The government-controlled media in China is once again menacing Australia.
Like a bully telling you at lunchtime they’ll be waiting for you at the school gates after the final bell.
This time they’re threatening to heap on even more trade strikes, after former PM Tony Abbott accused Beijing of bullying Taiwan.
‘Australia, a country that relies heavily on trade with China, has persistently prodded the most sensitive nerve of its biggest trading partner,’ said China Daily last week.
‘With politicians in Canberra continuing to act and sound increasingly hostile toward China, the worst is probably yet to come.’
China’s ire for everything Australian will likely only intensify in 2022, even if they were forced to give in on Aussie coal imports recently.
So far, the Aussie economy remains surprisingly robust to the economic sabre rattling from our biggest export market.
But that could change very soon, according to our Head of Research Greg Canavan.
And with iron ore prices already well down this year, the consequences next year could be immense.
As an Australian investor, you may not realise how much you personally have at stake on this one issue. For that reason, you should read Greg’s extensive new research report.
What’s clear is that, in a very short space of time, our biggest economic partner just turned into our biggest adversary.
You need to understand and plan for this changing dynamic now.
To be quite honest, I’m proud Australia has taken a stand over COVID and human rights issues. We have the most to lose. And yet, we stood up to the bully, more than any other nation.
But morality and investing are not the best mix…
Getting ahead of this geopolitical shift, or should I say rift, won’t be easy. Our economic partnership with China has delivered extreme prosperity to Australia. Escaping a recession during the Global Financial Crisis is just one example of that.
But consider, if Greg is right, then the largest economic tailwind in the world, which Australia has harnessed for decades, more than any other nation, is about to become a headwind. The very shape of our economy would radically change. Not to mention the direction of our stock market…
Not that the ASX is a generic blob. Some parts are geared to China. Others are not. Parts of our economy might even benefit from the coming changes, such as our manufacturing, defence, and tech sectors. The point is, you’re going to have to choose wisely as the world changes.
And that’s why I think you need to check out Greg’s work. He’s a master of making those sorts of distinctions. Understanding what financial statements really mean, what makes a company tick, and what’ll determine their successes…or failure. Which is why you need to take a look at how he’s divided the Aussie market up between winners and losers.
Investors also need to understand that the rift with China may only just be beginning. There remain plenty of flashpoints which could cause trouble…
But here’s what I don’t understand about the China story. What has me both mystified and secretly optimistic about Australia’s commodity exporting future…
You see, commodity prices swing in cycles. We know that. And we also know that we’re near a bottom of one such cycle. Although it may already have turned given the recent drama in energy markets.
How, then, do you square a slowing Chinese economy, a demographic nightmare in China, and the bearish outlook which Greg gives in his report, with the cyclical nature of commodity prices?
The answer is inflation. Or stagflation.
You see, during inflationary periods, commodities make for good investments, relatively speaking anyway. That’s because they’re tangible things of immutable value, whereas most investments are vague promises to pay cash which may or may not come about. These promises may or may not adjust for inflation too, while commodities are comparatively immune thanks to their immutable value.
On a relative basis, then, commodities are the place to be. But this needn’t mean that they actually boom, adjusted for inflation…at least, not in terms of volume and, therefore, prosperity for Aussie investors. The commodity boom might be more like the energy crisis we’re seeing now, with supply disruptions, rising costs and general chaos.
There’s another distinction to draw. Just as the ASX is not a generic blob, but a collection of subsectors and individual companies whose fate is very different from the next, so too are commodities.
Over the past few months, we’ve seen bizarre booms and busts in the likes of lumber, iron ore, uranium, and other commodities. Their prices soared and then plunged again. Investors trying to take advantage of the boom in gas prices by buying gas stocks right now need to keep this in mind.
What does all this amount to? A great deal of confusion if you ask me. Which is what you’d expect when governments rule economies and central banks rule financial systems. They stop making sense.
At least Greg Canavan does, here.
Until next time,
Editor, The Daily Reckoning Australia Weekend
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.