Generate's Investment Specialist Greg Smith joined Mike Hosking on ZB this morning to discuss the market’s reaction to Donald Trump’s threats of additional tariffs on China after it imposed export controls on rare earths, and how things may unfold from here. Back home he looks at the state of the kiwi manufacturing sector, and the implications of the government potentially selling hundreds of millions of dollars’ worth of securities it holds in telecoms infrastructure company Chorus, which it invested in as part of the rollout of ultra-fast broadband.
Listen here or read the transcript below:
From Generate Monday morning Greg Smith, how are you?
Morning to you Mike. Well, thank you.
They didn't like what Trump said about rare earths in China or didn't like what China did with rare earths. So sort of all on again?
Markets didn't like it at all. So yeah, we have seen similar barbs leading up to previous negotiations, so we have to see whether that's all something similar. But yeah, so he's threatened tariffs of an additional 100% over what China currently pays. And that's in response to new export controls that China's introduced on rare earths. He's also threatened further stuff on critical software as well. And said he might cancel the meeting with this counterpart Xi, which is due to take place for the summit in a couple of weeks’ time.
So he said they've had a very good relationship over the past six months. You could say that's probably debatable and that China has suddenly become hostile. But we did have that progress on TikTok. But yeah, it's all around rare earths. Real bargaining chip for China. They control around about 70% of the global supply of the stuff, it's used in high tech, which is obviously very important.
And they've also as part of these controls said that foreign entities must obtain a licence to get things that contain more than .1% of rare earths into the country or use their IP. So they said they're not afraid of a trade war. Chinese officials they said that this is all pretty normal and that applications will be considered as long as it doesn’t involve the military.
Also made the point in terms of the double standards that the US has an export control list as well that covers more than 3000 items and it's more than three times what's on China's list. So by the by, they also said they're start going to start charging US ships for docking. That might seem a bit harsh, but Washington's already done the same thing. So tit for tat there. So, you know, the current tariff truce Mike that expires on November 9. So I think we'll see lots of jostling for position before then.
OK. So we got the PMI manufacturing, we're back below 50.
Yes, we're still in the doldrums. This is the BNZ business New Zealand Performance and Manufacturing Index. So we went back into contraction in August. We've stayed there in September at 49.9.
So under the breakeven 50 mark, just struggling to get momentum it would seem. You look at the quarterly average for September, only marginally higher than June, most sub indices were mixed, production that actually did bounce, but new orders that fell. BNZ they made the point that there is some cause for optimism. We obviously had the QSBO last week and 31% of manufacturers reported lower output in the last three months, but 44% expected to improve in the next three months.
So we clearly have a gap Mike between, you know what firms are seeing in the past and their expectations of the future. They're getting a bit more optimistic. Is that justified? Obviously we would particularly like to see some optimism in the in the jobs market. The employment index for the PMI that fell to 47 1/2. So hiring intentions still seem quite weak. But you know, we did get a half percent right cut last week, didn't we? So yeah, maybe we get optimism build a bit more. It'll be interesting to see what this looks like next month and also obviously with another potential quarter point cut coming in November as well.
All right, and what do we make of Chorus?
So, yeah, it's interesting. So obviously the government have said that they're looking it considering the sale of the securities they hold in Chorus rather than letting them mature I think sort of five to 10 years. Chorus itself isn't too bothered that the shares would just a touch softer. This is part of the 1.1 billion funding mechanism for the ultra-fast broadband. Government says this is over, there's no need to hold the shares. Also I guess there’s the point that will free up around about $640 million, which is the book value of the of the debt.
So it's going to free up money, I guess the projects to talk about in budget 2026, things like hospitals, schools and roads. And we've talked about this before, haven't we? So the government had seen no asset sales during this term, but this is sort of going ghat way. So the question is whether this is the starting point. We've got an infrastructure deficit of $200 billion by 2028 net crown debt, that's going to be 45% of GDP. That's $40,000 per person.
They've already said last week the 51% stakes in electricity companies are off the table, but plenty of other things they could sell Mike. You got the former Land Corp $2 billion farming portfolio, you got NZ Post, you've got QV. Then there's Transpower and that stake in Air New Zealand, isn't there? 52%. And what about Kiwi Bank? So yeah, it could be an interesting discussion on this in the run up to election.
As for Chorus, there should be pretty strong demand you would think maybe particularly from Aussie super funds. So Uni super, that's a big one. They own 13.5 percent of Chorus shares at the moment, so they could be interested. But yeah, Chorus they don't seem to fazed by it.
Good stuff. Numbers please.
The Dow was lowest, down 1.9 percent, 45479. S&P 500 down 2.7 percent, 6552. And Nasdaq down 3.6 percent, 22204. So this is all in reaction to Trump's comments. Footsie 100 that was down .9 percent, 9427. Nikkei down one percent, 48088. ASX200, down .1%. NZX 50, we were down .8 percent, 13467.
Gold up around record highs up $40, 4018 an ounce. and oil down to $2.62, 58.90. In the currencies, we were lower against the US 57.2. Against the Australian dollar, we actually perked up a bit up almost 1% at 88.4. British pound 42.9 that was lower. Lower by 1.6% against the Yen 86.5.
This week, bit going on, we've got the services data today. We've got card spending, food inflation, AGMs Wrightsons and Genesis. Offshore we've got China trade data, a bit of inflation, RBA minutes and more. We get a bunch of data of the US? We’re due to have retail sales, housing and in the like. And that the obviously the shutdown still going. So we'll see about that. But we will be getting quarterly earnings Mike lots coming, lots of big banks. We've got Johnson & Johnson, Taiwan Semiconductor, and American Express.
Go well, Greg Smith out of Generate Wealth and KiwiSaver specialists.