Commodities stocks to upgrade earnings, plus look at APAC travel & hydrogen
APAC Strategy Team
Summary: Small cap IPOs fall to lowest level in two years and expect IPOs to remain thin as rates rise. Commodity companies could report record earnings growth and drive further share price growth. Australia’s stock market continues to rise up, benefiting from the commodity surge, outperforming global markets once again. Expect higher sanctions on Russia. Some US tariffs on China to be eased. Plus why consider looking at Hydrogen, APAC travel and US and Australian Fertilizer stocks.
Co-written by Market Strategists Jessica Amir in Australia, Redmond Wong in Hong Kong, Charu Chanana in Singapore.
What’s happening in equites that you need to know?
- The Australian share market (ASX200) is continuing to rise and is looking increasingly bullish. After pushing up for the third day, and moving further off its 200 day average, the ASX200 its benefiting from the boom in commodities, given its market is made up of 30% commodity stocks, which is why the market is looking increasingly bullish on an hourly, and day chart from a technical perspective if you look at the moving averages, the MACD and RSI technical indicators. As for the best performer today in the ASX200, new entrant AVZ Minerals (AVZ), an African lithium miner rose 8.4% to an all time of $1.11. AVZ, like many new ASX200 and ASX300 commodity constituents entrants this week, has also been bought by ETF providers and fund managers like Deutsche Bank, BlackRock and State Street after it entered the ASX200, as fund managers rebalance their portfolios for end of quarter. As for other strong performers today, one of the biggest global brick companies, Brickworks (BKW) shares were also a top performer after the company surprisingly advised it sees a higher profit this year, despite property growth and prices slowing. Brickworks shares rose 5.3%. Elsewhere, Gold producer, Gold Road Resources (GOR) upgraded its 2022 output guidance, sees higher gold grades and also dropped its costs.
- Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) Hang Seng Index and Hang Seng TECH Index (HSTECH.I) were down modestly. Tencent (00700) reported a slow 8% YoY revenue growth and a 25% decline in non-GAAP EPS in 4Q21. Advertising revenues from education, gaming and real estates, which were hit particularly hard by tightened regulatory policies, were weak. Losses from associated companies and JV investments in grocery business also contributed to the earning miss. Tencent’s share price was down 3%. On the other hand, China Mobile (00941) rose more than 3% after reporting better than expected results, driven by better ARPU due to 5G migration and improvements in broadband business. The Company increased dividend payout ratio to 60% and indicated that it would be go up to 70% in three years. In A shares, CSI300 was down more than 1%.
- USDJPY and AUDJPY reach new highs despite BoJ's caution on increasing inflationary pressures. Minutes of the Bank of Japan (BOJ) meeting suggested policymakers saw inflation reaching close to their 2% target as companies pass on rising raw material costs to households. Still, ultra-loose monetary policy settings will be maintained as wage growth remains meagre. USDJPY remains on the front foot around the highest levels since early 2016, refreshing its highs around 121.20 as Tokyo opened for Thursday. AUDJPY touched fresh record highs of 90.9.
What you need to consider
- Expect commodity stocks to be upgraded by brokers, boosting their share prices even more. Commodity companies are also expected to upgrade their outlooks and earnings forecasts for the year. Commodity stocks on the US and Australian stock markets are this years best performers, and this will likely continue. As we have seen this year, the iron ore price, copper, wheat, oil, coal prices are all higher. And we think higher highs will come from global commodity companies earnings too as a result. In February 2022 Australia’s biggest mining companies and some of the world’s biggest commodity companies reported results, BHP and RIO. And both citied that they expected demand to grow. Then the war in Ukraine erupted. And we saw further fire stocked into coal, wheat, iron ore, oil prices. So, you could expect money flows to back commodities for the rest of the year, and probably indeed until August reporting season. Then also consider, if a company reports better than expected results, their shares generally rally. So that’s something to ponder.
