Growth rockets for WA business owners

What is the global macro signalling for West Australian export-oriented businesses?

Global macro trends have a strong influence on Australia's economic landscape. As you know I’ve been warning about demand/price declines in many of your favourite Western Australian bulk, base and battery minerals, and their knock-on effects to our mining, exploration and mining support industries.

These factors have now come home to roost, including my predictions relating to nickel, lithium, iron ore and state royalty income projections—with plenty of evidence like BHP and Mineral Resources announcing mine/smelter closure as well as 40% - 50% profit decreases. FMG has pushed out its transition plans, and we’ve seen a flotilla of negative closure and failed financing announcements by other industry players.

But to anticipate what lies ahead and avoid more closures and collapses, it’s important to examine key international drivers that will shape the country's future. And the main factors that are now impacting on the WA economy include: recent developments at Jackson Hole; global liquidity conditions; movements in the dollar/yen; China’s increasing property crisis and dissention; and the cyclical nature of inflation.

Having now recovered from a nasty virus (apologies for being offline last week) I thought I’d share my views on these factors and some of the ‘solves’ our exporters might like to think about.

What Really Happened at Jackson Hole?

At the Jackson Hole economic symposium, U.S. Federal Reserve (Fed) Chair Powell hinted the Fed (via its open market committee, FOMC) might soon shift to cutting interest rates, signalling the return of what some call the "Powell Put." While Powell gave no guidance on the extent and timing of cuts, Philly Fed Chief Patrick Harker said it would be slow and methodical.

So as long as the economy does not implode (and there are zero signs of that happening) this is probably not going to result in the aggressive 300–400 basis point cuts that some have been predicting for months. For that to happen would require another COVID or GFC. And despite the market fading the hawk (not believing the restrictive bias of the Fed) a more measured reduction in rates seems likely, so I’m assuming 25 basis points on 18 September.

If it plays out this way, the yield curve will steepen gradually, over the long term (short term rates come down, long term rates go up) which is probably not good for equities—leading to a slow grind to the right, and in time, down. On the other hand, the key saviour for equities would be the introduction of new liquidity into markets. So, if on 18 September we get a rate cut and the Fed announces an end to QT (i.e., an end to quantitative tightening which would effectively increase liquidity in markets) that could put a rocket under markets. The jury’s out.

Global Liquidity

The lifeblood of financial markets—global liquidity—has a more profound effect on risk assets than interest rates alone as alluded to above. Rising liquidity, driven by central bank policies (and Treasury spending) is the tide that tends to lift all boats, while a reduction can cause all boats to run aground.

Watch for increases in the U.S. money supply (M2) and central bank balance sheets (a pause in, or reversal of QT). Global liquidity has started to break out (to the upside) as has central bank liquidity. Bitcoin often acts as an early indicator of these liquidity changes and all other things being equal it might provide a clue.

When liquidity flows, risk assets benefit, but when it dries up, markets can stagnate. So, the key event on the horizon is the 18 September FOMC meeting and not necessarily because of the anticipated rate cut, but if the Fed surprises markets by announcing a stop to QT.

Dollar/Yen and Japan’s influence

Japan's significant role in global bond markets, particularly in U.S. Treasuries means that its monetary policies can ripple through other economies. As Japan attempts to move away from its deflationary struggles with rate adjustments and its Yield Curve Control (YCC) policy, it is unwinding positions in U.S. assets—which impacts treasury prices and global liquidity.

If Japan’s banks continue to move capital back home due to rising domestic yields (and the Fed cuts interest rates exacerbating the gains to be had by unwinding carries) this could create further volatility in bond and equity markets, including in Australia—making loan capital less available and more expensive.

Inflation comes in waves

Inflation tends to occur in waves, driven both by base effects and the gradual impact on different sectors. Initially, inflation affects goods, then services, and finally housing and rents. As liquidity conditions ease and employment rises, aggregate demand can increase, leading to renewed inflationary pressures.

U.S. hedge funds that I follow, and research firms anticipate this cycle could unfold in the first half of next year. If this prediction holds, the expectation of future rate cuts might diminish, potentially capping gains from holding Treasuries and bonds. A six to nine-month period might favour short-term Treasuries, but inflation could resurge, leading the Fed to pause rate cuts to manage inflationary pressures effectively. In turn that could cause renewed strength in the dollar—which is bearish for commodities and the long-imagined green transition minerals super cycle.

Just to be clear—renewed inflation could put upwards pressure on U.S. interest rates and the dollar, which would be negative for commodity prices—and that would be negative for project financings, and West Australian exporters in general (given they would receive less AUDs for each USD of export income).

China property crisis and dissention influence

China's property crisis has fuelled a significant rise in dissent, with CDM (China Dissent Monitor) documenting an 18% increase in protests in the second quarter of 2024, compared to the same period in 2023. Notably, 44% of all dissent cases were linked to the struggling property sector, particularly involving homeowners and construction workers. This is a showcase for the severe impact that real estate collapses are having on livelihoods.

Despite government efforts to stabilise the sector, unrest remains widespread. There’s some very recent evidence of yield curve control (YCC) as the People’s Bank of China (PBOC) looks for ways to snap the dragon out of this malaise. And it’s important, because without broad-based stimulus there is little chance of increased demand for Australian products and services, which in turn puts downward pressure on the AUD.

