Category: Business

The Australian share market has risen for the third consecutive week, with the ASX 200 rallying 1.01% for the week and 5.83% over the past month to close trade on Friday at 7015.6 points.

Whether we are witnesses a bear market rally or merely a correction in a large bull market is yet to be seen, however positive shoots are appearing.

RBA raises rates again

The Reserve Bank of Australia (RBA) lifted the cash rate on Tuesday by 0.5%, taking the overall rate to 1.85%.

The highest it has been in six years.

RBA’s governor Philip Lowe hinted that rate rises from here on in will be more modest, adding that “inflation is expected to peak later this year and then decline back towards the 2–3% range.”

Commercial banks follow suit

Joining in on the RBA rate rise is Australia’s major banks, confirming they will pass on the hike on their variable mortgages by 0.5%.

Despite the big four making the move to raise rates on borrowers, only some savings accounts will see an increase. With savers still being overall punished by inflation being higher than the rate of return from the banks.

Retail sales for June saw a surprising 1.4% rise in volume and 12% increase year-on-year in dollar terms.

However the increase is largely a reflection of price rises and the end of government imposed lockdowns.

Overall sentiment and rate rises have started to impact on Australia’s property market, with prices beginning to cool in all major markets.

Recession risk remains

England’s central bank didn’t mess around this week either, raising interest rates by 0.5%, to an overall rate of 1.75%.

The largest rate increase in 27 years.

What was more attention grabbing was the Bank of England’s (BOE) prediction that a long recession is on its way.

The BoE expects inflation to peak at 13.3% in October, stating that the UK economy would begin to shrink in the last quarter of 2022 and contract throughout all of 2023, making it the longest recession since the global financial crisis.

Further signs of inflation may be peaking is the oil price now at pre-Ukraine war levels.

With crude oil today trading at US$87 per barrel, down significantly from its recent peak of US$126 per barrel.

Small cap stock action

The Small Ords index climbed 2.02% for the week to close on 3016.8 points.

Small cap companies making headlines this week were:

ioneer (ASX: INR)

Emerging lithium producer ioneer inked another binding offtake agreement for lithium carbonate produced from its Rhyolite Ridge project in Nevada.

The five year agreement was made with battery manufacturer Prime Planet Energy & Solutions, which is a joint venture between Toyota Motor Corporation and Panasonic.

Over the term, Prime will purchase 4,000tpa of lithium carbonate from the operation – accounting for about 19% of expected annual production.

The deal follows other offtake deals with Ford and EcoPro, which have each agreed to take 34% each of the mine’s annual planned lithium carbonate.

ioneer says the three offtake agreements represent the completion of all its pre-production commitments for lithium carbonate from Rhyolite Ridge.

BPH Energy (ASX: BPH)

BPH Energy and its investee Advent Energy have completed a 10% acquisition of Clean Hydrogen Technologies.

The deal involved BPH scooping up US$800,000-worth of Clean Hydrogen shares – giving it an 8% interest.

Advent purchased US$200,000-worth of shares, which gave it a 2% stake.

Both BPH and Advent have a further right of refusal to pick-up another 10% equity in Clean Hydrogen for a combined $1.42 million before the end of the year.

Clean Hydrogen has developed technologies to produce hydrogen and carbon black and carbon nano products, using less energy and without emitting carbon dioxide. The technology uses natural gas as the feedstock.

Frontier Energy (ASX: FHE)

Emerging clean energy producer, Frontier Energy debuted on the US-based OTCQX market this week under the ticker FRHYF.

The secondary US listing is to enhance visibility and accessibility of Frontier to North American investors.

News of the US listing came after Frontier announced it was acquiring extra land for its primary Bristol Springs solar project in Western Australia’s South West.

The company secured exclusive options to acquire 6.51sq km of land for the project – adding to the existing 1.95sq km, where it plans to produce 114MWdc of solar energy.

This extra land will enable Frontier to realize its green hydrogen production strategy, which it is closer to achieving after a pre-feasibility study forecast it would have a total unit cost of $2.83/kg of hydrogen produced.

Frontier says this would place Bristol Springs as one of the lowest cost green hydrogen producers in Australia.

Kairos Minerals (ASX: KAI)

Gold explorer Kairos Minerals attracted investor interest this week after it revealed assays for spodumene pegmatites it had discovered at its Mt York project.

The pegmatites had been uncovered during drill pad construction in readiness for a gold drilling program at the Lucky Sump prospect.

Five pegmatite samples that were assayed returned peak results of 1.91% lithium and 103ppm tantalum; 1.56% lithium and 115ppm tantalum; and 0.58% lithium and 167ppm tantalum.

