Rudi's View | Jun 24 2021
In this week's Weekly Insights:
-2021, The Year Of Doubt
-Research To Download
2021, The Year Of Doubt
By Rudi Filapek-Vandyck, Editor FNArena
Others see a world dominated by central bank interventions, fiscal stimulus, a virus that refuses to surrender, still rising inequality, asset price inflation and a growing consensus on climate action, but I look upon 2021 as the Year Of Doubt.
Are equity prices finally ready to come back to earth? How high can house prices rise, really? Is bitcoin making a fool out of all of us? 'Value' stocks have had a rough time for most of the past decade, why aren't they rallying more? Surely corporate bonds are today's ultimate bubble?
Inflation cannot stay 'hidden' forever, or can it? Why are bond yields falling? Whatever happened to gold as the inflation-safe store of wealth? Is global debt ever going to shrink? Are we already too late to save the world from climate disaster? Is war with China inevitable? What will the New Normal look like?
These are still only a selected few of the many doubts and questions that live inside human brains in 2021. And yet, somehow equity indices have denied all forecasts for a range-trading outlook, or worse, and set new record after new record as we approach mid-year.
It's just one of many inconsistencies inside financial markets in 2021.
Doubts, and many persistent questions. They may, on balance, not have held back share market indices over the past half-year, but they dominate the landscape underneath the surface, where individual stock prices reside.
Take engineers, contractors and mining services providers as an (excellent) example.
With global economic indicators running hot and commodity producers enjoying a strong revival in prices for iron ore, copper, crude oil and the like, share prices for those companies servicing the commodities sector should be well and truly shooting the lights out by now.
They most certainly are not, with the occasional exception that is ALS ((ALQ)) or XRF Scientific ((XRF)).
Yet, most sector analysts remain adamant:
All of our key indicators suggest a high likelihood of a sustained increase in mineral investment that we believe will likely provide plenty of demand for services through the cycle, from exploration to construction and production, analysts at Canaccord Genuity reported on Monday.
"Commodity prices are at multi-year highs, mining ECM [equity capital markets] activity remains very elevated and the balance sheets of the majors are stronger than they have been in over a decade."
Yet, share prices for the companies involved are trading well below valuations and price targets set by Canaccord and other sector analysts. Shares in Seven Group ((SVW)) are trading -29% below consensus target. Monadelphous ((MND)), widely seen as the quality standard for the sector locally, is well off from the price reached in December and nowhere near the $12.39 consensus target.
It can get a lot worse elsewhere in the sector. Shares in NRW Holdings ((NWH)), highly leveraged to iron ore and infrastructure spending, are currently trading no less than -79% below consensus target.
This now leads to the rather odd situation that when a broker like Canaccord Genuity adds four additional mining services providers to its coverage, total coverage of the sector rises to eight Buy recommendations out of nine, including one Speculative Buy, and with NRW Holdings as the sole Hold-rated stock.
But share prices are not moving.