Attention turns to US-China relations as tension soars



In what was otherwise a quiet week for economic news, the development that China is seeking to impose new national security legislation on Hong Kong could weigh on markets and dampen sentiment this week.


The relationship between China and the US has already been strained in recent weeks amid concerns surrounding COVID-19 and trade, meaning this could prove a flashpoint. The US has signalled it will react “very strongly” if the law is pushed through, while other countries have criticised China’s move.


Looking to the economic calendar, new home sales will outline the state of the US housing market. More importantly, durable goods orders could sway the S&P 500 if indicating the likes of Northrop Grumman (NOC), Boeing (BA), Ford (F) and General Motors (GM) were hit hard. We expect personal income and spending data to reach new all-time lows, which may weigh on discretionary retailers.


Three high-profile stocks that will report in the week ahead include Salesforce (CRM), Dell (DELL) and Costco (COST).


Meanwhile, Alibaba (BABA) wrapped up last week by reporting earnings and revenue that beat expectations. Pleasingly, retail volume growth in China is back near pre-COVID levels. The company also indicated April gross merchandise volume has shown growth consistent with the December quarter, but trade tension pushed the stock lower by 5.9%.


Global Growth Portfolio

We added several positions to the portfolio last week, favouring technology-oriented and defensive stocks.


Providing us with tech exposure, we entered Facebook (FB), Baidu (BIDU), and Intuitive Surgical (ISRG). We also added more shares in Amazon (AMZN) and Mastercard (MA).

In our view, Facebook’s rebounding advertising momentum bodes well, while demand for Amazon services has remained resilient and should continue to benefit.


Elsewhere, Mastercard is leveraged to the trend of growing digital payments, and Baidu, as one of the world’s largest AI and internet companies, has a commanding position in the Chinese market much like Google. We believe Intuitive Surgical, a leading seller of surgical robots, is poised to rebound strongly as delayed elective surgeries resume.


Offering defensive exposure, we added to our holdings in Costco and took up new positions in 3M (MMM), Procter & Gamble (PG) and Berkshire Hathaway (BRK B).


Costco shares have held up well due to its resilient operations and perpetual demand for its products. Similarly, P&G has benefitted from these strengths, reporting sales in line with estimates and better-than-expected earnings. P&G’s strong cash flow and improving gross margins allowed it to raise its dividend for the 64th consecutive year.


3M also reported well recently. We believe the demand for its personal safety products is unlikely to slow amid COVID-19, which will underpin robust sales and earnings visibility.

Finally, Berkshire Hathaway is trading near its recent lows and below 1.2x book value. While Buffett has been stockpiling cash, he has been buying Berkshire shares as much as any other stock, which we believe suggests strong value.

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Castlereagh Financial Group Pty Ltd ABN 76 604 407 516 Trading as Kauri Asset Management is a Corporate Authorised Representative (No. 1275519) of AFSL Holdings Australia (AFS License No. 460 940). Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situation or needs except in circumstances where you have provided your personal financial details via our online application process and received a Statement of Advice from us. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us. © 2020 Kauri Asset Management