The prospect of a fully-fledged trade war between Australia and China threatens to derail the market’s recovery but big miners should be resilient.

The big three iron ore miners – BHP, Rio Tinto, and Fortescue Metals Group – account for 10 per cent of the Australian sharemarket, meaning any attempt by China to curb imports would drag on the market at a time when the big four banks – which have a 17 per cent weighting – have been hammered by the economic slump. Australia lost almost 600,000 jobs in April, it was revealed this week.
Meanwhile, the Chinese jobless rate rose to 6 per cent in April, from 5.9 per cent, defying expectations of a fall to 5.8 per cent. Chinese retail sales plunged 7.5 per cent and fixed asset investment fell 10.3 per cent. Property investment, which is a proxy for steel demand and iron ore use, fell a smaller-than-expected 3.3 per cent while industrial production rebounded by 3.9 per cent.
Friday’s data comes ahead of next week’s meeting of the National People’s Congress, China’s rubber stamp parliament. Investors are watching to see whether the Communist Party leadership led by President Xi Jinping will unveil extra stimulus measures to bolster growth and support jobs.
Miners
Stimulus in China has historically proved a boon for Australian commodity producers and expectations of another boost to demand have been rising since China emerged from its pandemic lockdown. During the market’s 17 per cent rally from the March 23 low, resources have outperformed with a near 26 per cent jump.
“The miners still have very good balance sheets, they are going to be fine. Even if they go through tough times they are very long duration stocks – the BHPs and Rios – they are going to have upcycles in the future as well as down,” said Mr Conlon.
The broad market surge in the weeks since low on March 23 came as investors started to hunt for stocks that had taken a beating in the bear market slide from February 20.
“It’s obviously a period of great uncertainty where there isnt much transparency as to what the economy or company earnings will look like going forward,” said Anton Tagliaferro, investment director at Investors Mutual.
“The length and depth of the downturn is uncertain and a lot of companies are not making money and are not in a position to pay dividends or distributions for a while.”
Hunting for certainty
Mr Tagliaferro prefers companies that can provide some certainty on earnings and dividends and highlighted supermarket group Coles, telecoms group Telstra and packaging group Amcor.
Supportive factors for markets include interest rates at near zero in most countries, central banks “manipulating the bond market” and huge government fiscal stimulus packages, he said.
“I think its a time to be really selective, very cautious. There will be a recovery of sorts when things open up a little but I think that one has to be a bit cautious about the economy for the next 12 to 18 months.”
Mr Conlon is also downbeat on the outlook for the economy and corporate earnings. Prospects for earnings for most companies cannot be described as “anything other than tough” he said. “Most companies have come out and said exactly that.”
“There will not be earnings support in the short run but obviously valuations are to some degree looking through that and saying, ‘OK well there will be brighter times in the future’.”
“Most technology stocks and most healthcare stocks are trading at or close to all time highs. The only pockets of the market that are actually trading materially lower than they were are the REITs and the cyclical stocks.”