Trump yet again sets up markets for another trade tantrum

Trump China trade tantrum AMP unemployment
WEEKLY MARKET REPORT

Once again, US President Trump has shown he has the capacity to move share markets with his “loose lips sink ships” approach to trade negotiations.

No sooner had he claimed that China had “ripped off” the United States for too long and that he had told Chinese President Xi Jinping “we just can’t do that anymore” than generally benign and growing share markets started to cool off and change.

It didn’t help that he poured cold water on the chances of continuing talks between US Treasury officials and their Chinese counterparts, saying: “Will that be successful? I tend to doubt it.”

By the market close in Australia the effects of his words were plain to see – defensives such as health care were the star performers in a flight to safety as the rest of our market took a breather – with only energy stocks also marginally higher after a stellar run.

Behind the bull run in oil is continuing unrest in the Middle East which threatens a reduction of oil supply and has sent crude prices to their highest level in three-and-a-half years.

A rapid slide in oil supply from Venezuela, concern that US sanctions will disrupt Iran’s oil exports, and falling global inventories have all combined to push oil prices up nearly 20 per cent this year.

Traders are obviously concerned about the chances of a renewed trade and tariff war and as our very own Treasury Wines Estates (ASX: TWE) has found to its peril, some of the Chinese “alterations’’ to import rules can have a very significant effect on individual companies.

Just how much Penfolds and other Treasury wines will remain tied up in Chinese warehouses remains to be seen but it is a good example of the chilling effect a renewed trade war could have around the world.

How much is AMP worth?

One interesting piece of research that caught my eye this week came from absolute return fund manager Watermark which took a close look at the beleaguered fund management giant AMP Limited (ASX: AMP).

Even taking into account significant reductions in funds management profits flowing from the recommendations of the Financial Services Royal Commission, Watermark found that there could be significant value in AMP at the current depressed share price.

Watermark said the two biggest threats to AMP – other than its bungled handling of the Royal Commission – were the breaking up of its vertically integrated model and an early end to advisers receiving pre-FOFA/grandfathered commissions.

On that first count, Watermark said it had passed largely unrecognised that the regulator ASIC (the Australian Securities and Investments Commission) has already strongly supported vertical integration, which makes this threat a less likely impediment.

ASIC said the customer benefits of vertically integrated companies included large economies of scale, stronger balance sheets and higher compliance standards while it believed the conflict of interest risks were well known but manageable.

Given how widespread this model is across the financial services sector and following ASIC’s statement last week, it seems unlikely that the Royal Commission will be the catalyst for meaningful changes to vertical integration.

More likely, however, is an acceleration in the phasing out of grandfathered product commissions – products that pay a trail fee to advisors – to a pure fee for service model.

On that count ASIC said the grandfathered commissions should “cease as soon as reasonably practical and to the maximum possible extent”.

In many ways that transition is already underway and even if the process is sped up by the regulator, it may not harm AMP as much as many expect.

Watermark said that with former Commonwealth Bank chief David Murray now chairing AMP and the board in the process of being restocked, AMP’s trashed share market price may mean the shares are quote attractive for value buyers.

Even assuming that AMP loses 25 per cent of the assets under management of its wealth platform and has these margins squeezed, the other 60 per cent of the company could continue to grow.

With some cost cutting and some share buybacks with excess capital, Watermark thinks AMP might still maintain earnings per share of 34c – a fall of around 20 per cent from where the market expected the company to be at by 2020.

With AMP shares now trading around $3.92 and given David Murray’s reputation as a deal maker, Watermark believes the sum of the parts valuation of AMP may not be too far below the pre-Royal Commission consensus level of around $5.50 to $6 a share.

That leaves not much downside and plenty of upside, assuming, of course, that AMP’s new board do a really good job of reformatting the company or even selling parts of it off.

What happens when jobs and unemployment both go up?

One of those slightly perplexing statistics released this week was the fact that the number of jobs in Australia rose but so too did the unemployment rate.

The answer to this seeming paradox is that more people are coming to the party, with the long period of jobs growth having the very desirable effect of encouraging the under-employed or unemployed to keep trying to find work.

That is why even as the number of jobs added under the Coalition government rises above 1 million for the first time, unemployment is actually slightly up at 5.6 per cent as the participation rate – those looking for work – rises to a record of 65.6 per cent.

This higher participation rate is interesting, particularly because many assumed that the ageing of the workforce would reduce participation, rather than see it hit a new record.

The real issue now is whether jobs growth can continue to keep pace as more people begin to look for work and also whether there can be strong enough jobs demand to begin driving large wage hikes to reach the fairly optimistic Budget forecasts.

One thing the good run of jobs growth does explain is why income taxes have been building up so nicely, allowing Treasurer Scott Morrison to dole out tax cuts in the pre-election Budget.

Small cap stocks this week

It has been a multifaceted week with all economic sectors well represented amongst small caps with the small ordinaries index continuing its climb on the back of mostly strong macroeconomic news.

The broader measure of small cap performance (the ASX Small Ordinaries index) is up almost 5% since this time last month and around 20% since this time last year.

Six Sigma Metals (ASX: SI6)

Six Sigma Metals came out of its self-imposed trading halt with a bit of a bang this week. The aspirational battery-market supplier announced it had acquired a slew of highly prospective lithium and vanadium-titanium tenements in Zimbabwe.

