The RBA, China and the US market

History was made this week. The Reserve Bank of Australia (RBA) held its first extended two-day meeting to set interest rates. Previously, it was just one day. For the first time, the RBA Governor also held a news conference an hour after the rates decision.

The changes are part of a suite of reforms introduced after an independent review of the central bank last year. No doubt, the changes will increase the transparency of rate decisions from the RBA. Whether they influence the substance of the decision making remains to be seen.

The cynic in me thinks the previous RBA Governor Philip Lowe was simply the fall guy for a global inflationary spike that led to rising interest rates, which highly indebted Australians didn’t like, and our politicians needed to do something to assuage their concerns. So, there was a review and these changes followed.

While all the focus is on the RBA, the Government is failing to address deeper structural issues holding back our economy. The key problem is what economists’ term, productivity. It’s a fancy word for doing more with less.

I’m not a trained economist but I have run several businesses, so perhaps I have a different take on the problem. My view is that businesses, not governments, are the primary drivers of economies and economic growth. And businesses here aren’t thriving, domestically or on the global stage, because costs are high.

The three largest costs for businesses are wages, rent, and energy. All these costs in Australia are at nose-bleed levels, both in historical terms and compared to other countries.

For example, if you want to start a restaurant business in one of the larger capital city CBDs, my guess is you’d have to be turning over at least $700,000 to cover costs. To do that in year one of a business is very difficult.

High costs ultimately mean fewer businesses are getting off the ground. And that results in less competition and innovation.

The issue not only affects small businesses but larger ones too. Everyone knows that electric vehicles are the future, and Australia has much of the critical minerals to power this revolution. Yet, business bosses in battery metals say that Australia won’t be able to compete with other nations in this space until high costs are addressed.

The RBA doesn’t have much influence over wages, rent, or energy. The government does, and it’s doing little to fix the cost issues.

Until it does, innovation and competition will be stifled, and economic growth subdued. It will prevent Australia moving from being principally a resources producer to one producing more valuable and sophisticated goods and services.

China's progress

You may be surprised by one country that is showing signs of moving up the value chain: China. You wouldn’t know it by looking at their economy and stock market. The Chinese and Hong Kong stock markets fell through the floor in January. Hong Kong is now below levels reached in 1997.

The Chinese economy is in the middle of a deflationary bust, after an investment-driven, debt-fueled economic bubble. In an article for Firstlinks this week, Andrew Swan from Man GLG, suggests the investment-driven model is dead and China needs to find a new one. He says China needs to help its exporters and a large one-off devaluation of the currency could do that. And he believes China must drive consumption. The best way would be to provide a better social safety net for people, which would give more certainty around retirement finances and encourage them to consume more before they stop working.

While China has significant problems, it remains a formidable force. Not enough attention is being paid to some of its companies becoming global leaders. And these companies are posing serious threats to the likes of Tesla (NAS: TSLA) and Apple (NAS: AAPL).

For instance, BYD Auto recently overtook Tesla to become the number one seller of electric vehicles. The company has grown revenues by 25% per annum over the past decade. For most of that time, it concentrated on selling into the domestic market. But in 2020, it started selling its own cars overseas. First in Norway. Then in 2022, it added France, Germany, and the Netherlands. And it entered the UK market early last year.

Guess where Tesla decided to cut prices last month? In Norway, France, Germany, and the Netherlands.

BYD is posing a global threat to Tesla with the production of lower priced, competitive EVs.

Another Chinese company making serious inroads is Huawei Technologies. In September last year, it introduced its Mate 60 Pro smartphone. The phone has a 5G chip that is competitive with Apple’s A17 chip. And customer reviews suggest it has all the functionality of the iPhone 15 Pro.

The US technology community has been taken aback by how advanced the Huawei phone is. After all, the US placed sanctions on China’s access to semiconductor manufacturing technology more than four years ago. Historically, China had reverse engineered Western technology and with these sanctions, the US thought China would be less competitive. Yet, here is Huawei developing proprietary technology from its own chip designs and foundries.

iPhone sales in China have struggled of late and Apple reduced their prices on the iPhone 15 Pro and iPhone Pro Max by 16%.

So, it’s not all doom and gloom for China. There are companies that are becoming global players and threatening to upend the likes of Tesla and Apple.

How this impacts the US market

With Tesla and Apple facing stiffer competition, the ‘Magnificent Seven’ may soon have to be renamed the ‘Magnificent Five’. Yet, the remaining five Big Tech companies are doing exceedingly well. Of recent results:

• Alphabet’s (aka Google’s) (NAS: GOOGL) fourth quarter revenues increased 13.5% over the last year to US$86 billion. Net income increased 52% year-on-year (YoY) to a record US$20.69 billion.
• Microsoft’s (NAS: MSFT) fourth quarter revenues increased 17.6% over the last year to $62 billion. Net income grew 33% YoY to $21.9 billion (2nd highest quarter ever).
• Meta’s (NAS: META) revenues increased 25% YoY to US$40 billion in the fourth quarter. Net income rose 201% YoY to a record US$14 billion.

Meta’s results beat expectations and the stock rose 22% on the day. It was the largest one-day gain in history in dollar terms.

And Meta’s stock is up 445% from the lows of October 2022.

The remaining five of the ‘Magnificent Seven’ are flying and it may justify the undoubtedly rich valuations that many of the stocks sport.