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Bond and stock markets at cross purposes as slowdown nears

Global financial markets have had a lot to cope with this year with Trump and tariffs which all spell slower earnings, but strangely equity prices are trending higher into record levels. Something has to give.

AMP’s Ben Hillier. Illustration: Sturt Krygsman
AMP’s Ben Hillier. Illustration: Sturt Krygsman
The Australian Business Network

The central issue facing investors now is which market has it right, bonds or equities, because they can’t both be right amid unprecedented geopolitical risk and a wild man in the White House.

MST’s Hasan Tevfik notes the forward ASX 200 equities yield is at 3.4 per cent against the 10-year bond yield at 4.25 per cent, which tells you over the next year or two stocks will underperform bonds.

This is in part due to the rally in stocks from the April lows to record highs which now has the market trading on a hefty 18.8 times expected earnings. Depressed earnings haven’t stopped the market rising.

The US already faces a $US1 trillion interest bill bigger than its Medicaid and disability insurance combined and Trump’s budget bill will add another $US2.4 trillion to its debt while slashing welfare recipients by 10.9 million people.

In both Australia and the US earnings will inevitably fall yet the Australian stock market is hovering near record territory having already smashed that boundary in total return terms, which includes dividends.

JPMorgan Chase chief Jamie Dimon Picture: Getty Images
JPMorgan Chase chief Jamie Dimon Picture: Getty Images

Bond yields have until recent days risen steadily as prices fall and smart folk in the US like Ray Dalio and Jamie Dimon are forecasting doom and an imminent collapse in yields.

In Australia, just as in the US, equity markets are happy to suspend disbelief so long as the show continues. If Trump is unpredictable, the bigger fear is what happens if China changes its mind and reverses course? Australian investors who out of justified caution built up cash levels are now looking a touch foolish, but for how long?

Bain Capital clearly is backing its luck with its long awaited Virgin float and will be mightily relieved if it happens.

Soul Patts capital raising mystery

The rally in both Brickworks and Soul Pattinson stocks since the deal to unwind the cross shareholding was unveiled this week showed the naysayers had it right all these years.

But one of the questions raised is just why the Millner family saw the need to raise $550m in capital ahead of a deal at zero discount to the Soul Pattinson price at the time of $36.93.

Surely a capital raise at a premium could be justified.

Full marks to Aitken Mount to get the deal which with the benefit of hindsight admittedly was a walk in the park.

The explanation is the deal will trigger a $1.25bn tax bill and better to get some funds in the door today.

How to keep a part-pension in retirement

Amid all the focus on the Government’s breathtakingly dumb new tax on superannuation accounts above $3m, most of us are trying to work out the best way to stay financially viable when we retire, due in some part to not knowing how long we will live for.

AMP super guru Ben Hillier has designed a product which he figures provides a lifetime pension which also cuts your assessable assets to open the door to at the very least the perks available from owning a pension card.

The AMP super lifetime product is one of the first in the market providing annuity income streams, taking advantage of Government changes to asset valuations opening access to Government superannuation and allocated pensions.

The final product won’t be unveiled until next year, but this month’s release reveals AMP’s aim to also use it to ensure customers stay with it longer.

Liberals ‘can’t stop’ Labor from taxing superannuation balances

The example floated is someone aged 30 with a super balance of $50,000 and $75,000 in annual income who on retirement has a balance of $476,000.

By splitting that sum into the lifetime pension and an allocated pension account, the investor limits the assessed assets controlled to those invested in the pension account of $238,000.

The discount applied and assessed when the investment started (30 years ago) means deemed asset base is just $21,000 which depending on your other assets, opens the chance Centrelink will also pay you a part pension.

This means the investor will earn $56,000 a year on the allocated pension and $9,000 a year when and if this runs out.

It’s a market linked product so actual earnings will fluctuate depending on market returns but the lifetime pension earnings will be at the Government deemed rate of just 2.75 per cent which is hopefully well below actual market earnings from the allocated pension account.

The annuity-like product is open to new customers but the discounted asset values are bigger the longer you have invested with AMP.

Cost of ACCC merger scrutiny

Each year the ACCC investigates around 10 mergers via in depth reviews, called stage 2 reviews, which under the new regime will according to figures released this week now cost companies an extra $952,000 on top of the $56,800 for all merger reviews.

Then there are FIRB fees which are based on deal size and of course legal and investment banking fees when deals are actually done.

Low thresholds mean virtually all deals will be subject to review and as court appeals are more limited ironically, the ACCC has effectively eliminated its competition in the new regime.

GFG Alliance executive chairman Sanjeev Gupta Picture: Tait Schmaal
GFG Alliance executive chairman Sanjeev Gupta Picture: Tait Schmaal

Sanjeev Gupta’s Infrabuild complaint fizzles

The doubling of US steel tariffs threaten a flood of imports into Australia, except the crumbling empire of Sanjeev Gupta may just have outsmarted itself.

Case in point, hot rolled debar and rebar used in concrete for construction supplied by Infrabuild. Prices were raised to build Gupta’s cash reserves.

Trouble is, high domestic prices give exporters a fair leeway on what they can charge.

Initial results were in last week on a dumping complaint lodged last year against Indonesia, Malaysia, Thailand, Turkey and Vietnam.

Often when dumping cases are lodged, trade is effectively frozen and the exporter dutifully follows the process imposed but in this case, the exporters figured given the domestic prices in Australia were so high the dumping claims were a stretch.

Last week the Anti-Dumping Commission (ADC) released an export verification report for Indonesian-based Putra Baja Deli which found a margin of just 1.3 per cent which is officially de minimis, effectively negating the case.

To win a dumping claim you need to prove the export price was below the normal value in Indonesia and caused injury to the local industry.

Trump tariffs a ‘cruel blow’ to Australia’s steel and aluminium industry

Another 11 exporters from the region have sought export verification reports which if they mirror the Indonesian finding will not be good for this Infrabuild complaint.

It may well serve as a dampener to expectations of a rush of further claims.

Separately, the ADC is investigating claims by Martogg Group offshoot LCM General Products that Malaysian exporters are using different colour film to sidestep a successful claim against black plastic film used as concrete underlay.

The original claim was against black plastic but this has been extended to grey plastic with the argument the change in colour was designed to sidestep import duties.

One exporter, GT Max, opposed the claim noting the plastic film came in a variety of colours including blue, orange and white and used for different purposes including general farming, aquaculture and packaging, all with different pricing.

That different colours reflect different customer uses is rejected by LCM, arguing the grey plastic sold under Australian standard AS 2870 only appeared after the original dumping decision.

The Malaysian firm also noted since the original dumping decision on black builders film in 2021 other companies throughout South East Asia have exported the product to Australia and Malaysia product market share into Australia has fallen year on year.

Anti-circumvention orders are imposed if the imports are near substitutes for the product which was originally found to be dumped.

They seem to be more popular since last year’s controversial decision to investigate steel mesh for concrete as a claimed proxy for wire rod based on another Infrabuild case.

John Durie
John DurieColumnist

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Original URL: https://www.theaustralian.com.au/business/bond-and-stock-markets-at-cross-purposes-as-slowdown-nears/news-story/c4bb81661c67813378655e5eca9f24a2