When Godzilla Comes to Town

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Oh dear. Nationalist sentiment shows no sign of slowing down around the world.

You better pay attention to this. You might wake up to find yourself down thousands of dollars. The cause? International politics instead of bad business.

We have two examples in the last week of how stock markets are becoming much trickier to navigate.

Here’s the problem. You can make all the right decisions and a government will come out and change the rules on you.

Look no further than any shareholder in a US refiner. Trump’s sanctions took Iranian oil off the market. Now he wants to slap a 5% tariff on Mexico as well.

That would be a nasty problem for the US refiners that import Mexican oil. It drives up their costs. It also invites Mexico to retaliate.

Where do US refiners send a lot of their product for sale? Mexico! In two sentences, you can see why Trump’s plan is a great way to stuff up a thriving American industry.

China’s refiners will gladly take their market share if possible. Too bad if you’re a shareholder in the affected firms. 

But China is not innocent here, either.

Aussie listed firms associated with the infant formula trade have tanked over the last two days. A2 Milk Company [ASX:A2M] has lost 1$ billion in market cap alone.

What’s going on?

It appears the Chinese government wants to reduce the country’s dependency on foreign imports. Beijing wants domestic firms to supply a greater share of the market.

That’s a worry for the European and Aussie firms trying to compete here. Markets hate uncertainty like this. Hence the stock selloff.

Now’s a good time to look at your portfolio and see where these businesses operate and if they could be in the line of fire. Even great financial results cannot necessarily save you.

Earlier in the year, I made the case for scooping up stock in Chinese behemoth Alibaba when it was around US$140. It coasted to as high as US$190 by May.

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It’s gone back under US$160 on bad sentiment towards all things China alone. Revenue growth in the last quarter results was 50% for a $400 billion stock. That’s huge.  

What to do in this environment? One idea is to look for firms that have national importance in some way. Governments usually signal these, if you pay attention.

Take, for example, the US Department of Commerce. It just released a report urging the federal government to do more to reduce America’s dependence on importing critical minerals.

The department calls it an urgent weakness for the economy and the US military.

Trump’s the kind of cat that will act on this in the name of ‘America First’.

Rare earths are the classic example here. Most of these are produced in China.

There’s always the veiled threat that Beijing will shut off exports. They did it to Japan in 2010.

It’s not unreasonable to expect US government money to flow into projects around this. At least be on the lookout for it. Some of it might show up here in Australia, too.

The Commerce Department specifically mentions Australia as a secure and trusted supplier. I’d suggest keeping an eye out for any explorer digging around for the minerals considered critical.

We got a taste of this effect with the near 50% run in rare earth play Lynas Corporation [ASX:LYC] last month. I’m not saying buy it now. I’m just using it as a point of comparison to Alibaba above.

This trade spat has dragged out for a lot longer than I expected. It’s been over a year now.

Another way to avoid businesses that could be subject to international retaliation is to find stocks only exposed to the domestic market.

While the growth outlook may be smaller, there can be enough runway in Australia to make a cracking gain if you get in early enough. Just look at Afterpay!

Fair warning though: Governments are currently like Godzilla stomping through Tokyo. Nobody knows which part of town gets rattled next.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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