The End Game has arrived
Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
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APAC Markets: Bracing for rates to rise for 1st time in 13 yrs. 'Out of tech into commodities'
Jessica Amir
Australian Market Strategist
Summary: After Russian troops reportedly shelled Europe’s biggest Nuclear power plant, markets brace for tension to escalate. Thankfully the IAEA says radiation levels have not changed in Ukraine. However, equities sold off, as investors continue to de-risk their portfolios, selling out of tech and pouring into physical oil, gas, gold and wheat. Today’s events also highlight that global energy supply will worsen. Meanwhile, the rotation that’s been taking place since November, with investors selling out of tech and investing into commodities ramped up, ahead of the Fed mapping out when rates will rise.
Co-written by Market Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong.
What’s happening in equites markets?
- US equities, futures fell 1.6% after the alleged attack on Ukraine’s nuclear power plant, implying the S&P 500 (US500.I) and Nasdaq 100 (USNAS100.I) will likely fall for the second session on Friday. Also keep in mind, on Friday in the US, the Fed Reserve Chair is due to give a testimony, and he’s expected to map out when rates will rise. Rising interest rates in a cycle for the first time in 13 years will likely cause growth (tech names) to slow in growth, at a time when inflation is at records (and will likely worsen), all while wages are rising too. As such money continues to flow out of the tech sector and into mining, energy, grains and cybersecruity stocks.
- The Australian share market ASX200 (ASXSP200.I) fell for the first time in 6 days, losing 0.9% before 2pm Sydney time. The Australian tech sector was hit the hardest, falling 4% as markets brace for US interest rate hikes to start from this month. Separately, the worst performer was uranium mining company, Paladin Energy (PDN), with its shares falling 18% from their three month high. The company makes 100% of its revenue from Namibia. So today’s sell down reflects that investors think money will favour oil, coal and gas instead of uranium. Meanwhile, buy now pay later group Zip (Z1P) shares continued to fall to $1.86 a rock bottom all time low, after UBS downgraded its price target to $1. The tech giant’s slide highlights our house view; tech stocks will continue to lose shine and commodities will likely outperform for the next 10 years, as rates are rising and money favours commodity momentum, given its ghastly lack of supply.
- In Asia, Hong Kong’s Hang Seng (HSI.I) fell over 2% and China’s CSI300 (000300.I) was down almost 1% in early trading, following reports that the war in Ukraine intensified. Tech stocks were sold. Hang Seng TECH Index fell 4%. Bilibili (09626) fell 10% even though reporting Q4 results basically in-line with expectations. JD.COM (09618) and Alibaba (09988) fell over 7% and 5% respectively. Estimates from the China Association of Automobile Manufacturers suggested that February auto sales in China were down 34% MoM and up 13.8% YoY. This, plus the weaker February sales data released by individual car makers earlier, triggered selling in XPeng (09868, -12%), BYD (01211, -4%), and Li Auto (02015, -9%). In Singapore, the Straits Times Index (STI) fell about 1%. February Market Singapore PMI came lower at 52.5 (vs 54.4 in January). Written by Redmond Wong.
What to consider
- Iron ore stocks are charging after the iron ore price (SCOA, SCOH2, SCOH3) as measured by the futures, soared 6% yesterday and extended that gain today, up 0.3% to $158, taking the steel-making ingredient’s price to August 2021 levels. The iron ore price is up 15% this week on expectations China will ramp up its buying. It comes as China’s top government officials ordered state-owned buyers to buy materials, including oil and gas, barley, corn and of course, iron ore, to secure commodity supply and fill potential supply gaps, regardless of price. BHP (BHP) shares are up 9% this week to 7-month highs. Rio Tinto (RIO) rose 13% this week, also to a 7-month high.
- Consider that Australia holds its place as the lucky country. Foreigners will increasingly look to invest here and buy our commodities, LNG, iron ore, wheat, other grains, coal. This will also likely benefit our trade surplus (the profit Australia makes from from exports minus imports). And this supports the Australian dollar rallying up as it has been.
- All eyes will be on the Global Uranium ETF (URA) which invests in 50 international uranium mining and the nuclear component production companies.
- In Hong Kong & the China A share market: Auto makers in China are facing headwinds from lackluster household consumption, cannibalization from used car sales and car hailing services, semi-conductor shortage and sharply rising materials costs. Written by Redmond Wong.
Trading ideas
- Equites: While the trend of increasing penetration of electric vehicles (EV) is here to stay, EV makers are exposed to the secular rising trends of the price of lithium, cobalt, nickel and graphite. Rather than betting on which EV makers are going to gain market share and have pricing power to pass on higher material costs, other pockets along the EV supply chain may present better investment opportunities, for examples, lithium and cobalt, battery recycling, and EV charging stations & power grid. Some of the leading companies in these areas include: Ganfeng Lithium (01772), Tianqi Lithium (002466), China Molybdenum (03993), Zhejiang Huayou Cobalt (603799) and GEM (002340) and NARI Technology (600406) in Asia, and Allkem (AKE), Pilbara Minerals (PLS) and Liontown Resources (LTR), listed on the ASX. Written by Redmong Wong and Jessica Amir.
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