Kairos plans to follow the discovery up with more sampling and mapping plus a major drilling campaign.

Lucky Sump is adjacent to Pilbara Minerals’ Pilgangoora lithium operation and about 25km from Albemarle and Mineral Resources’ Wodgina mine.

It is suspected Lucky Sump could be a southern extension to Pilgangoora.

Incannex Healthcare (ASX: IHL)

After completing its acquisition of APIRx on Friday, Incannex Healthcare officially has the world’s largest portfolio of patented medicinal cannabinoid formulation drugs and psychedelic treatments.

The acquisition was announced in March and APIRx co-founders Dr George Anastassov and Lekhram Changoer have joined Incannex as non-executive director and chief technical officer, respectively.

APIRx has 22 clinical and pre-clinical research and development projects, with aggregate addressable markets of US$400 billion a year.

The acquisition follows Incanex’s announcement earlier in the week it was scaling up the manufacture of IHL-216A, which is a neuroprotective drug designed to treat concussion and traumatic brain injury.

Incannex engaged Curia to scale the fill-finish manufacture of IHL-216A in compliance with current Good Manufacturing Practice (cGMP) and generate data on the quality and stability of the drug to underpin future regulatory filings.

European Lithium (ASX: EUR)

BMW AG is the latest major auto manufacturer to secure a direct lithium hydroxide supply after it inked a non-binding memorandum of understanding with European Lithium.

European Lithium has agreed to grant BMW first right to 100% of the lithium hydroxide produced from its identified resources at the Wolfsberg project in Austria.

In the event the parties agree to a binding contract, BMW will make a US$15 million up front payment, which will be used to advance Wolfsberg.

A definitive feasibility study on Wolfsberg is targeted for completion in the December quarter.

The week ahead

On the local front, consumer and business confidence numbers are out mid week, along with consumer inflation expectations and new home sales for July.

Over in the US inflation numbers for July will reveal how far behind the curb the Federal Reserve is in what it once dubbed as ‘transient inflation’, which has been anything but.

Analysts are forecasting inflation to once again read 9.1% for July, the same as for the month of June. This was the highest inflation reading in over 40 years.

Meanwhile over in China, inflation and industrial production numbers for July will be revealed.

Granted these inflation numbers are a look back in time, however it is clear that the globally synchronized central bank policy of rates held to near or below zero percent in most countries for over a decade and excessive money printing is seeing inflation spiral out of control and the cost of living rises for people around the world.

This week’s top stocks

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As one of Australia’s most popular automakers, Mitsubishi has been holding back internationally from releasing a mainstream electric vehicle. Instead of jumping onto battery EVs, Mitsubishi Australia wants to stick with PHEV (plug-in hybrid electric vehicle) technology… At least for now.

Over in Japan, Mitsubishi recently released the eK X, a short-range EV for inner city driving, developed alongside an identical Nissan model (Mitsubishi, Nissan and Renault have a strategic alliance). It’s not something you’d expect to come to Australia, with a limited range and speed, but that’s the point. Right now, Mitsubishi doesn’t see electric vehicles as a good choice for the Australian market.

On a recent press trip to Adelaide with Mitsubishi, I got the opportunity to speak with Shaun Westcott, the CEO of Mitsubishi Australia.

The Mitsubishi team showed media images of Westcott testing a new vehicle in the Simpson Desert. After chatting with him, it’s clear Westcott is an advocate of cutting emissions, but why isn’t Mitsubishi going all-electric in Australia?

“At the moment, if we had to switch to pure electric, all we’re really doing is shifting the problem from the tailpipe to the power station,” Westcott told Gizmodo Australia.

“We’re in Australia. We’re not in Norway, we’re not in Europe.”

Last year it was reported that 24 per cent of the Australian energy grid was powered by renewables. In Norway, the example cited by Westcott, 98 per cent of the grid is made up of renewable energy.

This is a jaw dropper, by any measure, but it is something that we can work towards in Australia. As we reported earlier this week, the Australian government entered a Bill to cut our emissions by 43 per cent below what it was in 2005, and to do it before 2030. We also reported that the ACT will be phasing out gas power by 2045.

And a lot of these points back to the transport sector.

In 2020, it was reported that the Australian transport sector, as a whole, makes up 18.9 per cent of all emissions. This figure varies at the state level, which is why the ACT is so bent on phasing petroleum vehicles out by 2035 (because the transport sector makes up the majority of emissions in the territory).

So then, why is Mitsubishi bringing PHEV technology back? Why hasn’t Mitsubishi launched an electric competitor to the Hyundai Ioniq 5 or the Kia Niro?

