Trades of the month: The great rotation sees miners go for gold, banks on hold and AI’s starring role

As Donald Trump’s revised deadline of August 1 draws nearer, so does the likelihood of a global tariff of 15-plus per cent.

In a sane world, that would be negative for stocks, given it will crimp global demand, snarl up supply lines and squeeze profit margins.

But this is Trump’s world and so effectively has he manipulated it that a collective Stockholm Syndrome has taken hold of investors.

A month ago they were bidding up share markets in anticipation of the TACO trade, the notion that Trump Always Chickens Out, and would back down from his tariff tyranny.

Now, they’re celebrating the fact the average tariff is likely to be 15 per cent, not 30. While China is yet to strike a deal, the sense is the final number will be much lower than the 145 per cent at the height of the tit-for-tat standoff.

Gold medal miners

That has put commodities back on investors’ radars.

Leading up to today’s shock announcement of a 50 per cent tariff on copper which triggered a mini sell-off, Australia’s mining sector have been on a tear in July with iron ore pure play Fortescue soaring almost 20 per cent since the start of the month.

BHP and Rio Tinto had risen by by 9.5 per cent.

That has helped push the ASX200 resources index up 7.1 per cent for the first 30 days of the month compared to a 1.8 per cent rise for the overall index.

It’s a bounce back after a significant fall for the year to mid-June, and a reminder that it’s always good to look out for quality companies at beaten down prices.

There were a number of tailwinds that have been working the miners’ favour: first, China is expected to respond to tariffs with stimulus, and has announced a massive hydroelectric project in Tibet which will require 18-20 years’ worth of steel.

The Chinese government had been cracking down on over supply in the steel market which sent the iron ore price to below $US92 a tonne. But with recent stimulus news, it has leapt back up above $US100, a surge of 10 per cent for the month.

Looking forward, Morgan Stanley reckons the miners have more to run, upping their price targets for BHP and Fortescue by another 8 and 7 per cent respectively.

They also like some of the more diversified miners such as South32, which is tipped to rise 14 per cent.

Banks back off

The miners’ gain has come at the expense of Australia’s big banks, which had been on a tear for the first half of the year.

Where miners have been cheap, banks have been expensive, trading at 19.7 times their expected future earnings, compared to a 10-year rolling average of 14 times.

That has been particularly driven by Commbank, which was trading at 27 times future earnings and hit a record high of $192 late last month.

With their purely domestic focus, banks have been seen as something of a safe haven in a volatile world but now investors have been taking profits and looking for growth elsewhere.

The big selloff took place in mid-July, when Commbank dropped 6.7 per cent, NAB dropped 5.4 per cent and Westpac 3.6 per cent. ANZ, which has been a laggard amid the run, has been an anomaly is actually up 5.5 per cent for the month.

In the last days however, the banks have been slowly climbing back up. With better news on inflation, Morgan Stanley is looking at “potential for a robust recovery in the Australian economy driven by lower rates and a strong fiscal pulse”.

AI eats the world

No-one really yet knows what the hell is going to happen as a result of all this tariff turmoil but they sure as hell know that Artificial Intelligence will play a part in what comes next.

Even if it can’t do half the things its spruikers promise, the sheer weight of money being thrown at the technology and those who are deploying it means investors can’t afford to miss out.

That is creating a self-perpetuating updraft in AI-related stocks driven by the bellwether NVIDIA.

The chipmaker got a boost earlier in July when Donald Trump lifted his three-month ban on sales to China as part of tit-for-tat tariff negotiations.

NVIDIA leapt 13 per cent his month to be 33 per cent higher year to date.

The big chip users, who are embedding AI in their product suites, are continuing to have a banner year, with Alphabet (owner of the Gemini AI model) up 11.5 per cent for the month, Microsoft (owner of ChatGPT) up 3 per cent for the month and 22 per cent for the year.

Big names outside the Magnificent 7 are also enjoying AI related gains. Oracle, a cloud services provider that was part of Donald Trump’s big $US500b AI announcement in January is up 14 per cent this month and 50 per cent year to date.

And like the old adage of selling picks and shovels to miners, the essential building blocks of data centres, such as energy, are also a good place to be.

One company which has surged this year is General Electric’s Verona. It makes the gas turbines that are critical to fill the energy gap. That stock has doubled this year.