- Small cap IPOs fall to lowest level in two years. On the ASX and in the US, the small cap IPO boom is fading, but is still above pre-pandemic levels. In the US; healthcare has had largest numbers of IPOS so far this quarter (with seven new listings), followed by industrials with three new listings. We are expecting less IPOs this year given interest rates are rising, but keep your eye out for clean energy stocks.
- High stakes on the NATO meeting. Expectations of stronger sanctions on Russia and possible action against China is keeping the risk sentiment fragile. Oil extended gains in Asia with Brent rising above 123 as U.S. stockpiles dropped and a Black Sea export terminal halted loadings following bad weather. Japanese refiners like Eneos (JP: 5020) are and Idemitsu (JP: 5019) are also staying away from Russian crude, which could mean more threats from any increase in sanctions and resulting gains in oil prices. WTI broke to fresh highs in Asia as Russia insisted on ruble payments for natural gas exports. Gold held onto its gains.
- The US Government will renew tariff waivers for 352 categories of Chinese imports, including electric motors, machinery, chemicals, bicycle parts, seafood and others.
- Singapore moves towards ending COVID restrictions. Singapore announced moves to ease restrictions, lifting mask mandates outdoors, increasing the workplace and events capacity to 75% and hinting at easing travel requirements to almost like pre-Covid times. A stark contrast to Hong Kong's strict rules, and bodes well to attract more businesses. Travel related stocks like Singapore Airlines (SG: SIAL), ComfortDelGro (SG: CMDG) rose on the news. USDSGD to see downside pressures with MAS tightening moves also on the cards in April.
- China unveiled plans to triple global output of hydrogen by 2025 to achieve its climate goals. Meaning you could see more funding for hydrogen companies. For more, see here. For those looking to invest in this theme, in Australia and the APAC region, consider there is an ETF that invests in 30 leading global hydrogen businesses, ETFS Hydrogen ETF (Code: HGEN). For more info: click here.
- APAC travel is picking up. India scrapped travel restrictions. Indonesia has scrapped quarantine requirements for international arrivals. Thailand is dispensing with pre-departure PCR tests from April. Vietnam is taking some steps towards reopening. HK is also cutting quarantine even as its Covid Zero strategy continues to be criticized. Singapore and Malaysia are moving towards a full reopening of air and land travel for vaccinated people. While a full tourism recovery still cannot be expected in 2022 as Chinese tourists remain scarce, H2 should see some gains provided vaccines remain effective against any new COVID variants. You could look at stocks like Qantas, Air New Zealand, Singapore Airlines, Japan Airlines, ANA Holdings.
- US And Australian Fertilizer stocks back in vogue. As European natural gas prices spiked, it could be worthwhile looking at fertilizer makers using cheap US or Australian natural gas like CF Industries (CF) and Nutrien (NTR) in the US, and Nufarm (NUF) who makes fertilizer in Australia and APAC. Manufacturing fertilizer in the US, and Australia, and selling them at a premium, and without the expensive constraints of shipment will likely boost their earnings and revenue. And growing earnings drives share price growth.
- With oil prices getting higher, investors should remember earnings drives share price growth. For investors who want to back US oil producers, and make most of their money from the US, investors could look at Cheniere Energy (LNG), Occidental Petroleum (OXY), Marathon Petroleum (MPC). Meanwhile with higher prices in LNG, and given Australia is the second biggest LNG producer in the world, it could be worth looking at Woodside Petroleum (WPL) for example.
- Yen trading. Yen was particularly weak among the majors as the Bank of Japan pledges to keep 10-year JGB yield before 0.25% while the U.S. Fed has opened the door for much higher interest rates. The June 2015 high of 125.80 seems within reach. As we are approaching the Japanese year-end, moving too fast and too far above 125 may raise eyebrows of Japan’s Ministry of Finance. Investors experienced in options may consider trading the move towards 125 by buying a 121-125 call spread in USDJPY,
Earnings to watch
Hong Kong & mainland China
- Mar 24: BAIC Motor (01958), China Life (02628), China Overseas Property (02669), China Resources Beer (00291), NIO (09866)
- Mar 25: Greentown Service (02869), Longfor (00960), Meituan (03690
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.
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