Market Digest Jan 18, lithium stocks shine, iron ore stocks rebound on Rio’s outlook
Australian Market Strategist
Summary: The Australian market trades higher for the second day, moving off its 30 day average, buoyed by gains in lithium with Novonix up 7%, Liontown is up 4%, while retailer JB Hi Fi jumped over 7% after reporting better than expected earnings results. But the news of day is from lithium giant, Allkem expecting the lithium price to jump 80% in the second half of the year, while Rio Tinto reported its quarterly report, expects yearly production to rise across all major commodities. Plus, we dissect how professional investors are investing vs retail, and why to watch iron ore stocks like a hawk at these levels as iron ore has fallen for the third session, and could pull back further before potentially rising again in March.
ASX News of the day
Australia’s second biggest lithium stock, Allkem (AKE) (founded after Orocobre and Galaxy Resources merged) released its quarterly report, announcing higher overall sales, production and shipments in the quarter, while also expecting the lithium carbonate price to rise 80% on the first half of 2022 (to $20,000/t) due limited supply, while it’s observing ‘very strong demand’. This not only supports Allkem’s stock but also the lithium sector, as higher prices imply higher earnings and higher earnings support share price growth. As for Allkem’s flagship lithium mine in Olaroz in Argentina, in the lithium triangle, total sales revenue jumped 68% QoQ and up 149% from the prior corresponding period. Allkem is also expanding the facility and works reached 68% completion, with first production expected in the second half of this year. As a result of the extra work done capital expenditure was raised 10-15% to ($365-$390m); with spending funded from guaranteed funds. Allkem’s other mine, Mt Cattlin in Australia, revenue was 15% lower in the quarter as it shipped 58% less. Also in the quarter, AKE was added the ASX100 Index. AKE shares rose to a record al time high, $11.91 pulling most lithium stocks up with it.
Rio Tinto (RIO), the world’s second biggest miner, released its quarterly results seeing a 1% a upturn in quarterly exports in the final three months of 2021, while also noting its expects 2022 iron ore shipments to rise as much as 4% (expecting 320- 335 million tons). However Rio says iron ore shipments remain subject to weather and market conditions. The miner also said shipments have not been as strong in the Pilbara due to staff shortages in Western Australia, and delays in starting new mines. As for copper, guidance for 2022, Rio sees mined copper shipments rising from 494 kt 1.2-to 16% (to 500 to 575 kt), while Diamond shipments are tipped to rise as much as 57% in 2022, Bauxite shipments could rise up to 5%, and Alumina shipments up to 6%. Rio Tinto shares trade 0.4% higher at $110.42, a 4-month high.
What is happening in markets
US markets were closed overnight for a public holiday. However the next big driver for equity is that earnings season is underway. Earnings are expected show the S&P500 companies grew their earnings by 20%. Remember earnings growth drive share price growth. And better than expected results often result in share price rallies. While inversely, weaker than expected results or forecasts often result in shares pulling back. This week in the US Procter & Gamble and Netflix will be watched on the consumer side and Goldman Sachs and Bank of American will be watched in banking.
Professional vs retail investors, are investing differently:
- Professional investors have been; reducing their positions in tech, high-growth, high-valuation stocks since December, all ahead of the US Fed hiking rates and the fed slowing down bond buying next month.b This has taken sales in these stocks (high value stocks, tech stocks, stocks with little to not profits), to their highest level in 10 years.
- While professional investors are also working building diversified portfolios that will benefit from higher inflation and interest rates; with investors putting a lot of money into the Oil and Gas sector in the US, which is why it’s up the most this year (up 23%), while the US Banking sector is up 12%. In Australia, investors have also been doing the same to some extent, the ASX Energy Sector is up 10%, while the Mining sector has also seen a lot of flows and is up 6% (with Pilbara Minerals and Min Res up over 16%).
- On the flip side, retail investors have been; buying the dips. For example, gaming chip maker Nvida shares are down 20% from November low. On Friday Nvida shares jumped 1.4%, bouncing off its two month low after falling through key level. The company’s last financials were strong - they generated revenue of $7 billion up 50% year-over-year. That included record gaming revenue of $3.2 billion up 42%. And Nvidia’s gross margin is ticking higher from just under 63% a year ago.
