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Note from the editor - 18 January

Glenn Freeman  |  18 Jan 2020Text size  Decrease  Increase  |  
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Wednesday’s détente in US-China trade hostilities is arguably the biggest business breakthrough of the past 18 months.

More a truce than a resolution, the “phase one” deal nonetheless marks an end to escalating tariffs – for now. And as Morningstar's Peter Warnes says, "it's probably as good as it's going to get on the trade front in 2020". Many of the more difficult topics, such as China's market-warping subsidies of its state-owned enterprises, remain in the too-hard basket and won't be addressed until after the US presidential elections in November.

But investors certainly welcomed it. The S&P/ASX 200 this week blew past its previous record and topped 7,000 points. Its 5.4 per cent gain for the year is the highest of all developed markets but the question remains: do Australian company fundamentals support the frothiness?

Earlier this week, I revisited how some of the most China-exposed large Aussie companies have fared since the height of the trade war – including milk and infant formula company A2 Milk, premium wine distributor Treasury Wine Estates and vitamin maker Blackmores.

The week also saw some encouraging news on the environmental front. Rain fell across some fire- and drought-affected parts of Australia, and global fund manager BlackRock made the bombshell decision to step away from coal assets.

The dumping of thermal coal companies by ETF giant BlackRock sends a particularly clear message. Morningstar's head of sustainability research Jon Hale summed it up neatly in his analysis of the move by BlackRock CEO Larry Fink: "The world’s largest asset manager just became the world’s largest sustainable investor".

The move sends a powerful message that may encourage similar moves among BlackRock's contemporaries – but it remains to be seen just how much of an effect it will have. The market didn't move much after Fink announced coal was being dropped from the company's US$1.8 trillion active funds management business.

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The carve-out of BlackRock's US$5 trillion passive exchange-traded and index funds also means some of the largest diversified miners including Glencore, BHP and Anglo American are still investable.

We touched on how environmental, social and governance principles are becoming increasingly mainstream and almost compulsory for modern companies. Articles on ESG this week included:

We also learned this week that Australians are among the most pessimistic on the economic outlook for 2020, compounded by more bad news from the retail sector with the shuttering of Jeanswest. The almost 50-year-old apparel company this week entered voluntary administration amid mounting costs and intensifying competition from online retailers.

Solomon Lew's Super Retail Group, which operates direct competitor Just Jeans and several other brands, has held up better despite structural challenges hitting the sector. But it’s still 27 per cent overvalued, according to Morningstar analyst Johannes Faul, who expects fierce competition to shrink its already slim margins.

E-commerce is also eating away at grocery retailers. The best days of Australian supermarket duopoly Coles and Woolworths are behind them, Faul reckons.

These glory days could soon fade further into the distance, as Amazon Fresh in the US recently surpassed a key inflection point, according to Morningstar's R.J. Hottovy.

The removal late last year of a US$15 monthly service fee and introduction of one- and two-hour delivery windows strengthen his conviction that Amazon is the top e-commerce pick of 2020.

Warm regards,


Glenn Freeman

Senior editor, Morningstar Australia

is senior editor for Morningstar Australia

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