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27 November 2017 

Last week in the markets

Over the past week Australian shares were up 0.4% while small company shares rose 0.6%. Shares in developed countries also rose 1.3% with the US market up 0.9%. Shares in emerging markets were up 1.6%. The Australian dollar rose 0.7% to 76.17 US cents. The Australian 10 year bond yield fell to 2.50%, while the US 10 year bond yield ended the week unchanged at 2.34%. The oil price rose 4.2% to 58.95 US dollars per barrel.

Mine, oars and trains

BREXIT, the Trans Pacific Partnership (TPP)1 and China’s actions in the South China Sea are all examples of events that impact the future of international trade. But why are these so important?

Let’s consider a well-known fictional island2 that is highly reliant on artificially intelligent (AI) rail for domestic transport. If the island is remote, surrounded by treacherous waters and perhaps hostile neighbours then this economy will likely be without international trade; what economists like to call an ‘autarky’. 

Without trade the island’s economy is unable to make the most of its competitive advantage. The island can’t capitalise on its natural resources, farming, agriculture, or clever new technologies (like AI), nor can it develop new products using inputs like timber from other countries. These exports and innovations could contribute to economic growth. Without trade consumers can’t benefit from more competitive prices and many enjoyable products from abroad such as cocoa or hops. 

If instead the island had friendly neighbours and was linked via a rail bridge to nearby England, then goods could be moved on and off the island. Better still, if the island’s government developed a safe port, producers could directly export to foreign markets through marine shipping – and the economy might benefit from a few rail-buff tourists too. The strong timber found on the neighbouring Misty Islands could be imported to improve rail infrastructure, develop low-cost housing, and establish a boat building and shipwright industry. Trade, infrastructure and innovation would all contribute towards the island’s economic growth and prosperity.

There have been many international developments involving trade recently. The heavy trade sanctions on North Korea prove that a dictator doesn’t need an island to have an autarky. The BREXIT negotiations show how vital trade is for economic growth and the importance of politics. The Chinese militarisation of the tiny islands in the South China Sea and the freedom-of-navigation missions of US and British warships demonstrate how vital shipping lanes are; even for countries on the other side of the world. The difficulties in salvaging the TPP show how complex free-trade negotiations are, particularly when governments change. Amazon, Netflix, Google and Uber show that the digital disruption of local and international product distribution impacts on a country’s tax-revenue and the long-term prospects of local companies both large and small.

At Mine we monitor the geopolitical and macro risks to international trade and ‘adjust our sails’ based on the long-term impacts of free-trade decisions.

Signing off

Sean Anthonisz | Senior Quantitative Analyst – Asset Allocation

1A trade agreement historically between a number of countries touching the Pacific Ocean including USA, Canada, Australia, and some South American and Asian nations.
2Of course we are talking of Sodor Island from Thomas and Friends!

Past performance isn't necessarily an indicator of future performance. All data sourced from Bloomberg.