By Warren Buys.
A recent article caught my eye, explaining that Australia is considering building its first new oil refinery in more than 60 years, as the war in the Middle East squeezes supplies.
Like a lot of countries, Australia depends on imports for about 80% of its fuel needs and has been racing to secure supplies since the US attacked Iran. The government and Western Australia will jointly spend A$4m (R46.4m) on a feasibility study for the project.
This is symptomatic of the current age of geo-politics we are experiencing and one of the first examples we are starting to see of a longer-term trend of the world moving into a more multi polar world.
The trump administrations have accelerated a trend of countries looking after themselves, and is one of the major implications of the prioritisation of securing strategic assets and reserves which is leading to the duplication of supply chains.
This duplication of supply chains will increase the demand for commodities. In a market where there has been large underinvestment in supply, we believe this will create a positive environment for commodity prices, and investors with exposure to commodity producing emerging markets and resource shares will benefit.
In financial markets we see other early signs of a similar trend – the move away from the dominance of US assets being expressed.
Commentary from the Financial Times Global Bond Summit last month noted that in a recent EU bond issuance, 28% of the issuance was taken up by Asian investors. These investors usually take up on average around 8% of an issuance like this. Another long term EU bond issuance saw Middle Eastern participants take up 18% of the issuance (usually 2%).
These type of investors would usually be buying US treasuries, so if this is a start of a longer term trend it has negative implications for the US dollar and their bond market. The US relies heavily on foreign investors to buy their bonds which in turn helps finance their current account deficit – essentially their imports.
Another interesting observation from the FT Global Bond Summit is that many participants believe that US inflation will find an equilibrium level at 3%. This is 50% higher than the long term accepted 2% normalised inflation. ‘3 is the new 2’ seems to be the new mantra. This is a big shift in thinking and is likely to imply higher interest rates for longer.
There is a fine balancing act going on right now with stock markets mostly ignoring the spectre of rising interest rates and rather choosing to focus on the extremely strong earnings growth coming out of the US corporate sector. This has largely been driven by the AI tech related build out, which is broadening into more sectors of the US economy.
We will be watching decisions from the new Federal Reserve (Fed) chairman Keven Warsh very closely. As always the US interest rate direction and level is the key element leading global markets. I think we are in an appropriate situation to remember a favourite financial market adage: “Bull markets do not die of old age, they are murdered by the Fed”. This implies that the one thing that can bring the party to an end is US interest rates moving up strongly.
Warren Buys is Senior wealth manager and investment committee member at Private Client Holdings.