APAC Market Digest: Commodities are king, tech tantrum magnifies
Australian Market Strategist
Summary: The rotation out of tech and into commodities has been amplified due to the Russian Ukraine crisis with Russia attacking the region. The Nasdaq is now down 19% from November, while the Aussie tech index is down much further, down 37% from its high. But we can see investors still pouring into commodities, which has taken the S&P Metal and Mining ETF up 20%. While in Australia, the ASX Energy stocks are up 14% and ASX Mining stocks are up 17%. This is all ahead of a potential commodity super cycle. We cover what you need to consider, plus why look at oil, iron ore and the NZ dollar.
Co-written by Market Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong.
-Updated 5.30pm Sydney Time-
What’s happening in markets?
What we have been speaking about since November last year; has now been amplified due to the Russian Ukraine crisis, with Russia now launching an attack. Money been coming out of tech and high valuation stocks, since November 2021 and been pouring into commodities.
Last night in the United States (US), the Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) slid 2.6% and 1.8% on their Wednesday.And today on Thursday in the US, the futures are suggesting another dark day is ahead, with a fall of 2.3% and 1.9% respectively expected. It’s vital to know while the Nasdaq is down is now 19% from its November 2021 high, money is storming into commodities, with flows into metal and mining stocks at the highest levels in 10 years. For example, the S&P Metals and Mining ETF (XME) has rallied up 20% from November 2021 (while the Nasdaq lost 19% over the same amount of time).
In Australia, the ASX200 (ASXSP200.I) fell 3% on Thursday (it's the biggest fall in 17 months), and is now down 8% from the August 2021 high. It’s also important to know, investors are aggressively moving out of tech and backing commodity stocks. We can see this as the ASX’s tech sector is down 37% from the August high, while Australia’s mining stocks are up 17% in this time, and Australia’s energy stocks are also up 14% in that time. Meaning… investors are moving out of tech and going into energy and mining stocks.
On the ASX; note the two biggest companies are commodity kings, who are likely to benefit from the new commodity super cycle (prolonged growth). This should help the ASX outperform the rest of the world. BHP (BHP) and Rio Tinto (RIO) listed on the ASX are the two biggest stocks in Australia. Fortescue Metals (FMG) is the 10th biggest. They are expected to pay dividend yields of 10%, 8%, and 15% respectively. Meaning you could benefit from share price growth and dividends. So consider longer term positions for your portfolio perhaps.
Other stocks in the top ten ASX include lending and banking companies, Commonwealth Bank (CBA), National Australia Bank (NAB), Westpac (WBC) and Macquarie (MQG), who are poised to benefit from the other new cycle about to start, with interest rates rising. Meantime, CSL (CSL) is the world’s biggest blood therapy company and is also in the top 10 biggest stocks. And so too is ASX newcomer, tech stock, Block (SQ2), who makes 50% of its revenue from bitcoin. I think in the top 10, Block is the only that could see further significant pressure as interest rates rise. A part from that, the rest of the top 10 are deemed to be capital stable with strong balance sheets.
In Asia today, Hong Kong’s Hang Seng (HSI.I) and China’s benchmark index, China A shares (000300.I) fell 3.4% and 2.5%.It was all about risk-off, following Russian’s attacks on Ukraine across the country. Hang Sang Index broke below 23,000 and Hang Seng Tech Index (HSTECH.I) was down 4.3%. Large tech names fell over 5% across the board. Alibaba (09988) fell almost 7% to new low. The Company is reporting results today. Auto and Chinese property names declined in excess of 6%. Energy stocks traded in Hong Kong were steady to modestly higher. A-share oil, oil services and gold mining stocks surged more than 4%. CSI300 fell 1.3% by mid-day and was down 2.7% at the time of writing.
In Singapore, the Straits Times Index (STI) fell 3.1%. In corporate news, yesterday, OCBC (OCBC) reported 4Q21 results below market expectations due to higher provisions, operating expensing and trading losses. Its shares stumbled and have continued to fall today.
What to consider?
- NZDUSD has risen to a one-month high, after ending its downtrend and rising for the 4th straight week. The Reserve Bank of New Zealand yesterday increased its interest rates by 0.25% to 1% as expected. The bank forecasts the cash rate to rise to 2.5% over the next year, with rates to peak at 3.25% by 2023 end. This is much higher than its previous forecast of 2.5%. In response, the NZDUSD surged 0.7% and from a technical perspective, the rally looks like it could continue.
- It’s Australian reporting season, remember. Rio Tinto (RIO) the second biggest miner in the world and the 2nd biggest stock on the ASX reported its second biggest profit in history and a record dividend of US$10.40 per share (that includes a final and special dividend) amid copper and aluminum prices rising to records. As for the future, Rio says long-term pricing for aluminum and copper are favourable, given they are critical to transitioning to a low-carbon future. While the iron ore outlook for pricing is murky, it doesn’t see it impairing its future.
- Iron ore (as measured by the futures contracts SCOH2, SCOH3) rose back to $137.85 on Thursday in anticipating of China increasing its purchases of iron ore after the Beijing Olympics ended. From a technical perspective, the iron ore price is bouncing off of a lower level of support, and has stayed above the lower rising trend line. What does this mean? Well the Iron Ore price could have another crack at rising to $155.25. However, if the iron ore price falls under $132 a larger correction could be expected.
- Why invest in oil? Oil rose to a fresh high 8 year high today, jumping 5% after Russia launched an attack on Ukraine. But oils escalation highlights what we've been speaking about for some time. So far this earnings season, commodities companies, including oil and gas businesses are outperforming the market on the ASX and NY markets, and have bene delivering better than expected earnings too. So what's next? Well supporting Crude oil (OILUSMAR22 & OILUKAPR22) higher is that OPEC+ countries are struggling to meet their quotas with many members already hindered by declining fields, unstable oil infrastructure, and an exodus of industry investment. However also consider that, putting a cap on oil is that Iran could return 1 million barrels of sorely needed oil per day to the market. This may cause short term noise, and volatility but oil upside remains, as Iranian oil supply doesn’t take away the long-term supply glut. For other considerations on why to consider investing in energy, click here.
- For downside protection: please refer to yesterday’s note here which also covers considerations for Gold.
- Equites in Asia: With demand on the rise and favorable government policies, Chinese semiconductor foundries, equipment makers and materials suppliers may be set to benefit and worth monitoring closely for investment opportunities.
Upcoming company earnings calendar
- Australia: Feb 25: Brambles (BXB), Medibank (MPL), Iluka (ILU), National Storage REIT (NSR) Charter Hall (CHC), Novonix (NVX), Lynas Rare Earths (LYC), PolyNovo (PVN)
- Hong Kong & China A Shares: Feb 24: Alibaba (09988), Hysan Development (00014), Sun Hung Kai Properties Ltd (00016), Hong Kong Exchanges & Clearing (00388), Bank of East Asia Ltd (00023), NetEase (09999), PCCW Ltd (00008), Pacific Basin Shipping (02343). Feb 25: Li Auto Inc. (02015), AIA Group Ltd. (01299), Beigene (06160), New World Development Co. Ltd (00017), HKT Trust & HKT Ltd (06823), Seazen Group (01030), NWS Holdings Ltd (00659), Great Eagle Holdings (00041), Angelalign (06699), Sunlord (002138)
- Singapore: Feb 24, 2022 Singapore Airlines (SIA). Feb 25, 2022 Singapore Technologies Engineering (STD)
For a global look at markets – tune into our Podcast
For prior Australian market and APAC updates - click here.
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.