ASX Market Wrap 19/10/20

ASX200 (XJO)

· The XJO rose 74.60 points or 1.22% last week making it two consecutive weeks of gains. Our high was 6,210.30 on Thursday and our low was 6,093.10 on Monday.

· The XJO rose 5.4% the week previous. This is only the second time it has risen 5%+ in a week. The last time it did it was 6 months ago in April.

· The XJO is -7.59% for the calendar year, -13.76% from our highs and +35.87% from our lows

Market Commentary

Since its been a while since we last spoke I thought I’d just run down a few of the events that have been moving markets over the last few weeks and some that may dictate us into the near future.

US Elections- Its front and centre of every financial market publication now and for good reason as it’s had the most influence over our markets in the last few weeks. Only a couple of weeks ago the market had real concerns surrounding the possibility of a ‘contested election’ in the US where a result would not be known for some time and may even have to be decided by the Supreme court. This saw equity markets sell off with the XJO hitting lows of 5,763. Since then a Biden win has been seen as more likely and the chances of a contested election have diminished. In fact, the market has been rallying on the back of increased chances of a ‘Blue Wave’ where the democrats win both the Senate & the House by large margins. This is important as it leads the way to greater fiscal stimulus with an easy path of having this approved quickly. A Trump win still is positive as its likely a stimulus deal is done regardless but will be harder to push through. It is a case of as long as we avoid a contested election then the markets will be happy.

US Fiscal Stimulus- This has been obviously very topical as the last lot of stimulus has run out and the general population + small business is really hurting. There is still massive unemployment and rising benefit claims every week. Trump has declared he would sign a separate bill to get $1200 cheques out to the people straight away. The republicans want a $1.8trill package done and the democrats want a $2.4trill package done. Republicans have opposed the democrats deal until now because it has too many proposals within it that have nothing to do with pandemic relief. The democrats will not sign a republican deal as, lets face it, why would they help them out 3 weeks before an election. At this point its too hard to predict if a deal gets done before the election or not. It does not look likely but there is also every chance we get something announced this week. Flip a coin stuff. If Trump wins then we probably get a deal done before the end of November. If Biden wins it will depend on what mood Trump is in as he will still be in power until January 19th.

The Australian Budget- The Australian budget was handed down last week and had no real surprises within it. Overall, it was a good budget with a lot of stimulus in there to help us during the recovery. The biggest being the tax cuts, with some backdated to July 1st. It means people will have more in their back pocket in their pay packet every week and then when they do their tax for FY20/21 they will likely get most of the tax they overpaid during the back dated period returned; acting as a large cash injection for most in the FY21/22 year. There was also some extra spending on infrastructure in there, + incentives for corporates to hire younger people. This is important as most of the jobs that have been lost have been in younger demographics. There are more incentives for skilled training and apprentices + better incentives for R&D and innovation. Like I said it was a good budget which will get more money back to workers and incentivize employers to hire again. Will it be enough? It is too early to say at this stage but it’s a foundation and the Government can always add more if needed. We already know Scott Morrison is not afraid to spend at this point and austerity is a problem for another time. I believe the budget was the main reason the XJO rallied so hard last week.

The RBA- As we all know the RBA held the cash rate at 0.25% during the October meeting, but it was their minutes and comments since that has really got the market excited. Lowe signalled that there was a case for further monetary easing as the economy opened and it could have a greater effect. This means a likely rate cut of at least 15bps to 0.10% in November (60% chance) + pure QE to start in November also but possibly to be delayed until 2021. Lowe remarked that current cuts and any subsequent easing have had limited effect as our ability to spend, especially in Vic, has been so restricted. He emphasized that any easing now would have a better effect as we open more. As for QE it is not a definite but a strong possibility as they have been studying how this has been rolled out in other countries. He gave no indication on what form it would take but did remark that our 10yr Government bond yields were a lot higher than most. This means any QE would probably be centered around longer dated bond yields and getting those yields lower. Why would they do that? It is all with an aim to keep in step with what is happening with other central banks globally, especially the Fed, and keeping the AUD in check. Any QE here in Australia would at least keep a cap on the AUD and possibly put downward pressure on it as yields came down. A lower AUD benefits our economy as it inflates the price of real hard assets.

China- The recovery in China has been remarkable and the envy of most of the world. We all saw the videos of the Wuhan pool parties and by all account’s things are relatively normal in China again. Everything from PMI data to Import/Export numbers are suggesting an extraordinarily strong recovery in China. A recent report showed domestic air travel is at 98% of what it was this time last year & retail spending is well up. Any covid outbreak is contained quickly with often whole cities tested within days to help trace and eliminate the virus. I forget the latest city that went through this, but reports suggest 9million people were tested. Australia has seen great benefit from the strength in China with out resource exports soaring. In September China saw its second highest volumes of iron ore imports ever at 109mt. Its copper imports continued to strengthen and remain up 37%+ yoy. Commodity imports are likely to remain strong as more fiscal stimulus is likely as China continues to build out its infrastructure and support the economy. This is all excellent news for Australia and goes a long way to helping us recover as well.

EU Shutdowns- Only a recent occurrence but places in the EU such as the UK & France have started implementing partial shutdowns again as a response to rising covid numbers. These are not full on shutdowns like last time but measures such as curfews and closing pubs etc. are starting to roll through again. This is a concern and does slow the recovery, but ICU numbers remain low and deaths are not rising at any concerning pace either. At this stage most measures are for two weeks but could obviously be extended. Again, whilst this is a sobering it does also mean the EU are likely to hand out more stimulus in the months ahead to help with the eventual recovery.

Australian Market Outlook

I was convinced just over a week ago, from a technical perspective, the XJO looked destined to break down and fall to the 5,550 level before the US elections. Only to bottom on election day and rally from there into Christmas. This all changed last week when we saw the XJO rally 5.4% and push toward the 6,200 level, which it remains around today. A break above 6,200 looks likely now, but hopefully we get some consolidation around those levels now to help strengthen a move higher. We have a mere 11 trading days before the US elections and my bet is for the XJO to trade sideways until then. I feel the only events that could move it either way is a stimulus bill be signed or 100% ruled out or fears over a contested election rise again. Even then these are all short-term problems that will eventually be resolved. Any major correction is a buying opportunity in my eyes.

Technically the XJO is looking the most bullish it has since late May when we pushed back into our longer-term trend. Please note the chart is on a weekly basis, thus every candle represents a week. I feel like it cuts out more noise this way and emphasizes the longer-term bullishness I am seeing. A break and hold of 6200 should mean we find our way back to old highs over the next 12 months.

Commodities Super Cycle

I passionately believe we are at the beginning of our next major commodity super cycle that will last a decade or more. Now this does not mean it will be linear and we wont experience corrections along the way but in the grand scheme of things we will see a significant uplift in demand globally for resources. What I believe to be driving this are the following factors:

1. Cheap commodity prices- Whilst some commodities have bounced off their lows many remain significantly below recent highs.

2. Falling USD- Despite a recent bounce the USD looks destined to go lower as massive stimulus and extra money supply enter the market. This makes commodities even cheaper for entities to buy as most trade in USD.

3. The pandemic- The virus and subsequent lockdowns have forced the globe into a deep recession that is forcing the hand of central banks and Governments to provide stimulus via QE & fiscal measures. This is flushing the system with cheap cash/credit (rates are at zero) and will make it easier for major projects to get off the ground.

4. Infrastructure boom- China has already started and others will follow with a major infrastructure spending spree. The recession means a focus on job creation and what's the best way to get thousands of workers into work again? Massive infrastructure projects. We also have very old infrastructure that needs to be upgraded or replaced in places like the EU & central USA.

Hence you have a situation whereby commodities are cheap; credit is freely available and cheap, and we have Governments needing to get their economies moving again and jobs need to be created. This creates the perfect storm for a massive increase in demand for commodities that makes very logical sense. Now this wont happen straight away as places like the EU are heading into a second wave, workers need to be reskilled and approvals made but I feel by the beginning of 2022 we will start to see some of those projects breaking ground. Consequently, we probably do not start seeing the impact on earnings until late into the FY21/22 year possibly beginning of FY22/23. Commodity prices will see the quickest impact as obviously we need resources to make the steel, concrete, internet infrastructure etc.to begin with. I feel the best exposure comes from iron ore, copper, nickel, zinc & rare earths.

Iron Ore- An obvious one as it is the major product used in the production of steel. $BHP $RIO $FMG give you the largest exposure here and will stand to benefit from exceptionally low debt levels, and extremely high free cash flow levels. $CIA is another who produce extremely high (67%+ Fe) concentrate from Canada that will benefit greatly. Also keep an eye on a very high-risk micro-cap in $TI1 who probably will be producing in South America within 12 months.

Nickel/Zinc- Also both used in the production of steel. Nickel is mainly used for hardening steel and Zn/Ni for protection. Nickel is also being increasingly used in cathodes for batteries. The shift to renewables and electric vehicles will increase the demand there. It’s difficult to get exposure to zinc production on the ASX with it dominated with explorers and developers I’m not confident enough to mention. Nickel is easy enough to get exposure to again with $BHP a producer but also $WSA & $IGO major producers as well. I probably prefer $WSA in that space at this point. Also, worth keeping an eye on the small cap in $MCR who will be a producer again soon and have excellent management.

Copper- One of the most important resources on the planet as its not only used within infrastructure but a lot in the tools used for construction + modern networking infrastructure and electric vehicles. Four times as much copper is used in an EV compared to a current ICE car. $BHP appears here again for its exposure via Escondida and Olympic Dam. $RIO also has exposure to Escondida but looks also to start up a new mine at Winu in WA by 2023. $OZL probably remains the purest play with roughly half of its earnings coming from copper with gold being the bonus here. $SFR have exposure as well but are winding down and need to replace exiting reserves. Then there is also a small cap in $C6C who produce copper in Canada and are looking to produce more here. Higher risk play there but will also give you that copper leverage.

Rare Earths- Important minerals and used many in electric vehicles, other electronics, and weapons. China dominates global production with around 75% share, so its important other producers are found. The only listed producer here is $LYC with the rest being explorers and developers. $ASM is another rare earth company I like, that spun out of $ALK, but have become too expensive at current prices. The risk with rare earth’s minerals is that if Trump loses the election and Biden eases tensions with China then the risk of export bans to the US and subsequent price appreciation would ultimately fall significantly. This means in the short term there could be a sell off in the sector but longer term it remains very bullish and I would use any major correction as an entry opportunity.

Gold

Gold continues to drift lower as global risk diminish and any US stimulus continues to be delayed. I remain incredibly positive on gold longer term as I believe the globe will continue to be flushed with stimulus from the US & EU which will force their respective currencies down and keep real rates negative. Until then we could see gold grind lower with $1800 being my lower end target. My top end target is $2,500 for now, but obviously it could trade much higher than that. Whilst I still prefer gold ETFs as my exposure, $GOLD my favourite now being that is currency unhedged. I am happy to enter the Gold equities as well as I feel since the $NST/$SAR merger many are in play. I prefer $EVN & $PRU here as EVN has the size to be attractive to a major player and has a great production runway and PRU as its undervalued given where production is expected to be in 24 months. I also like $NST once the merger is finalised as they plan to be producing 2mill+ ounces by 2027 and will be the sixth largest producer based on today’s current production rates.

In the high-risk speculative space, there are so many with great potential, but I will highlight $MXR $FFR $AEV $CST $MGV as stand outs. These are just explorers at this stage so as mentioned are very high risk but potentially could offer a lot of upside. Overall Gold is a buy on dips situation, but I would not be rushing in now as I feel there could be more downside to come.

Wrapping things up

Just wanted to say, as it seems we are coming out of the end of this pandemic situation, I hope you have kept safe and well over what has been a testing period for many. Luckily here in SA we kept numbers low and community transmission was basically non-existent. Talking to clients and even just wondering around the city and suburban shopping centres it feels as if things are relatively back to normal. Cafés and pubs seem full again and people are wanting to get out and spend money. Let’s hope our hot summer helps keeps numbers down and we get a vaccine in Q1/Q2 next year.

As for the future of these market updates I will be trailing something different soon. I will, either on a Monday or Tuesday night, do a live stream from my website where for half an hour I talk about the markets and events impacting it over the last week and even take questions live from those watching. You will also be able to replay the stream via VOD any time you like. It’s something a bit different and not many advisors do it on a regular basis. I feel it would keep things more relevant to you all and its easier for me to do than write a 3000-word email. I have the technology to do it already so why not take advantage of it. I would be sending out a link 24-48 hours out before the live stream to give you plenty of warning. Let me know your thoughts on this and if there is anything you would like to include or if you are just simply dead set against it.

Finally, on a personal note my wife needs to have major surgery on the 29th October that also requires some decent recovery time. This means for a month after the surgery I probably will not be available for in person meetings but obviously could still do video conferencing as I will need to be around to look after her and the kids. If you need to see me, we have about a week and a half to tee it up so please let me know. My day to day availability for trades and enquiries should not be affected. I want to thank you for your patience here in advance.

Next week I want to talk to you all about artificial intelligence, machine learning, automation and 5G networks. I feel there is a massive opportunity in that space for the foreseeable future. I will also chat to you about some earnings & production updates we are seeing roll through from Q1 of FY20/21. Just simply ran out of time and words this week. Hope you all have a wonderful and safe week. I will speak to you all very soon. Go Crows!

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.