Iron ore price fell 2% on Monday, falling for the third session, what's next?
- Fresh wind taken out of the sails of iron ore stocks. Iron ore now trades at $122.92, but holds October highs.
On Monday; Fortescue Metals (FMG) fell 3%, but on Tuesday FMG trades 1.3% up. On Monday BHP lost 1.1%, and today it erased that and rose 1.5% and trades at $46.85. Champion Iron (touted as the most undervalued) was steady on Monday and trades 1.8% up today. But be careful if you are trading iron ore stocks as they are susceptible of a pull back, before another potential rally again. Why;
On the negative side; privately owned Hancock Prospecting (owned by Australia’s richest woman) announced plans to develop a 20 million tonnes per annum iron ore mine in the Pilbara, that would operate for up to five years. And secondly; the iron ore price eased as orders are expected to slow in Luna new year holiday.
On the positive side; iron ore orders are expected to pick up after the Winter Olympics games are over, so if you are a long term investor, you could have your time to buy the dip. Iron ore orders are likely to continue to pick up as the PBOC cut interest rates yesterday and the country is ramping up more infrastructure stimulus, all while its economy is growing stronger than expected.
For Iron Ore analysis, see the latest here.
Recent news from China is positive;
- On Monday we learnt China’s economy grew stronger than expected; GPD grew 4% in the fourth quart of the year, vs 3.3% estimate. Although China is slowing down right now and it grapples with lockdowns to offset covid,
- I personally believe China’s economy could grew 5.5%, this year we’ll likely see more infrastructure stimulus announced, after China announced or kick-started 3 trillion yuan ($471 billion) in projects just two weeks into 2022.
- If you care more about the figures released yesterday from China, here you go; Industrial output rose 4.3% vs 3.7% estimates, Fixed assets investment grew 4.9% vs 4.8%. While retail data disappointed (sales grew 1.7% vs 3.8% expected).
Oil’s bull run continues;
- Crude rose trades at over US$84.00, up 0.4% on Tuesday (holding its highest level since November 10). While Oil has already set a new 2022 high, calls getting louder than oil could soon trade at $100 a barrel, as demand is outpacing supply and frantic oil buying is taking place.
- On Monday the ASX Energy sector rose 1.4%; Woodside Petroleum - the biggest oil stock on the ASX rose, While Santos, the second biggest oil stock on the ASX rose 2%. Other strong performers in in energy include Whitehaven Coal up 4.3%, Beach Energy up 3.9%
- The Aussie dollar’s has fallen for the 4th session, and trades at a 4-day low 72.04 US cents Which has been a key level of support since late December 2021 when Omicron cases spiraled.
- The next catalysts for the AUD are the eco news mentioned below, and then of course, WA’s border opening to Australia on February 4 and to internationals on February 5 and if this will occur.
What to watch this week
- Company news:
- Wednesday 19th: BHP, Lynas, Woodside release sales results.
- Thursday 20th: Northern Star, Sandfire release results
- Economic news;
- Wednesday 19th: Australian consumer confidence data is released for January. December new home sales data is also out.
- Thursday 20th: Australia Employment data will be watched and is expected to show unemployment fell from 4.6% o 4.5% in December, with 30,000 expected to have gained jobs last month.
Potential Trading ideas
- If you believe iron ore orders will pick up beyond March, you could potentially look at investing in iron ore stocks and buy the dip. But trade with caution. For more on iron stocks on the ASX, read this story.
- I’d also consider a position in energy if you already haven’t, given the energy crisis is rumbling on. For more on energy read the latest from our Head of Commodity Strategy
Today’s ASX broker upgrades to peruse
- ACL AU: Australian Clinical Labs Rated New Outperform at RBC; PT A$6.50
- CAJ AU: Capitol Health Rated New Sector Perform at RBC
- HLS AU: Healius Rated New Sector Perform at RBC; PT A$5
- IDX AU: Integral Diagnostics Rated New Outperform at RBC; PT A$5.50
- SHL AU: Sonic Healthcare Rated New Outperform at RBC; PT A$47
- SXY AU: Senex Cut to Hold at Canaccord; PT A$4.65
- WES AU: Wesfarmers Raised to Add at Morgans Financial Limited
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: 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?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.