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A Technical View on Some Australian Stocks Amid Icy Australia-China Relationship

By

Kim Ming Lam

on

May 11, 2021

A Technical View on Some Australian Stocks Amid Icy Australia-China Relationship: Treasury Wine Estates (TWE), Graincorp (GNC), Australian Agricultural Co (AAC), BHP Group (BHP), Qantas Airways (QAN), A2 Milk (A2M)

Australia and China first saw their relationship dampened in 2018 when Australia became the first country to publicly ban Chinese tech giant Huawei from its 5G network.

Bilateral ties were further strained in April 2020. Then, the Australian government questioned China's handling of the coronavirus, which was first reported in the Chinese city of Wuhan, and demanded an international investigation into the origins of the virus.

Feeling offended, and acting in retaliation, Chinese authorities launched a series of trade sanctions on Australian exports ranging from wine to coal.

For example, in May 2020, the Chinese government imposed anti-dumping and anti-subsidy duties of over 80% over barley imported from Australia. In November 2020, China slapped anti-dumping duties of up to 212% against Australian bottled wine imports. Beijing has banned beef imports from six Australian suppliers.

It is widely reported that China's central government has given state-owned utilities and steel mills verbal notice to stop importing coal from Australia. Coal is Australia's third-largest export to China.

Also, Australian cotton, timber and lobsters are encountering difficulties in getting into China.

In the big picture, currently China is Australia's largest trading partner in terms of both imports and exports. Australia is one of the few developed nations on Earth that exports more into China than it imports from China.

Meanwhile, Australia is China's sixth largest trading partner; it is China's fifth biggest supplier of imports.

Before the Australia-China relationship deteriorated markedly in 2020, China accounted for up to 40% of Australia's exports.

China Accounted for 40% of Australia’s Exports in 2019

Source: Trading Economics

The latest official data showed that Australia's exports declined 2% on month in March, compared to a growth of 4% expected. In March 2020, China remained Australia's top trading partner accounting for A$13.42 billion, or 35.1%, of its total exports of A$38.27 billion.

Australia’s Monthly Exports to China (in $A million)

Source: Bloomberg

The latest official data showed that Australia's exports declined 2% on month in March, compared to a growth of 4% expected. In March 2020, China remained Australia's top trading partner accounting for A$13.42 billion, or 35.1%, of its total exports of A$38.27 billion.

Price of Australian Iron Ore Imports to China (US$/tonne)

Source: Bloomberg

Investors should also watch closely Australia’s education and tourism industries, which rely heavily on Chinese students and tourists.

Treasury Wine Estates (TWE.AU) :

Turning Down, Watch February Low at A$8.90

Source: TradingView

Recently, Treasury Wine Estates (TWE) said it would face an anti-dumping and countervailing duty rate of 175.6% for its Australian country-of-origin in China, after an investigation by that country's Ministry of Commerce. This high duty rate could affect the company's competitiveness of its wine product in China.

On a daily chart, the stock retreated around 15% from February high and broke below both 20-day and 50-day moving averages. Besides, the death cross between 20-day and 50-day moving averages has been identified. Therefore, the technical configuration would suggest the bearish side.

As long as the key resistance level at A$10.65 holds on the upside, the stock prices could expect a drop to A$9.60 and the low of February at A$8.90 as downside targets.

Graincorp (GNC.AU) :

Still Bullish, Targeting A$6.00 Upside

Source: TradingView

The core business of Graincorp (GNC) is the receiving and storage of grain and related commodities. It also provides logistics and markets these commodities. Recently, investment bank Macquarie raised the Graincorp 2021 EPS forecast by 9% and believed that the company could hedge against any uncertainty over trade with China.

The technical outlook of the stock is bullish as the series of higher tops and higher bottoms remains intact. Currently, the stock returns to level above the 20-day moving average, while the RSI suggests the upside momentum for the prices.

Bullish investors could set the key support level at A$4.90 (around the level of rising 50-day moving average), the upside targets could be A$5.52 and A$6.00.

Australian Agricultural Co (AAC.AU) :

Further Decline to A$1.045 Expected

Source: TradingView

Australian Agricultural Co (AAC) is the largest integrated cattle and beef producer in Australia. In fact, China has suspended the import of meat from six Australian abattoirs on trade tension since last year.

