Martin Conlon, Schroder’s head of Australian equities, said that Donald Trump’s tariffs on China pose risks for Australia, particularly if they weaken the Chinese economy and reduce demand for Australian exports.
Beyond the direct economic impact, Conlon said that this could also weigh heavily on the Australian equity market.
“Subdued sentiment on China and poor affordability and economics in housing construction are creating the preconditions for depressed multiples for Australian shares and jeopardising future returns,” he said.
“In an environment in which investors become ever more attuned to chasing popular themes at incredibly rich valuations, it is perhaps understandable that most investors are happier running with the crowd than feeling lonely.”
Conlon said that China, as a production-driven economy, typically responds to economic weakness by stimulating output. However, without domestic demand to absorb this production, China increasingly acts as an intermediary between raw materials and export markets.
CBA echoed similar concerns, saying that around one-fifth of Australia’s exports to China are re-exported to other countries.
The big four bank’s economists said that while Australia may be relatively insulated from the direct impacts of President-elect Trump’s tariffs, the greater risk lies in second order effects on China’s economy, which could weaken demand for Australia’s key exports.
“A 60 per cent US tariff on all imports from China, all else equal, would lead to a slowdown in China’s economy growth. As a reminder, economic growth in China has already underwhelmed in 2024,” it said.
In the event of a slowdown, China’s outsized influence on commodity markets could trigger a drop in commodity prices, posing the most direct risk to Australia’s economy.
“A fall in commodity prices, particularly iron ore, would lower Australia’s terms of trade and lead to less export income, government revenue and corporate profits,” CBA said.
“Resource export values would fall considerably in the event of a Chinese slowdown. Private Australian investment and consumption could also soften in response to lower export income.”
Expounding on this, the bank said that a dim outlook for commodities locally could see miners back away from investing to expand or maintain production.
Notably, mining investment is set to plateau this fiscal year, following several years of gains.
Despite these risks, CBA said that Australia has several buffers to help protect its economy. Among them is a depreciating Australian dollar that could protect local export businesses. Additionally, the big four bank said a negative demand shock to Australia might prompt the Reserve Bank of Australia (RBA) to ease monetary policy.
“Australia’s exports to China are dominated by mining and energy commodities: iron ore, gas, coal, gold and other minerals. But Australia also exports services – mainly education and travel – and agricultural goods including wheat, wool, beef and cereals that could benefit from a consumption focused stimulus package,” CBA said.
“Given this, and the Australian economy’s ‘shock-absorbers’ of a flexible exchange and interest rates as well as a likely response from Chinese authorities, we consider a material downturn in Australia is unlikely but it is a headwind to take note of.”
