In Brief: It’s Not The Economy, Stupid!

Weekly Reports | Jul 05 2024

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Weekly Broker Wrap: The World Gold Council sharpens the focus on political uncertainty; Barclays dissects the election deluge; Jarden stays full bull on travel trends and Morgan Stanley remains in the August rate hiking camp, plus an update on lithium.

-Politics and uncertainty remain
-Is the death of the USD overstated?
-Gold taking a breather
-Ausie rates: the only way is up
-Travel companies in the sweet spot
-Lithium can’t catch a bull

By Danielle Ecuyer

This week’s In Brief continues with a special “Food for Thought” quote. 

If you find any interesting investing quotes that spark the creative investing juices, email them to info@fnarena.com with your name, if you are happy to be published alongside the quote with a brief sentence on why you think it is great.

“It’s the election stupid”

If last Friday’s debate between Biden and Trump didn’t shock you back into political reality, then surely the French and UK election results will act as a reminder the very nature of over four-decades of political stability is shifting beneath our feet (albeit, proverbially).

Barclays astutely points out the phrase “It’s the economy stupid” as coined by President Clinton’s adviser James Carville in the 1992 election campaign, no longer holds sway. 

Surely under a macro-economic backdrop of “low unemployment, decent wage growth and slowing inflation” elections would be focused on the economy, Barclays questions.

No longer.  “It’s the election, stupid”.

With investors reassessing the greater likelihood of another Trump Presidency, Morgan Stanley took laser like analysis to discuss “How US elections could affect Asia”.

The heightened chance of rising tariffs and de-globalisation, equals in Morgan Stanley’s eyes to increased risks of slowing growth and a deflationary “shock” to Asia.

In 2018/19, Asia’s GDP growth eased to 2.1% from trade tensions. Much will depend on who wins the US election and which party holds the balance of power in Congress or not as the case, maybe.

The implementation of 60% tariffs on Chinese imports from the US, could accelerate the supply chain diversification with an offset in Asia from the China impact.

Alternatively additional 10% tariffs on all US imports have the scope to erode corporate confidence and accelerate a deterioration in investment spending, similar to 2018/19.

The key concern for Morgan Stanley revolves around downside risks to growth.

China doesn’t hold elections but the upcoming July 15-18th Third Plenum could provide confirmation of what is considered by Barclays as a consensus view on the economic focus.

Options to boost the beleaguered property market are “exhausted” and more emphasis on supply-side reforms (tech innovation) is anticipated. Any focus on demand side stimulation is viewed as a low probability, though remains a needle moving event for Barclays.

The world financially’ continues to fracture

Which takes us to the next challenge on the geo-political front, the de-dollarisation of world trade.

DBS delved into this hot topic, highlighting the ongoing moves by BRIC (Brazil, Russia, India, China) nations to diversify away from US dollar reliance. 

In June, the expanded sanctions against Russia resulted in the cessation of USD and EUR trading on the Moscow Exchange (MOEX), and the adoption of the Chinese Yuan (CNY)/Russian Ruble (RUB) exchange rate.

The Chinese Yuan now represents the major “primary” currency on the exchange as confirmed by the Russian Central Bank, or a 54% market share of transactions.

June also marked the expiration of Saudi Arabia’s 50-year petrodollar agreement with the US, opening opportunities to trade oil in other currencies.

Saudi Arabia also joined Project mBridge, a multi-central bank digital currency program (CBDC) which was commenced in 2021 and includes Chinese, Hong Kong, Thai, and UAE central banks.

The aim is for a faster and cheaper alternative to the existing SWIFT standard. Other Asian countries have adopted a universal QR code for payments on cross-border transactions.

While these developments might appear significant, at the margin, the moves highlighted are more symbolic when it comes to USD dominance.

DBS states the USD accounts for almost 90% of global foreign exchange transactions and the global share of USD reserves closed at 58.4% at the end of 2023.

Gold price rise has more to go

Turning to gold, the precious metal has risen 12% throughout the first half of 2024.