Currently, the trade tension between China and Australia is rising, would the Chinese government suspend more beef product imports from Australia? If the Chinese government suspended more beef products imports from Australia, the company, the largest beef producer in Australia, cannot avoid the effect from the potential restriction.

On a daily, stock broke below the rising trend line drawn December 2020. The 20-day moving average is turning down and has crossed below the 50-day one. The RSI also broke below the rising trend line. In this case, the above technical events would suggest the bearish outlook.

As long as the key resistance level at A$1.210 is not surpassed, the stock prices could expect a drop to A$1.090 and last year's December low at A$1.045.

BHP Group (BHP.AU) :

Targeting New High at A$57.70

Source: TradingView

The giant miner BHP Group's share price has climbed nearly 50% over the past 12 months, amid soaring iron ore prices.

The company's share price performance has suggested that investors were not concerned about the impact of China-Australia trade dispute. A major reason is that China relies heavily on Australia's iron ore, which accounted for about 60% of Chinese import of the raw material.

The post-pandemic construction boom have driven up steel and iron ore prices, which has caused unease to the Chinese government. Market analysts pointed out that China would be cautious on imposing iron ore import ban from Australia, as it would be hard to find alternative sources for the commodity.

From a technical point of view, BHP Group shows early signs of an upside breakout from its recent consolidation range. Currently, it is trading at levels well above both the 20-day and 50-day moving averages, indicating strong upside momentum.

Bullish investors may consider A$46.80 as the nearest support, with upside targets located at A$55.00 and A$57.70.

Qantas Airways (QAN.AU) :

Turning Down, A$4.10 Downside Expected

Source: TradingView

Australian flag carrier Qantas Airways' (QAN) share price has been sideways so far this year, after recovering in the second half of last year.

The tension between China and Australia is expected to have limited impact on Qantas, as its revenues were generated from a diversified regions. In 2019, the pre-Covid-19 year, domestic and international revenue totaled A$6.11 billion and A$7.43 billion respectively.

The recent decline in Qantas' share price is more likely related to later-than-expected reopen in international flights, amid renewed concerns over India's Covid-19 crisis.

From a technical point of view, Qantas Airways' share price outlook has turned bearish. In fact, it has broken below a long-term bullish trend line drawn, while the 20-day moving average has crossed below the 50-day one.

As long as the key resistance at A$5.20 holds, share price is likely to test A$4.40 and A$4.10 on the downside.

A2 Milk (A2M) :

Persisting Downward Pressure, Aiming at A$4.00

Source: TradingView

Dairy nutritional company A2 Milk (A2M) dropped for a fifth straight month in April and its share price is now more than 60% lower than 2020's high.

The deteriorating relationship between China and Australia may have dampened investors' sentiment the consumer goods sector, however this factor alone could not explain such a slump in A2 Milk's share price.

First of all, A2 Milk is company dual-listed on the ASX and NZX, but headquartered in New Zealand. Secondly, the company's most recent first half China and Asia segment revenue was still up 2.8% over year, while total revenue was down 16.0%.

Source: A2 Milk first half 2021 results

Instead, the company has repeatedly downgraded its 2021 outlook, pointing out that the decline in revenue "was driven by performance through the daigou and cross-border e-commerce (CBEC) channels being significantly impacted due to disruption resulting primarily from Covid-19 related issues".

With increasing competitions in China and high level of inventories, investors are skeptical that A2 Milk would be able to achieve its target and are expecting more downgrades to come.

From a technical point of view, A2 Milk's share price shows little signs of a convincing rebound. Currently, it is capped by a long-term bearish channel and is trading at levels below both the 20-day and 50-day moving averages.

Bearish investors may consider A$7.54 as the nearest resistance, with downside targets located at A$4.90 and A$4.00.

The investment ideas presented here are for information only.  They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing. Learn more.

Kim Ming Lam

Head of APAC Research
Ming graduated from Hong Kong University with a Bachelor degree in mechanical engineering. He has been working in the financial services sector for over 10 years. He is currently tasked with providing clients with technical analysis views on forex and Asian stock indexes.
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