Oz-terity

Australia’s economy has boomed in recent decades. Fuelled by China’s insatiable growth in demand for commodities and food it has grown to become Australia’s biggest trading partner. However, recently Australia has suffered a form of austerity from China which has imposed bans on a range of Australian exports. While Australian’s sweat under record breaking temperatures, relations with China also appear to be reaching boiling point.

In the latest incident, Australia has demanded China apologise for posting a fake picture on a government Twitter account that depicted an Australian soldier murdering an Afghan child. Prime Minister Scott Morrison said Beijing should be ‘utterly ashamed’ for sharing the ‘repugnant image’.

Bilateral relations have rapidly deteriorated this year after Australia led calls for an investigation into the origins of the Covid-19 pandemic. However, Australia is a key ally of America in the Pacific region and its decision to block Chinese investment projects, notably the first to ban Chinese tech firm Huawei from its 5G tender and comments about China’s actions in Xinjiang, Hong Kong and Taiwan may also have played a major part.

In the latest escalation, China has imposed up to 200% tariffs on Australian wines, and has also targeted Australian coal imports, sugar, barley and lobsters.

Should investors be concerned? Well, yes. It is a reminder of just how powerful a nation China has become, even more so as it has emerged from the Covid-19 pandemic relatively intact while many developed countries have been severely weakened economically. The UK has also blocked Huawei on 5G and made similar comments to Australia regarding Hong Kong and other areas.

President-elect Joe Biden has projected himself as being less confrontational than President Trump. However, he has stated he won’t immediately remove the elevated tariffs that the Trump administration imposed on China and in the short-term tensions show no sign of abating. The ongoing long-term strategic struggle between the US and its allies and China is likely to continue to overshadow markets and have consequences for British companies.

China remains a key export target market for the UK in a post-Brexit world and Boris needs all the friends he can get. Many UK companies have operations in China which also forms a key part of many global supply chains. Are these also at risk?

What have we been watching?

The beginning of the end for the Covid-19 crisis given the vaccine news? The beginning of the end also for Brexit trade term negotiations? Will the UK and EU agree a deal or not this week?

The UK has become the first country in the world to approve the Pfizer/BioNtech vaccine for widespread use. The government has ordered 40million doses. It is given in two injections, 21 days apart, with the second a booster. Some 800,000 doses will be available next week with the bulk available in the New Year. Meanwhile, the US hopes to have immunised 100million people against Covid-19 by the end of February which is about 40% of the adult population. The US needs this urgently as daily hospital admissions reached 100,000 for the first time.

Final results from the trials of Moderna’s vaccine against Covid-19 confirm it has 94% efficacy and nobody who was vaccinated with it developed severe disease. The vaccine is being submitted to UK and European health regulators. Moderna aims to supply 20m doses in the US before the end of this year and is on track to manufacture between 500million to 1billion doses in 2021. The UK government has ordered 7million doses for next year.

Australia’s call for an investigation into the origins of the Covid-19 outbreak received support from CNN which published ‘leaked documents’ that showed infections in Hubei, where the virus was first detected, was ‘more than double’ the official figure. The misinformation is said to have led Western leaders to downplay the severity of the outbreak at a time when they should have been preparing for a more serious epidemic.

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Brexit looks to be going down to the wire. Reports suggested that some EU members particularly France were warning Michel Barnier against giving ground on any UK requests. After a weekend of more confusing messaging from both sides, Sterling is little changed from where it was a week ago at just under $1.33. The Irish Taoiseach Michael Martin said negotiations were on a ‘knife edge’ and hoped ‘common sense would prevail’ but added that chances of a deal being agreed are 50/50. Markets are still implying that the probability of a deal is higher than that.  However, we are talking about politicians -will common sense prevail?

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In the UK, England exited lockdown 2.0 but adopted the new tier system while in Wales pubs, bars, restaurants and cafes will have to close by 6pm and will not be allowed to serve alcohol after Covid-19 cases were accelerating. Meanwhile, UK house prices are 6.5% higher than a year ago- the sharpest rise for nearly six-years, according to the Nationwide. UK manufacturing activity also increased to a three-year high in November with the PMI activity indicator signalling six straight months of successive growth. However, while business optimism improved to a six-year high, uncertainty remains about the sustainability of this improvement given the temporary boost from stock building ahead of Brexit.

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In Europe, the ‘flash’ manufacturing activity indicator reading was 53.8 reflecting slower but still marked improvement in output and new orders.

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In the US, Jerome Powell, Chair of the Federal Reserve (Fed) warned of continuing uncertainty. ‘The rise in new Covid-19 cases, both here and abroad, is concerning and could prove challenging for the next few months.’ Progress towards agreement on a US fiscal package remains slow despite another call from action from Jerome Powell.

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China’s manufacturing activity continued to improve in November with the Caixin survey at its highest level in ten years. November trade data also revealed strong export growth aided by PPE and electronics equipment. Meanwhile, China has announced major infrastructure projects to support the economy including the proposed Yurlang Zangbo River hydro-power project in Tibet while China’s State Grid company is planning to build over 1million electric vehicle charging stations.

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OPEC+ has done a deal to gradually reduce the capacity cuts by 500,000 barrels a day from January. Meanwhile, Iran has moved to stop UN inspections of its nuclear sites and is planning to step up uranium enrichment under a new law approved by its parliament. This follows the recent killing of its top nuclear scientist. Brent oil edged up towards $49.

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Finally, another example of how Covid-19 has turned business and investing upside down. Historically, the beauty sector has always been viewed as defensive as people still buy cosmetics even during a recession to look good or cheer themselves up. However, lipstick sales are estimated to have fallen by as much as 35% in 2020 in some countries as women have had to wear face masks. Likewise, men are shaving less as they work from home. At least we can go to the pub and drown our sorrows… hang on a minute, no we can’t. Even pubs are no longer a recession safe-haven! Thank goodness for national premium bonds. hang on a minute, they’ve cut the prizes! Well at least there is always cash under the mattress and you can even order one of these online nowadays – how times change.

 

Read Last Week’s Alpha Bites – Respect RCEP – TCB*

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.