- Infrastructure Green Shoots
An infrastructure bring forward of $4B was announced on 20th November. Your diarist in previous editions has joined many commentators querying the benefit of further lowering in interest rates, but calling instead for more traditional infrastructure spending which can be financed at the current low long term interest rates able to be accessed by governments. The announcement was pleasing in that Australian and Queensland governments had jointly agreed that a deal of this expenditure will take place in Queensland where it is sorely needed.
The continuing weakness in global growth noted below means your diarist sees the need for infrastructure spending globally to be picked up as a cause by governments around the world. This may be the only way forward to stopping the weak economic global growth from being translated into higher unemployment.
- Buffet Record Pile of Cash
Over the years Warren Buffet has been renowned for building up cash prior to market corrections. He currently has US $128B, a record pile. Where stocks are trading at valuation multiples which cannot be justified by independent research, clients should seriously consider selling. Likewise on the buying side, decisions should be made based on valuation rather than sentiment.
- LNG Demand to Double by 2025
On 10th November 2019, Woodside Petroleum significantly boosted the Scarborough Gas resource. This is a precursor to the second Pluto Gas Train including a 430km pipeline at a total project cost of $16B. As part of this announcement it was noted that the independent resource expert Wood McKenzie has forecast that LNG demand will almost double by 2025. That is indeed a staggering prediction given it has taken Australia 50 years to reach the current level of LNG production.
- Confirmation of other blog themes
The need for infrastructure spending, carrying a reasonable level of cash and energy as a theme are noted above. Other themes:
A) Weak economic growth globally
- Eurozone growth during the month announced that 1.4% in 2019, the weakest since 2013
- UK GDP for the quarter 0.3%, unemployment 3.8%
- German GDP September quarter + 0.1%, unemployment 3.1%
Interpretation: European growth extremely low; how long can the unemployment numbers hold up?
B) Fixed Interest Rates especially for 10 Year are historically very low, property leads way up
- Property Sales showed some increase in cap rates with sale of part of Westfield Adelaide 5.5% compared to Sydney Burwood 4.8%. Continue to be wary of property trusts trading premiums to full net asset values. Retail shopping centres may be the only oversold sector due to markets being too pessimistic of the impact of Amazon in Australia
- New car sales down 1.9% in October, continuing 18 months of declines. We continue to see the electric vehicle (EV) publicity causing buyers to defer the purchase of new cars. Australian car drivers will keep their cars longer, with many deciding after some delay to buy a further petrol/diesel car, either new or second hand. EV China sales were down 45% in October, due to the slashing of Chinese subsidies. This compared to total Chinese car sales down 4%. The changing of the subsidy regime has caused a setback of the EV uptake in China, previously one of the major growth markets.
- Australian Banks
The Westpac AUSTRAC announcement caught the market by surprise. The government said the extent of the money laundering breaches was “off the charts” and the government indicated the fines should exceed the $700M for CBA. The fall to under $25 is a loss of $15B in market capitalisation for Westpac since it was trading at over $29 in late October. This is a one off event which shareholders will have to pay for. Your diarist has the view that this is a repeat of the market’s reaction to Hayne in February when it treated a one off event as systematic occurring year after year in forthcoming years. It is not. Westpac self-reported the breaches. And while there will be material fallout, it appears an example of markets over reacting to bad news and thus providing buying opportunities. An impact of the AUSTRAC case is that Westpac may well withdraw support for the new JUDO Bank.
- ANZ reported during November with the EPS surprisingly robust.
- Trade Wars/Geopolitical
Moves by the US and China to have their own vertically integrated wholly sufficient supply chains is continuing apace. The revelations of human rights issues in China during the month have increased political concerns globally with respect to the Chinese government and this may result in an even more insular response to the trade issues. The US political environment also took a step down into the negative with the likelihood of Congress passing a resolution for a Trump impeachment trial in the Senate increasing dramatically. This is a possible X Factor for a correction in the overvalued sectors in the USA in the first quarter in 2020. However Trump has proven himself a Houdini to date.
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