There are two countries right now reaping the benefits of Donald Trump’s undeclared war on Iran: Saudi Arabia and Australia. The connection is not immediately obvious.
Saudi Arabia is set to cash in as the market looks for a replacement source of oil for previous Iranian supply now locked out by US sanctions.
Saudi Arabia has a similar type of oil to Iran and is practically the only country with any spare capacity anyway.
This is going to send a lot of US dollars to the Saudi royals in Riyadh. This is most likely a deliberate aim of US policy.
But the US isn’t only blocking exports of Iranian oil. It’s putting sanctions on Iran’s industrial metal sector as well.
The Financial Times reports that this has an unintended side effect for us here in Australia. Why? It’s likely to knock out 14 million tonnes of Iranian iron ore from the global seaborne market.
This is highly important. The iron ore market is already suffering an unexpected shortage. That’s because Brazil’s major producer, Vale, suffered a devastating accident in January at one of its iron ore mines.
This situation is not going to change anytime soon. One report today in The Australian Financial Review says this disruption could last for another three years.
Iron ore is already trading far above previous industry and government estimates of where it would be. It could go even higher if the Chinese economy holds together pretty much as it is now.
Why do you care? You should — a lot. There are two massive implications from this.
Dollars to pour into these two stocks
One is that BHP and Rio Tinto could issue special dividends if this cash flow bonanza continues. A rise of US$10 per tonne in the benchmark iron ore price is worth US$2 billion of free cash flow to Rio, according to the AFR.
Some of that is bound to head into your super fund, wherever it may be. Certainly, this could keep the ASX pushing higher over 2019.
But the second angle is even more relevant. This is going to give the Aussie government a huge windfall in revenues.
The federal Treasury priced the budget for a US$55-per-tonne iron ore market. It’s currently US$95 per tonne.
Where is this money going to end up? The Aussie property market, of course! PM Scott Morrison has already gone public with a plan to help first home buyers.
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Labor is willing to match it. It would appear it doesn’t matter who wins on this front.
What’s the deal? It’s a $500 million deposit guarantee. Any first home buyer who can’t reach a 20% deposit will have the shortfall met through a special fund. It will also mean they can avoid lender’s mortgage insurance.
This will reignite the property market. The biggest problem right now is access to credit. The floodgates are ready to open — the banks’ cost of funding is at record lows right now.
The bears who have called for the collapse of the property market never factored in a political chess move like this.
Aussie stocks: The place to be for 2019!
All this leads me to conclude that it’s possible the ASX starts to outperform the US market for the rest of 2019.
Here’s why. I’ve made the case a few times now that the FAANG trade is running into trouble over there.
US big tech has driven the big expansion in earnings over the last five years. If that stops, as looks likely, the US market could stall.
Here in Australia, it’s possible the federal election is keeping a lot of money on the sidelines until the uncertainty clears. Once that roadblock is gone, we could see a shift in sentiment.
Don’t forget that the market is now pricing the cash rate to head to 1% within 12 months. That means the search for yield continues.
Indeed, it could become even more acute if Labor gets up and abolishes the current dividend imputation policy as flagged.
Bull markets climb a wall of worry. The biggest one of all is Trump’s trade war with China. This will add volatility, for certain.
But we’ve lived with this for over a year now and the global stock markets are still chugging along. The headlines are scarier than anything else.
We’ve said it all year: Be bullish in 2019, with the usual bumps and dips along the way. Scott Morrison just added fuel to the fire.