Following the dawn of a new business-friendly resource policy being instilled by its newly-elected government and Zimbabwe’s new political leader, President Emmerson Mnangagwa, Six Sigma says it wants to capitalise on its first-mover advantage.

Being the first to scoop up an 80% stake in the lithium-rich Shamva project north of Zimbabwe’s capital Harare could be the start of something big for the small cap explorer.

Titomic (ASX: TTT)

Titomic made a bit of a splash this week by unveiling the world’s largest metal 3D printer at an official launch in Melbourne. Not only is the 3D printer the largest printer able to create metal objects (quite a rarity in the gradually developing additive manufacturing industry), it’s also the fastest.

The printer was developed in collaboration with Australia’s CSIRO and comprises a patented additive manufacturing process, which bypasses size and speed constraints found in other 3D metal printers.

Titomic says it has developed a proprietary kinetic fusion process enabling the company to transfer titanium and titanium alloy particles at supersonic speed onto an underlying frame. The process enables different metals to be conjoined created without welding, folding or bending, resulting in reduced time to market.

Sandfire Resources (ASX: SFR), Auris Minerals (ASX: AUR) and Fe Ltd (ASX: FEL)

Sandfire Resources announced some rip-roaring news from its Morck’s Well East project in Western Australia. Sandfire paid around A$1.2 million for its earn-in stake in February this year and considering its rapid-fire explorational progress so far, the mining major is clearly not looking back.

The news means the company is well on its way to earning a 70% stake in the joint-venture with Auris Minerals and Fe Ltd. To see it past the post, Sandfire needs to prove up 50,000 tonnes of copper via a feasibility study.

The news saw all three companies posting significant gains on the day with future exploration already around the corner in the form of diamond drilling.

Skyfii (ASX: SKF)

Skyfii is taking wi-fi metadata to a whole new level by marketing a platform that’s able to serve pretty much any business, in any sector, with a kaleidoscope of useful information about consumer behavioural patterns.

This includes their browsing activity done on internet-connected devices as well as their foot traffic at retail store, hospitals and gyms.

This week saw the company announce a new retail deal with luxury brand Versace, as well as a doubling of locations where its platform is being used by Nuffield Health in the UK.

With more and more public wi-fi hotspots popping up in Australia and Europe as well as more businesses offering wi-fi as part of shopper experiences, the sky could well be the limit for Skyfii.

Living Cell Technologies (ASX: LCT)

Treating Alzheimer’s and Parkinson’s disease could soon be taking a technology-induced futuristic turn for the better, after Living Cell Technologies confirmed the safety profile of its NTCELL product this week whilst showing signs of efficacy.

Following a phase 2b study of NTCELL, LCT says it has received official confirmation from the Data Monitoring Board, that there are no safety issues arising from the data.

It’s not quite time to celebrate just yet, although Living Cell’s progress is building momentum is on course to make headlines in the months and years to come.

Real Energy (ASX: RLE)

Real Energy is now on the home straight of finishing its highly anticipated Tamarama-3 well in Queensland.

With more than 2,400 metres of drilling now completed, from a targeted 2,600 metres in total, Real Energy stands on the verge of completing its well and establishing a new supply line for the Australian east coast – a part of the that’s currently having a bit of a tough time of it when it comes to gas.

Demand and supply of gas on Australia’s east coast is struggling to find an equilibrium that doesn’t involve intermittent shortages and price spikes as consumers continue to struggle with high prices and limited sources of competing supply, according to the Australian Competition and Consumer Commission.

Talga Resources (ASX: TLG)

There was excellent technical news for Talga Resources this week as the junior explorer discovered that its graphite has significantly more capacity and power, a 94% first cycle efficiency and no capacity fade after 300 cycles.

The strong results bode well for the graphite junior as it looks to become a vertically integrated miner, processor and supplier.

Talga also owns a a graphite and graphene processing facility in Germany, based on its proprietary technology which produce nanographite products for lithium-ion batteries, coatings, construction and composite sectors.

With the prospect of high-grade graphite continuing its strong demand streak to date, Talga’s vertically integrated commercial plan could well be paying off in the near future.

Weebit Nano (ASX: WBT)

Weebit Nano is inching closer to the most important phase of any new technology: production.

This week, the semiconductor developer extended its agreement with partner Leti to accelerate the development of its industry-busting ReRAM technology built on silicon oxide.

Both Weebit Nano and Leti are looking to move their new generation of ReRAM chips from the development to the commercialisation phase whilst ensuring the technology is able to meet and exceed memory industry standards for performance and reliability.

To really future-proof its activities, Weebit Nano also hinted that it’s looking to pursue applications of its avant-garde technology within the artificial intelligence space, currently one of the most intriguing market niches in computing.

The week ahead

It is a fairly sparse offering this week with the most interest being in a speech by the Reserve Bank Governor Philip Lowe on Wednesday night.

Other things to watch out for include the gauge of consumer confidence from ANZ and Roy Morgan on Tuesday.

Consumers are being pulled in two directions at the moment with higher petrol prices and a softer Australian dollar dragging them down while positive economic environment and share prices trending higher have been buoying them up.

There are plenty of international statistics to look out for including monthly report cards on Chinese investment, production, retail sales and house prices and some US indicators including sales and production numbers.

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