Will “AUKUS” be Awkward for Australian Equity Markets?
– Banyan Tree Research
In the past week, Australian Prime Minister Scott Morrison, U.K Prime Minister Boris Johnson, and U.S President Biden announced “AUKUS”, a trilateral security partnership between Australia, U.K and U.S. In his media statement dated 16 September 2021, PM Scott Morrison stated “We will foster deeper integration of security and defense-related science, technology, industrial bases, and supply chains… As the first initiative under AUKUS, recognizing our common tradition as maritime democracies, we commit to a shared ambition to support Australia in acquiring nuclear-powered submarines…”. In its first instance, AUKUS puts an end to Australia’s $90bn contract to acquire French conventional submarines in favour of nuclear-powered subs built with U.S. technology. Since the announcement, both France and China have condemned the initiative.
In conducting equity fundamentals analysis and valuation, and managing portfolios, we are not interested in making political statements but rather more concerned with deciphering the state of politics with a purpose to understanding its current and future impact on the Australian economy, and financial impact on Australian corporate earnings; we note:
(1) it remains unclear how much AUKUS may cost in the Australian budget and how much Australia will pay France by way of compensation to end the prior contract.
(2) Both France and China have condemned AUKUS, with France already withdrawing ambassadors to Australia and U.S. Moreover, what the impact of AUKUS will be, on both current and future trade relations remains uncertain. Indeed, the current developments will test Australia’s already strained trade relationship with our largest trading partner, China (especially by way of the China-Australia Free Trade Agreement). No doubt, Australian exporters, agricultural and resource companies are the most obvious candidates on the firing line; In Figure 1 we provide a quick ‘dirty list’ watchlist of companies which our investment managers are currently investigating for potential earnings impact from a direct and indirect earnings backlash, but no doubt, the quantum of earnings impact may yet be indeterminable as the situation evolves.
