Negativity has some investment positives

Last night we saw a dramatic reaction to a combination of the exit speech by British PM Theresa May and Donald Trump's continuing threats of higher tariffs which China and Mexico respond with trade war threats.

We saw gold jump, the US dollar fall and sterling rise, plus a big fall in the London share market and a lesser one on Wall Street. Trade war talk between the US and China usually hits our markets, so it was no surprise we opened lower this morning.

While markets are focusing on Brexit and the inauguration of President Trump, underneath the froth and bubble is the development of a series of fascinating trends as the global investment community positions itself for a period where the rules are going to change.

And for old timers like me, nothing cheers me better than to see that at a time of uncertainty and nervousness the gold price is doing what it always has done – rising. For generations, wherever there has been turmoil, gold has risen in price. People feel good about gold and, of course, that extends to shares in gold companies.

So it is no surprise that at this time we see gold rising. I must confess that apart from a sally into the silver market a few decades ago I have never felt it necessary to include gold as a cornerstone of my portfolio. I don't think I will change that stance, but I must say that the level of possible change in the global community on the election of President Trump is greater than I can ever recall as a result of one particular election result.

The long road ahead

As I described in my last email to you for 2016 (Into 2017: Prepare for a volatile year), I think that the domestic changes in the US will take longer to take place than the market expects. Erecting infrastructure is not a fast process, and it takes years to develop a project. Switching plants to the US and developing new US plants again will take longer. And if the US suddenly reduces taxes, as seems likely, I will be surprised if the money poured into the US overnight.

But these events look likely to happen and they are being superimposed on a completely new look at the United States foreign policy and defence strategies. Trump is being aggressive towards China and is questioning the funding of NATO, plus he is saying what we all know to be true – Europe is a mess and could well break up. Brexit and the clarity of British PM Theresa May's speech adds to that pressure.

Put all that together and you can see why gold has a greater attraction than we have seen for a long time. The gold buffs will lose if the level of change that Trump engineers is less traumatic than is currently being canvassed.

That nervousness about the extent and speed of change, plus the talk of trade wars, is being reflected in the weakness of the American dollar. We saw our currency fall sharply when Trump won the US election, but it has now strengthened to go beyond 75 US cents. So, in a strange way gold is being preferred over the American currency.

The inauguration address will either confirm that the whole process will take longer than initially thought or alternatively that the US is really going to move, and move fast. In that case we will see the US dollar start rising again.

Miners find new reasons for optimism

Meanwhile, in commodities like oil, iron ore and copper there is an increasing sense of optimism that Trump is going to engineer a much higher level of long-term demand. Conversely, coal is looking weaker. As you look around Asia the economies including China appear to be going pretty well with strong internal demand. Even if President Trump is able to attract more investment in US manufacturing, it will take a long time before it affects China. Of course, if events in Taiwan and the South China Sea turn nasty then Chinese exports to the US are likely to fall sharply and there is no doubt we will be affected, possibly severely.

Leaving that aside, we are about to enjoy a fantastic mining company earnings season. Miners like BHP and Rio Tinto have achieved good volumes for high prices for iron ore, oil, copper and other minerals. At the same time they have slashed their costs. If you are a shareholder in one of the large miners, get ready to enjoy yourself next month as the profits come through.

In the case of BHP, Donald Trump has met with chairman Jac Nasser and CEO Andrew Mackenzie. They will have warned him about their fears of aggressive action towards China, but Trump would have underlined to BHP that he will lower the US tax rate and has invited them to step up their investment in US oil, gas and copper. And my guess is that they will do exactly that, and that is where Australian iron ore cash will end up.

China and the Australian property market

Meanwhile China is greatly concerned about the state of its banks and does not want its domestic liquidity run down too far because that will require more government funds to be diverted towards keeping its dodgy banks alive. As a result, the Chinese Government is making it harder and harder for its citizens to invest in property in Australia, Canada and other parts of the world.

In Sydney the percentage of Chinese (including local Chinese) buying apartments has fallen from about 80 to 50 per cent of the market and continues to head south. Normally this would cause a fall in apartment prices, but increasingly Australians are getting sick of the our Government's superannuation games and are deciding to go for bricks and mortar. The negative gearing buying of apartments in Sydney has jumped and absorbed the Chinese fall. Indeed, the price of apartments has risen slightly.

In Melbourne that is what has happened in the inner suburbs, but there is a glut of one bedroom apartments in the city where the Chinese are having great difficulty in settling contracts. That is confusing the market. But I am sure as we look around the nation we will be seeing a rise in negative gearing in residential property in many property markets. In time this will affect government revenues, but the Government only has itself to blame.

The rise in the US bond interest rates is pushing up the cost of Australian bank borrowings and the banks are trying to maintain their profitability by increasing rates to home owners and lowering term deposit rates. Normally such a rise in interest rates would dampen the property market, but those that negatively gear appear very confident.

Of course, if Bill Shorten wins the next election and stops negative gearing on existing properties then it will cause considerable damage to the residential market. If the current trend towards a higher rate of negatively geared property continues it will be very dangerous for any political party to reverse it.