What does this mean for West Australian businesses?

For Australia, the scenario of (a) a weaker USD over the next six to nine months, followed by (b) a stronger USD, could present a mixed environment. Initially, a weaker USD may provide some relief, supporting higher commodity prices and exports. But, as inflation resurges in the U.S. and Treasury liquidity is tightened, global liquidity conditions could become constrained, negatively impacting risk assets, including Australian equities, and commodities.

Despite a supportive USD in the short-term, we must also look at other drivers of demand for WA. Primarily, with China continuing to struggle with low consumption and weak aggregate demand, the demand for Australian commodities like iron ore and coal might remain subdued in the short term, or possibly longer.

This would weigh heavily on Australia's export revenues – and thus iron ore, base metal and lithium royalties to the WA state government. In turn, that would mean lower government expenditure and materially less liquidity sloshing around in WA. Less government spending means less state demand/consumption. A stronger USD later in the cycle would further dampen Australia's economic prospects by making its exports relatively more expensive and tightening financial conditions as capital flows back to the U.S.

Ultimately, Australia could face a challenging combination of low demand for its exports (higher USD, plus China effect), tighter financial conditions as a result of further dollar/yen unwind) and an unfavourable global liquidity environment (liquidity may not happen as fast as what’s priced into markets)—putting pressure on growth and unemployment.

How to fly your Rocketship above the coming tsunamis

To navigate this challenging global environment, West Australian businesses need to acknowledge the macro backdrop and get serious about recalibrating business strategy. In my opinion, WA exporters and every industry that supports them, should focus on one or more of the following:

Diversify export markets: Reducing reliance on China by expanding into other high-growth regions like Southeast Asia, India, and the Middle East will help stabilise revenues and mitigate the impact of a sluggish Chinese economy. However, the strategy must also deal with a return of China demand—in other words, how can resurging China demand be delivered into, after diversifying away?
Enhance operational efficiency: In the face of rising costs and lower demand for commodities, companies should adopt cost-saving technologies, automation, and digital transformation to improve productivity and streamline operations.
Pursue M&A opportunities: Strategic mergers and acquisitions can enable businesses to diversify markets, acquire new technologies, re-regionalise, improve/aggregate access to cheaper energy, and gain operational efficiencies. This approach not only reduces exposure to one market, but also accelerates innovation and sustainability efforts.
Build strategic partnerships: Collaborating with international players can open up new markets and technologies as well as aligned supply chains, helping businesses reduce risk and capitalise on growth opportunities, globally.
Exploit alternative forms of financing: In addition to traditional funding methods, exploring alternative financing options like venture capital, private equity, or green bonds can provide companies with the necessary capital to invest in new opportunities, innovation, and sustainability efforts.
Embrace innovation and sustainability: By investing in sustainable practices and innovative technologies, companies can align with global trends toward environmental responsibility, improving their competitive edge and long-term viability.

Recalibrate now—don’t delay your corporate development moves

The impending global macroeconomic landscape over the next 12 months presents both challenges and opportunities for West Australian businesses, particularly those reliant on exports. With demand for key minerals like lithium, nickel, and iron ore softening, and global headwinds such as inflation, currency volatility, and China’s property crisis and dissension intensifying, the road ahead will be bumpy to say the least.

Those who adapt quickly and decisively will stand the best chance of thriving, even in these unpredictable times. But delaying action could result in missed opportunities and further strain on an already pressured economic landscape.

By acting swiftly and focussing on growth—whether it’s diversifying export markets, enhancing operational efficiency, or pursuing partnerships or M&A opportunities; and surrounding yourself with advisors that understand the macro forces impacting on your business—you can position your business to weather the coming storm.

Feel free to reach out if you would like to discuss how NextLevelCorporate Advisory can help you design and fly your personal business growth Rocketship above all the noise—with our fully customised Next Level Corporate Development solutions.

See you in the market,

Mike

Michael GanonSeptember 1, 2024#money, #management, #markets, #investing, #technology, #india, #future, #finance, #executivesandmanagement, #businessintelligence, #fundraising. #strategy, #managementconsulting, #business, #wealthmanagement, #sustainability, #venturecapital, #investmentbanking, #entrepreneurship, #economy, #gold, #silver, #bitcoin, #corporatedev #corporatedevelopment #miningandconstruction, #strategy, #commodities, #corporatefinance, #equities, #stocks, #bonds, #economics, #macroeconomics, #ethereum, #inflation, #qeinfinity, #interestrates, #trade, #transformation, #ceos, #directors, #founders, #cfos, #currencies, #construction, #mining, #renewables, #leadership, #china, #australia, #education, #research, #businessowners, #brexit, #community, #covid, #populism, #crypto, #successionplanning, #familyoffices, #uranium, #copper, #nickel, #Fed, #federalreserve, #monetarypolicy, #centralbanks, #marketoutlook, #financialmarkets, #stockmarket, #valuation, #SP500, #realestate, #foreignexchange, #humanresources, #productivity, #continuingeducation, #financialanalysis, #CPA, #CFP, #CFA