Rudi's View | Jul 19 2017
In this week's Weekly Insights:
-Resources Stocks: More Than Meets The Eye
-Franking Arbitrage In Programmed Take-Over
-Conviction Calls: Citi, DB, Morgans, Goldman Sachs, CLSA
-Medibank Private Is Gillette 2.0
-June Quarter IPO Review
-2016 - L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
-Rudi On BoardRoomRadio
Resources Stocks: More Than Meets The Eye
By Rudi Filapek-Vandyck, Editor FNArena
Lackadaisical. It's one of many beautifully sounding words in the English dictionary. It is a sentence compressed into one word, as shown by Shakespeare's Romeo when he cried out "shee's dead: alacke the day!"
The word might sound theatrical and flowery, it's modern meaning is not. Lackadaisical implies not much is happening; no spirit nor inspiration. Just like the Australian share market thus far in July.
The sole exception, maybe, have been mining and energy stocks that have at least attracted some buying interest from investors plus some positive commentary from analysts.
But all is not straightforward in the land of BHP ((BHP)), Fortescue ((FMG)), Whitehaven Coal ((WHC)), et al.
One reason to start zooming in on miners and energy companies might be because analysts are still cutting profit forecasts; they have been at it since February and market strategists at Ord Minnett, for one, believe these analysts are now exaggerating to the downside. The fall in earnings estimates for the sector has accelerated since May.
Historically, reports Ord Minnett, earnings estimates have a tendency to move upwards in January and in July, which then also explains why both months are among the best performing in a given calendar year.
This year, earnings estimates have yet to turn upwards and mining companies in particular have been hit hard with Ord Minnett calculating EPS estimates for the sector have declined by -11.1% over the past three months. Given Chinese data remain supportive (including on Monday), and looking at Ord Minnett's in-house forecasts, the strategists believe market consensus is being too harsh on, in particular, Fortescue Metals ((FMG)), Alumina Ltd ((AWC)) and Rio Tinto ((RIO)).
In anticipation of a short term reversal to the upside, which also potentially involves the banking sector, Ord Minnett has now pushed up its 12 month target for the ASX200 to 6000 from 5800 previously. I note, strategists at Deutsche Bank have penciled in 6000 for year-end, but they also have 6000 for mid next year.
Ord Minnett's positive sentiment is backed up by a recent China trip by commodities analysts at CLSA. Their view remains that demand remains solid, and that supply and environment-related reforms will support the coal, steel and aluminium markets. Notable exceptions are iron ore, nickel and crude oil for which price forecasts for the remainder of 2017 have once again been downwardly adjusted.
If CLSA's revised forecasts prove accurate, iron ore should average US$52.50/tonne in the second half. It is trading circa US$10/t higher in the present.
CLSA's Top Picks in the sector are Rio Tinto, OZ Minerals ((OZL)), BHP and Alumina Ltd. Most analysts are coming to the conclusion the Chinese are serious about restructuring their domestic aluminium industry, which leads to higher commodity prices forecasts, and this feeds into a more optimistic view for listed producers in Australia.
The more optimistic view from a fundamental, China-driven angle is supported by recent share price action. Shaw and Partners observes share prices for global miners have withstood further downward pressures since June 21. Central bankers are talking higher interest rates. Could this be the second leg in the global reflation trade that came unstuck so unceremoniously in early February?
Strategists at both UBS and Deutsche Bank advocate investment portfolios should be Overweight resources stocks on expectation of higher bond yields in the year ahead.
Whatever the cause, strong share price performances over (almost) the past four weeks have now allowed the sector to break out through technical barriers to the upside. It still doesn't look like much on a twenty years view (see below), but Shaw remains optimistic: the sector needs more EPS growth to allow for this rally to really take off and visit higher levels.
From a valuation angle, Shaw certainly likes the same names: BHP, Rio Tinto, and Alumina Ltd. Marked as "Sell" are South32 ((S32)) and Whitehaven Coal ((WHC)).