Macro: green transformation detour and bear market hibernation

Warren Buffett once famously said: “only when the tide goes out do you discover who's been swimming naked”. As tides change, with a new half year rolling in, we think it is vital to reflect, assess and adjust the portfolio, to weather the economic storm ahead of us. Given we see great risk of a global economic derailment, rising financial strain and some countries putting their clean energy targets on ice, we share the five things that investors must consider in the final half of the year.

The economy is at risk of derailment, putting banks & consumer spending earnings on the chopping block.  

Following runaway record inflation, central banks are aggressively rising rates, at a time when consumer confidence is headed for lower ground. US confidence is already at a record low, UK consumer confidence nears 50 year lows, Australian consumer confidence faces downside and business confidence is next. As the US, UK, and Australia make the majority of GPD from the consumer, we question what if consumption remains capped in this new rate hike cycle? Things could get uglier till consumer confidence picks up again. Think about this, the S&P500 Consumer Discretionary sector down 36% from its high; stocks like Nike are down 40%, Target is down 50%, but they face further pressure, unless earnings rise. And how is that going to happen in Q3?  
 
Meanwhile, lending will continue to tighten, bad debts and defaults will likely rise and this could trigger property prices to fall over 20%, which will unwind the ‘wealth effect’, and further restrict consumption. Plus we think it will likely squeeze banks profit margins; when lending has already fallen from its 2021 high. Now think about this; a AUD$700k mortgage payment rises by $850 per month, if rates jump to over 3%. How many households have that buffer? Thus, we think banks shares face further selling unless something changes. Shares in the US’ biggest lenders like JP Morgan are down 34% from last years high, Bank of America shares are down 36% from Jan.  

 

Coal & fossil fuel demand to rise with Governments forced to ramp up coal; sending clean energy commodities off the rails 

Developed countries like Germany and Australia have been forced to put their clean energy targets on ice to prioritise critical short term energy demands. Companies are being pressured to the do the same; amid a lack of supply which is causing blackouts in Australia; with the energy operator and minister calling on resources urgently. Over in Germany they’ll fire up coal power stations again, in a bid to rid the country of Russian gas imports. They admit it’s “bitter, but simply necessary in this situation to lower (Russian) gas usage”. Companies like BHP  are responding to, by scrapping the sale of their coal business and vowing to operate coal mining till 2030 to help fill supply gaps.  
 
Although the clean energy push goes on ice, Australia anticipates by 2025, some retail energy demands will be met by renewables by then.   

However, we anticipate an earnings growth slow down as well as selling, and profit-taking in clean energy stocks (lithium, hydrogen, uranium etc). Some equities to keep on our radar may include;  

• in hydrogen; Germany’s SFC Energy in hydrogen, which makes 10% of revenue from Germany and the majority from Europe. France’s McPhy Energy, making almost all of their revenue from Europe. Also keep an eye on fuel cell giant Plug Power who have global clients.  
  
  
• In lithium, the world’s biggest lithium company Albemarle, as well as Livent, listed on the NYSE. On the ASX; Pilbara Minerals and Allkem. In Asia; Genfeng, and Tianqi.  

Inversely, we anticipate higher demand and potentially even government support in coal companies, given the shift. Some companies to watch may include  

• Global diversified commodity giant BHP, who makes the majority of revue from China (65%), 5% from Australia and about 2% from Europe. 
  
  
• Australia’s Whitehaven Coal and New Hope Coal, who both make the majority of their coal revenue from Australia. As well as Coronado Global Resources, who make most of their earnings from Australia, followed by the US.  
  
  
• America’s Tech Resources, who makes over 5% of revenue from Germany, while most earnings are from Asia.  

The commodity super cycle is in hibernation; but beware of industrial commodity selling and slower earnings growth  

The commodity super cycle is not dead, but in hibernation. Industrial commodities which include oil, gas, iron ore, other metals, as well as grain and fertilizers- have been star performers on the New York, European, Australian and Brazilian stock markets in 2022; with many companies seeing record revenue and profits, supporting share price growth. But many of these companies face haircuts, with forward earnings growth to likely fall as global growth in question, demand destruction kicking from higher rates. Plus, China shows no signs of surfacing from lockdown till 2023. This also hurts industrial metal commodity economies too- Australia and Brazil- pressuring their trade balances. Meanwhile, amid tighter liquidity smaller commodity companies will also be squeezed.  

So when will the commodity metal market turn back up? We don’t have the answer. But looking out for the signs is key; we need to have consistent good news from China (and for restrictions to ease ahead plus signs of industrial activity rising consistently). Then commodity markets will likely move back to higher levels.  
 

But for now, industrial commodities might go into hibernation. Stocks to watch;  

• In the oil and gas sector include; in NY Occidental Petroleum, Valero Energy, Marathon Oil, APA Corp, Exxon Mobile, Coterra Energy, Hess Energy, Halliburton, Marathon Petroleum all of which are this years best performers on the NYSE up 92-36% YTD. On the ASX; Woodside Petroleum, Beach  Energy, Worley Parsons
  
  
• In industrial metal commodities; On the ASX; there is Rio Tinto, South32, Oz Minerals. 
  
  
• In the Agriculture sector; on the ASX; Graincorp, Elders, Costa Group, Nufarm, Incitec Pivot. On the NYSE Archer-Daniels, Mosaic, CF Industries.  

Gold stocks supported higher  

Since the 1970s gold stocks have outperformed the benchmark indices across every Fed rate hike cycle. And as Ole Hansen says; we see gold hitting a fresh record in the second half. So it’s worth keeping gold stocks on your radar and considering adding them to your portfolio for downside protection.

Expect a slow L-shape market recovery. Focusing on quality companies with rising earnings can help you outperform  

As you may know, Saxo’s long-term view on markets is bearish and we think the market is pressured downward. If you reflect on the prior bear markets (1970s, 2000 and 2007), they typically took 4 years to recover. But the key to outperforming those markets and this one, is to identify the right asset classes and companies that can outpace the slow recovery. Those companies will likely be in energy and also be companies that can pay dividends, as they have strong earnings and cash flow growth, which is vital to sustaining the pressure of higher rates, wage  inflation and other inflationary pressures.  Focusing on quality is key.  

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