sports betting partner of NBC sports. Readers of our small-cap stock picking service, Australian Small-Cap Investigator, are no doubt delighted after it was added to the portfolio in late April.

These are the sorts of gains Callum Newman, editor of Catalyst Trader, is on the hunt for too. He recently identified defence spending as one source of good news flow for a select bunch of companies he is watching.

Out of consideration for his subscribers, I can’t reveal those companies here. But if you’re interested in the way Callum goes about identifying catalysts for big potential moves, go here.

The good thing about this investing style is that it doesn’t matter if you have monkeys running the show at the state level. Callum dives down on specific sectors and situations to find opportunities, regardless of the broader economic challenges.

It’s an investment style that seems perfectly suited to today’s unique circumstances. Go here to find out more.  

And read on for Murray Dawes’ the ‘Week Ahead’ update where he shows you a little company drilling for gold near De Grey Mining’s massive Hemi discovery.

Cheers,
Greg


[WATCH] A Nearology Punt
By Murray Dawes

 

[Click on the picture to find out which stock is drilling for gold near the massive Hemi discovery in the Pilbara.]

As De Grey Mining Ltd [ASX:DEG] continues its immense rally having uncovered a new gold mining district in the Pilbara, I thought it would be worth showing you a little stock that is drilling just up the road from the Hemi discovery.

Mark Creasy, the famous resource investor, is the biggest shareholder with nearly 46% of the issue.

The stock is currently trading at 1.4 cents, but it has an eye-watering 2.7 billion shares on issue, so the market cap is currently around $38.5 million.

The chart is looking quite compelling with the long-term trend turning up a few months ago after bouncing from the buy zone of a multi-year wave.

I give you the stock code in the video above and show you the technical situation in detail.

I don’t give any trade recommendations in the ‘Week Ahead’ updates. I am just showing you some of the techniques I use to find trading opportunities for members of my trading service Pivot Trader.

I think you need to combine fundamental and technical analysis to find the best trades and this little stock ticks a lot of boxes that could get punters interested in positioning themselves before drilling results are released.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader