ASX: A Bright Outlook Ahead

ASX: A Bright Outlook Ahead

 

  1. Yesterday, the editors here at Fat Tail Investment Research got together for our weekly catch up. Topics up for discussion were the current gas crisis, China, and crypto.

I put out my bit: any dips in strategic mining plays should be bought if you’re prepared to hold for the next five years.

My overarching view is that the outlook for the ASX is very good, but wildly bullish for mining, in particular.

So much of resource development and exploration over the last 10 years has gone into gold. That’s all well and good.

But you can’t use a gold bar to heat your home or run your factory. You need coal or gas in many parts of the world: hence skyrocketing prices right now.

Now we have the threat of power shortages in Europe and China. I saw a story this morning that a Chinese iron ore operation had to shut down to conserve power.

Think on that for a moment. Chinese domestic iron ore production is known to be lower grade than Australia’s.

It requires, as I understand it, more ‘benefaction’, or treatment, to be useful for steel mills.

In a power shortage, China may have no choice but to prioritise high-grade Australian ore over domestic sources — whether they want to or not.

The rolling steel mill shutdowns may be part of this power conservation too.

That keeps what steel can be made higher in price than it otherwise would be — and mills happy to keep ordering more ore to meet the demand.

Iron ore has bounced back toward US$120 a tonne in the last few sessions. The panic of last week has subsided.

That puts Rio, FMG, and BHP back in the spotlight because their yields do look tempting. Here’s one set of numbers from Canaccord:


Iron Ore Producer Valuations

Source: Canaccord

[Click to open in a new window]

What we don’t know from this is the assumption they are using for their forecast iron ore price and level of the Aussie dollar.

But we can presume it’s roughly 75 cents to the USD and probably around $80–100 for the iron ore price in CY22.

But the broader point stands: is any movement in iron ore a dip to buy or a bounce to sell?

My money is on the former.

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One reason is the titanic level of demand coming over the next five years from the energy transition, decarbonisation of the steel industry, and global infrastructure spend planned.

Also note that Australia has some incredibly good yields still on offer. The world is hunting for these.

Look at this snippet I picked up on in a profile of a fund manager running an income fund.

From the AFR:

Around 70 per cent of the portfolio’s funds represent yield-starved Japanese investors who are hungry for the consistent distributions and the buoyancy of Australia’s share market through previous bouts of global turbulence.’

I also came across a report that says Australian household wealth in the share market (outside of super) is just 9%. It was 13% back in 2005.

My take on that is there’s plenty more cash out there to come looking for a home on the ASX, from both domestic and international buyers.

But remember the caveat: you have to be prepared to hold on for a wild ride over the next five years.

  1. Here’s something you won’t have thought about. When will ASX cannabis stocks come back? I made the case in 2020 that they would.

The sector has been hammered over the last three years. The giddy days of 2017 are long gone.

I check my watchlist of them regularly. They barely move…and there’s little volume.

We can at least say there might be value there. The main problem for ASX cannabis stocks is they don’t generate earnings.

I remember my publisher asked me to do a report on them in 2018.

Despite all the hype and blather about it, many of the stocks were flimsy at best. I was right to dismiss most of them as a waste of time. A good chunk have achieved diddly-squat since.

However, there’s a couple that have gone on to at least advance their business. Now we just need to see if the investor interest will come back. Stay tuned.

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.