While some investors have been questioning the breakdown in the relationship between gold, interest rates and the US dollar, the head of the World Gold Council believes it is these factors (higher USD and higher rates for longer) which have placed a cap on bullion’s price performance.

The council highlights ongoing central bank purchases, robust Asian investment, and “resilient” global retail demand. Gold jewelry and technology combine to underpin more than 40% of annual demand for the precious metal.

Gold retains in the council’s opinion an important role in asset allocation strategies.

Food for thought quote of the week.

“Political polarisation, armed conflicts, and erosion of globalisation in favour of nationalism and select alliances fuel economic instability. Geopolitical risk is particularly difficult to predict and may come from where it’s least expected. What is true, however, is that gold reacts to geopolitics, adding 2.5% for every 100-points the Geopolitical Risk (GPR) Index moves up”

Juan Carlos Artigas, Global Head of Research at the World Gold Council

RBA cash rate: more to go?

Will the RBA hike again? It is the billion if not trillion-dollar question on the lips of all mortgage holders, and investors.

As the hawks and doves battle it out on social media and through newsletter commentaries, nuancing every latest snippet of economic data, Morgan Stanley analysts discovered last week most investors they chatted with believe the in-house August rate hike call is nowhere near consensus.

In summary, the collective view believes the RBA is a “reluctant hiker” and the economy is revealing clear signs of slowing. The 2Q CPI print on July 31 remains critical, with investors expecting a slight beat and Morgan Stanley pointing to the reading as the major catalyst for an August rate hike.

Equally, investors do not accept the RBA will hike while other central banks are cutting, or getting ready to start. Morgan Stanley counters and points to the 2015-2018 precedent of the RBA cutting while other central banks hiked.

Lastly, one hike will have no impact or so say the investors. Morgan Stanley pushes back on that view with the expectation of a “powerful impact on animal spirits”. 

On balance, Morgan Stanley analysts expect inflation prints to become “more noisy” as state and federal subsidies kick in. Another rate hike is estimated to impact on debt servicing by $7bn with tax cuts providing $20bn relief over FY25.

The domestic savings rate becomes the swing factor and the broker still expects three RBA rate cuts in 2025, commencing a quarter later in May next year.

The travel boom continues

Meanwhile, the boomers are busy spending the inheritance as fast as possible in a global travel frenzy. My words not Jarden’s, who put pen to paper to explain why travel sector outperformance is set to continue.

Against what the broker describes as a “benign” consumer spending backdrop, global travel volumes are on the rise as airfare prices fall, thereby stimulating demand.

From a macro perspective, baby boomers are the demographic that are spending as they retire, while corporate spending is also on the rise. 

Easing airfares are also boosting longer trips with extended adjcacencies such as accommodation and stops, which boost margins for travel related companies.

Industry consolidation is also providing a fillip for the incumbents, with market share gains helping margins, supply access to larger contracts and improved return on invested capital.

Jarden’s two preferred stocks are Flight Centre ((FLT)) and Webjet ((WEB)), both with Buy ratings and respective target prices of $23.59 and $10.30, with the travel trends more positive for both.

Corporate Travel Management ((CTD)) and Helloworld Travel ((HLO)) are Overweight rated with targets of $19 and $3.70, respectively.

Lithium: are we there yet?

Having espoused the travails of the lithium price outlook in last week’s In Brief, I thought Morgan Stanley’s latest update from the Las Vegas Fastmarkets Lithium Conference might prove prescient.

On balance, the broker believes the risk/reward dynamics are improving for lithium, but more price falls are required to remove supply permanently from the markets via project closures.

To date, the supply side response has focused on expansion delays and maintenance cuts, which are not deemed as sufficient. Equally, Morgan Stanley points to higher EV price cuts to parity or below ICE alternatives in China, which explains the higher uptake of EVs in that market.

Other markets by comparison need to close the circa 15% price premium to offset range anxiety and residual value worries of the consumer.

Politics is also playing a part, with US and European trade barriers and the potential rollback in environmental targets.

Bottom line: lithium is expected to bottom out in the US$8,000/t to US$10,000/t range and closures will not be forthcoming until the price declines to that range.

The underlying message: don’t hold your breath!

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