By Peter Switzer

Wall Street is resisting heading lower despite Japan going into recession, Ukraine’s president says he’s preparing for total war and legendary investors like Wilbur Ross are saying the “markets are living on borrowed time”.

Meanwhile, here in Australia, we’re cheering the free trade deal with China and live in hope that the G20 get-together will pump up world growth.

Partly explaining the Yanks resistance to the sell off we’ve been having lately, was another talk-it-up effort by the European Central Bank boss, Mario Draghi, who said he’d be prepared to buy European sovereign bonds, which the markets liked. The German Dax was up 0.58%, the French CAC put on 0.56% and the Spanish IBEX rose a big 161 points or 1.59%.

Just imagine if Draghi was able to act as aggressively as his talk! By the way, smart investors are saying they’re starting to buy European stocks on the basis that the troubled economic region will come good.

Given the hoo-ha here, you might have thought our stock market would have liked what Xi Jinping was offering. Nope, our S&P/ASX 200 index lost 41.8 points or 0.77% to end at 5412.5. So much for the bright future, thanks to our Chinese buddies.

Of course, it didn’t help that our second most important trading partner, Japan, unexpectedly went into recession yesterday, with its GDP contracting by an annualised 1.6% in the September quarter, which was way below economists’ guesses of 2.1%. This followed a 7.3% contraction in the previous quarter and was the worst result since the 2011 earthquake and tsunami! They have been through a lot, haven’t they?

But against that bad news for our stock market, the China deal seems rich with winning industries. My gleaning has come up with the following businesses: health, education, tourism, transport, finance, dairy, wine, horticulture (vegies, nuts and seafood), miners and exporters generally.

It looks good but we’re not putting much focus on the losers and they look like local manufacturers, import-competitive businesses such as air conditioning suppliers, couriers, etc. Basically, just as our café owners might be able to open up businesses in China, engineering, services and other firms from China could come prowling here.

There will be winners and losers but the Federal Government says there’ll be a $20 billion shot in the arm for the economy. With 93% of our exports to China tariff-free in four years, the number looks believable but it’s still a guess.

Sydney radio station 2GB’s breakfast host, Alan Jones, is worried that we’re selling the farm and says the deal doesn’t pass the pub test. This is what he hit the Prime Minister with yesterday on his radio show and he wasn’t happy.

At present, just under 99% of Australian farm businesses are fully Australian owned and just under 90% of farmland is fully Australian owned, according to the Australian Bureau of Statistics (ABS).

"Our 2013 survey found that while there has been an increase in the area of farmland owned by businesses with some level of foreign investment, by far the majority remains Australian owned," Bruce Hockman from the ABS said mid this year.

"The survey also confirmed that large businesses continue to account for the majority of foreign owned farm land, with less than 50 businesses accounting for 95% of the total area of foreign owned farm land in Australia.

"Of the 400 million hectares of agricultural land in Australia, nearly 50 million hectares had some level of foreign ownership; this is up by around 5 million hectares, an increase of 11% on the 2010 result.”

But Jones says China is already buying up dairy farms, with 50 farmers in Victoria already set to sell to our free trade partner. The Japanese and Korean trade agreements had a $15 million limit on investment in agricultural farms and properties and $53 million limit on investment in agribusinesses, before FIRB referral and the China deal looks like it has the same limits.

All deals like this have winners and losers.  When Paul Keating started tearing down tariffs, there were concerns about our economic future and foreign raiders undermining our future. However, we’ve had 23 years of no recessions and solid growth. Our unemployment is lower than the double-digit levels of our grim past, inflation is low and we have historically low interest rates.

It’s one of the ironies of economics that as you give up restrictive or protectionist ways, the opportunities outpoint the threats.

Why is that? We can’t see opportunities immediately but let me give you one example that Morgan’s chief economist, Michael Knox, pointed to with the China deal.

He thinks services businesses will do well out of the deal. He says health businesses will form joint-venture deals to service the potential customer base in China and already there have been investigations into the opportunities in this area.

Working out what local companies gain from this deal will be good for stock picking but it will take some time to pay off.

The late US President JFK once observed: “Change is the law of life. And those who look only to the past or present are certain to miss the future.”

One last thing, Wilbur Ross said markets are living on borrowed time but that’s always the case. Markets go up and then they crash. The longer they go up, the more they rely on borrowed time. It was a nothing statement.

 

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