Is Australia heading for a recession?

1. Are we heading for a recession?

2. Rio Tinto's bets the business

3. Rental car companies reject EVs

4. The CFMEU is rotten

THIS WEEK'S BIG STORY

ASX hits a new high of more than 8,000 points

Mostly it is about interest rates, or interest rate expectations. The run late last year and early this year reflects the ending, or at least slowing, of interest rate hikes in Australia and the US. More recently, the rise in the bourse reflects expectations of interest rate cuts. The rally has been driven by the macro-environment, much more than the fundamentals of specific stocks. That makes the upcoming earnings season very important because it will force investors to look closely at individual companies, and whether prices justify earnings outllooks.  

What happened?

The S&P/ASX200 hit a record of 8037.3 points on Monday morning and ended the session at a new closing high of 8017.6 points. It has taken three years for the bourse to move from 7,000 points to 8,000 points. The rise in the last nine months has been even more impressive. The ASX tumbled to a low in October 2023, but since then is up 18 per cent. The local market isn't alone with Wall Street, the Japanese market and the STOXX Europe 600 trading around record levels.  

Why has it hit a new peak?

The optimists say the local market should be dragged higher alongside Wall Street, which in turn reflects lower US interest rates. Others argue that the ASX is relatively unloved compared to bigger bourses, and as people get sick of US tech, they will look for opportunities outside Wall Street and that might help the ASX. The sceptics say interest rates remain high and the economy is in for a sharp slowdown, possibly a recession. That will hurt earnings and share prices. There's also geopolitical risk and US election risk. And some of the market leaders, notably Commonwealth Bank, are looking overpriced. I'm coming down on the side of the sceptics.

Best performers

Wall Street has the Magnificent 7 tech stocks. Australia has the big four banks. Financials make up more than 30 per cent of the local S&P/ASX200 index so if the banks do well, the index does well. Commonwealth Bank is trading around record levels. NAB is at a 17 year high while ANZ and Westpac are at multi-year highs. It is the banks that hav driven the index north. It would have been even higher but for the relatively poor performance of the big three miners, BHP, Fortescue and Rio Tinto. The tech sector was the best performer of the ASX's sub-indices over the period, but it only accounts for around three per cent of the index.

What next?

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Local markets surged to a record high early this week, with the S&P/ASX200 pushing beyond 8000 points. It reflects expectations of interest rate cuts in the US, and an incredible rally by the big four banks. We ask Matthew Kidman, Principal at Centennial Asset Management why the market has rallied so much, and whether it can continue.

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Thanks for reading my opinions on the week's biggest stories.

- Sean Aylmer

Are we heading for a recession in Australia. It is probably an even chance right now. Whether or not interest rates rise again will depend on the consumer price index, due for release on 31 July. If the June quarterly reading supports the monthly data (which is based on a smaller sample of goods and services) and inflation is gathering pace, then the Reserve Bank will move on rates. It won't have much choice. I'm sure Governor Michelle Bullock and friends are hoping that doesn't happen. Other major economies have either cut rates (Euro zone, Canada) or are looking at doing so (US). In the US, Federal Reserve chair Jerome Powell is now warning of keeping interest rates too high for too long. Raising rates puts Australia out of step with the global economy, and adds to the chance of a recession in the latter half of this year. Already households have pulled back spending, sending the economy into a per capita recession. Without recent strong migration levels, we would be in a recession. The official growth rate for the last financial year was just over one per cent. Even without another rate rise, a recession, albeit mild, looks likely given the recent retail trade readings. The unknown in all this is what people do with their Stage 3 tax cuts, but another rate rise might be enough to tip the economy into recession.

Rio Tinto this week got final approval to develop a massive iron ore project in Guinea. The mining giant is part of a consortium, along with Chinese state owned companies and the Guinean government, that owns two of the four blocks in the reserve which geologists reckon contains two billion tonnes of high grade ore. Australia and Brazil are the dominant iron ore countries, but this mine has the potential to change the economics of the industry. It is a massive, high risk undertaking. Finding the ore and extracting it, is only part of the deal. The Rio consortium will also help build 600 kilometres of rail infrastructure, from one end of the country to another, and port facilities. There is plenty of sovereign risk involved. Guinea has a history of military coups and is a very low income country. Rio, which needs to find new mines in coming years to replace its current slate of operations, will spend tens of billions on the project. High risk, high reward. It is the sort of deal that makes, or breaks, a company.

It's been quite the week for Donald Trump. He survived an assassination attempt and in doing so, created the most iconic picture of the year - fist pumped, bloodied, daring to be stopped. Mr Trump then attended the Republican National Convention and was formally anointed the GOP nominee for the November election. He announced JD Vance, a first time Senator from Ohio, and former author, lawyer, tech venture capitalist and anti-Trumpian, as his running mate. Vance's book Hillbilly Elegy is the best book I've read explaining the malaise of low income, mostly white America. He has gone from writing a book about his very poor upbringing, to calling Trump "cultural heroin", to potential vice-president. Vance says he has changed his mind about Donald Trump (and thereby won his support, putting him in Congress). He is, conveniently, ignoring the fact that Trump policies like hiking tariffs and giving corporate tax cuts will work against the people he wrote about. Vance could be a heartbeat away from being President. He doesn't give Trump much in the way of attracting new supporters - he is too much of a clone. But he is a millennial, only 39 years old. This is Trump's last election, and one he is likely to win. The former President has appointed someone that can carry the Make America Great Again mantle.

The CFMEU must be deregistered. Nine media this week revealed corrupt practices, from criminal infiltration to threatening and bullying behaviour from union leaders, through to allegations of cash payments to senior CFMEU members. The national secretary, Zach Smith, said he'd lead the clean-up of the Victorian branch (which is now in Administration) and has backed the NSW boss who was caught, on camera, receiving cash. ACTU boss Sally McManus says all union officials facing credible allegations of corruption should step aside. The NSW Minns government

has suspended the CFMEU affiliation with the Labor Party. Now the federal government is preparing to appoint an independent administrator to the union. Clearly, the CFMEU is rotten, which is a disservice to the 115,000 members who pay their dues each month. Those union members in the building, construction, shipping, diving, timber, pulp and paper, textile, clothing and footwear industries deserve better representation. De-register the CFMEU and start again.

Rental companies are the biggest buyers of new vehicles, and last year in Australia, Toyota and MG topped the list of cars sold to hire fleets. Overseas the trend was towards electric vehicles, but according to a report in the New York Times, there's a bunch of things working against EVs. First, most rental car complexes at airports lack charging facilities. Second, many renters are unprepared for how quickly EVs accelerate. It's resulted in a spike in accidents. Third, related to the second point, insurance premiums have risen making EV rentals more expensive. Fourth, spare parts for EVs - think tyres - are harder to get than conventional cars. So far this year, just 1.4 per cent of cars sold to rental companies in the US are EVs, way below last year's levels. Hertz has pulled back from an order for 100,000 Tesla's, also dissuaded by tumbling resale values. It's another reason why hybrids, not EVs, are the vehicles of the next decade.

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