China strikes again; A November to remember on ASX; Bega’s new era

In retaliation, China has targeted a range of Australian export industries with sanctions. They have mostly been soft commodities exports, but coal has been in the firing line and there is a belief copper could be next. Importantly, the business sector is broadly supportive of the government’s approach to stand up to China on matters of principle.

The one industry China is yet to touch, though, is iron ore. If it were to do so, the relative calm about the situation in corporate Australia would surely dissipate, and quickly.

The key steelmaking ingredient is Australia’s most lucrative export earner. At the moment, there is a prevailing belief that China can’t afford to boycott Australian supply as it ramps up infrastructure projects to prop up its economy in the aftermath of the pandemic.

Yet Chinese state-owned enterprises are rapidly moving to diversify their sourcing through ambitious projects in various parts of the globe, most prominently Africa.

Unless things improve dramatically on the diplomatic front, Australia is going to need to diversify its economic reliance on China just as quickly.

November to remember for stonks

It has been a November to remember for stocks (or “stonks” as the internet meme ridiculing the ebullience of equity markets describes them).

The major US equity indices hit fresh highs this week, and with two trading sessions left in the month the local S&P/ASX 200 is on track for a record month after adding as much as 15 per cent.

Remarkably, that means the local benchmark is back to where it started the year, and just a smidgen below its record peak set in February before COVID-19 erupted into a fully-fledged global pandemic.

Investor spirits have clearly been lifted by the encouraging news about three COVID-19 vaccine candidates and the prospect of more political stability in the United States.

Balanced against this is the alarming resurgence of the coronavirus in the US and Europe and the massive debt overhang that advanced economies including Australia will face when the pandemic is eventually behind us. Not to mention the ongoing trade spat with China.

The strength of share prices in Australia around the world this year serves as a useful reminder of one of the great investing truisms: the stockmarket is not the economy.

For starters, share prices are forward-looking (that said, the future doesn’t look terribly bright at the moment).

The businesses that are publicly listed often don’t reflect the underlying economies where they are listed. In the US, Wall Street and Main Street have de-coupled to the point where the stockmarket is arguably no longer a useful proxy for the world’s largest economy. Small businesses power most developed economies, but they aren’t really represented on stock exchanges.

In Australia, there are also disparities. Mining is over-represented on the local bourse (it accounts for nearly 20 per cent of the ASX 200) relative to the number of people it employs (under 2 per cent of the workforce).

Bega deal heralds new era for agribusiness

One of the more encouraging developments for both the stock exchange and the real economy in recent years has been the revival of the Australian agriculture sector.

After a horror, bushfire-afflicted summer last year, farmers in many parts of the country are preparing for bumper harvests, while livestock prices are also strong. Meanwhile, there are now a handful of genuinely interesting and substantial agribusiness stocks on the ASX for investors to consider.

There is no better example than Bega Cheese. The $1.1 billion, ASX listed dairy business based in a sleepy town on the NSW South Coast has now become a genuine force in Australian food manufacturing with the purchase of the Lion Dairy business for $534 million.

The deal will add the Pura Milk and Yoplait brands to Bega’s portfolio, which includes Bega Cheese and Vegemite (the latter of which it acquired for $460 million in 2017).

Bega now expects to generate $3 billion in annual revenue and will become one of the biggest suppliers to the major supermarket chains. As Elizabeth Knight wrote this week, it is good news for the government which is hoping to strengthen local manufacturing of essential goods after the coronavirus exposed our vulnerability to global supply chain shocks.

On the other hand, it adds more fuel to the fire of the original topic of this article. After all, there is one key reason why this deal happened: Treasurer Josh Frydenberg blocked a planned $600 million purchase of the Lion business by China Mengnui Dairy on national interest grounds last year.