US–China Trade Deal Is Bad News for These ASX Stocks

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Backs have been pat, hands have been shaken, and a deal has been made.

After nearly two years of limbo, the US and China finally have a trade deal. Well…a trade truce more like it.

There is still a little animosity between the two superpowers. Though this new 86-page agreement will go some ways to alleviate them.

Long story short, Trump will lift some tariffs on Chinese goods and China will buy US$200 billion of US exports. An outcome that should please both sides, at least a little.

For the most part it’s pretty cut and dry stuff.

However, there could be some interesting consequences. Even for nations other than the US and China…

See, going through the announcement, one area stuck out to me in particular: dairy.

Under the terms of the deal, American dairy imports should now have an easier time getting into China. By the look of it, much of the red tape has been removed or streamlined. Meaning it should be far easier and quicker for US farmers to sell milk in China.

That’s not all either.

The US is also going after the infant formula market as well. Again, aiming to remove or speed-up any regulatory hurdles.

Now, this isn’t out of the ordinary. In fact there are a whole range of agricultural goods getting a similar treatment in this deal. But, this could be the big one that hits local companies the hardest.

Formula frenzy

By now most local investors have probably heard about the story of The a2 Milk Company Ltd [ASX:A2M].

A2 has been one of the biggest success stories on the ASX in recent years. If not the biggest success story.

In 2015 the NZ-based company made the move to the Australian market. A bid to drum up more capital to fund their growing ambitions in the UK, the US, and China.

By the end of 2015 they had already tripled their share price. That was followed by a flatter 2016. Then, during 2017 and 2018 the stock went absolutely nuts…

Around March of 2018, just three years after listing on the ASX, the stock had made a gain of 2,175%. The kind of trade that every investor dreams of.

The catalyst for A2’s success was selling baby formula to China. A market that was clamouring for international dairy products.

Without Chinese demand A2 almost certainly wouldn’t be as big as they are today.

A fact that many have taken notice of.

That’s why today we now have a plethora of baby formula companies on the ASX. Stocks like Bubs Australia Ltd [ASX:BUB], Synlait Milk Ltd [ASX:SM1], and the recently bought-out Bellamy’s.

Not to mention a raft of smaller, up-and-coming players looking to muscle in on the market.

Point is, baby formula has been a big market trend in recent years. A very lucrative trend at that.

Now though, I can’t help but wonder how this new trade deal might affect these companies.

After all, we saw China crackdown on imported formula last year. Imposing new rules to restrict the supply and sales of these products. Through both direct channels and the infamous ‘daigou’. A common form of onselling between local and international Chinese.

As it stands, Australian suppliers are still subject to these stricter terms.

Conversely, US suppliers will not be. Once the trade deal comes into effect, anyway.

That could be bad news for local investors.

Spilt milk, or salvageable situation?

Now before you cash out of any dairy-related companies, know that things could change.

You’ve got to remember that Australia still has a better trade relationship with China than the US. This deal hasn’t resolved everything. We could just as easily see things break down again.

I wouldn’t be counting on that to happen though.

Fortunately, it seems our trade minister is keenly aware of the ramifications. According to the AFR, Simon Birmingham will be doing his best to ‘piggyback’ off the deal. Aiming to put our local industry on a level playing field with the US.

Whether we actually have the leverage to make it happen though is unclear. Here is how Birmingham was spinning it:

It’s no secret there have been some companies frustrated with getting licensing approvals in those areas [dairy and baby formula] and we have taken that up with China.

We would hope the same standard in terms of licensing and approvals will apply to all nations that can meet those standards and we’re confident Australia can do that.

That’s certainly a message we’ll be conveying and encouraging China to heed.

My concern would be whether our government is willing to play hardball to ensure we get it. Trump had to conduct a two-year long trade war to get this deal.

Simply ‘conveying a message’ may not get us the result we need.

Right now it is hard to say how all of this will pan out. So, if you are invested in dairy or baby formula stocks, don’t ignore this.

You won’t want to be the one left crying over spilt milk.

Regards,

Ryan Clarkson-Ledward,
Editor, Money Weekend

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About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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