“At the moment, we have insufficient charging infrastructure in this country,” Westcott said.

“It’s going to require billions of dollars and a number of years to build all of that. Whether that money comes from private enterprise or whether it comes from government, it’s going to take time to do that.”

It’s hard to disagree with Westcott on this point in the Australian market. Transition-wise, with 76 per cent of our grid still being powered by fossil fuels, you’re really only transferring emissions from one sector to another by driving an electric vehicle.

That is unless you’re charging your electric vehicle off of your own renewable energy, which many users do. Australia has the most solar per capita of any country in the world, and when we consider daily driving distances, Aussie car owners typically drive for 34 kilometers per day on average (which largely defuses the argument of EVs having a lower range).

The Mitsubishi Eclipse Cross (from last year) and the upcoming Outlander use a battery first and petrol second approach. Where other PHEVs may run battery and petrol motors synchronously, Mitsubishi’s petrol motor functions as a generator, converting fossil fuels into battery energy.

If you go really fast, the petrol engine will start providing energy to the front wheels, but for most uses, it can be functionally an electric car, charged in the garage with the petrol engine disabled at speeds below 70km/h (though the battery of the new Outlander only provides 84km range without petrol-to-battery generation).

“Our customers use our previous generation Outlander in fully electric mode 84 per cent of the time,” Westcott added.

“Other research shows that only 19 per cent of Australians… are prepared to go straight into EV, right now, today.

“What we believe is that our technology allows people to transition. It allows them to experience EV, and the benefits of EV, without having the range anxiety, without having to worry about a charging station… I think it gives you the best of both worlds. We need to inform, educate and expose, which is what we think the PHEV allows us to do. It allows us to reduce emissions by 84 per cent right now with zero dollars spent on infrastructure.”

Westcott was able to confirm that Mitsubishi is moving in the direction of rolling out PHEV technology more across its brand (including in the upcoming revival of RALLIART), though he was unable to provide a timeframe.

Though how long does the PHEV concept have in Australia? What will it take and how long will it take for Australian cars to go all-electric?

Australia doesn’t have fuel-efficiency standards, which electric vehicle lobbyists believe are key to unlocking the EV market in the country, and it’s true that we don’t have a massive array of public electric car charging stations built out.

Though there is enthusiasm to change this, we’ll likely be waiting some time, just as we’ll need to wait for Australia’s grid to become more reliant on renewables.

The future may be electric, but it will take us some time to get there.

ASX lithium shares are charging higher today.

Leading lithium stocks Liontown Resources Ltd (ASX: LTR) is up 4.96% in early afternoon trade and Pilbara Minerals Ltd (ASX: PLS) shares are up 3.61%.

This week, both ASX lithium companies presented at the Diggers & Dealers Mining Forum in Kalgoorlie, Western Australia.

As attendees heard, the long-term demand outlook for lithium – a lightweight, conductive metal critical in electric vehicle (EV) and home storage batteries – remains very strong amid rapid global growth in EV markets.

This, as the battery metals industry is looking at a US$42 billion funding shortfall to meet that soaring demand, according to Benchmark Mineral Intelligence.

Growing future deficits in lithium supply forecast

According to Pilbara’s presentation at Diggers & Dealers, the expected deficit in lithium by 2040 is the equivalent to some 18 Pilgangooras. The ASX lithium share was referring to its Pilgangoora project, one of the largest hard rock lithium-tantalum deposits on Earth.

It said the forecast deficit comes “with likely pricing implications”.

Lithium prices have already leapt almost 500% since this time last year.

According to Pilbara Minerals CEO Dale Henderson (quoted by Bloomberg), “The appetite is insatiable. Any producer in lithium is very popular at the moment.”

In its presentation, Liontown Resources pointed to research from global consulting firm Boston Consulting Group (BCG). BCG expects overall lithium demand growth of approximately 20% per year from 2020 through to 2035. This will be mostly driven by increased demand for EV and energy storage system (ESS) batteries.

Liontown CEO Tony Ottaviano said (courtesy of Bloomberg):

I don’t want us to come across as self-indulgent because we have immense respect for our customers, but the simple fact is it takes five to eight years to bring greenfield supply online in tier-one jurisdictions.

Ottaviano said that “interest was low” when the ASX lithium share approached car makers and other manufacturers for its first offtake.

“Roll the clock forward and we are seeing a completely different commercial posture,” he added.

How have these two ASX lithium shares been performing?

Over the past 12 months, the Pilbara share price is up 42% while the Liontown share price has gained 74%. That compares to a full-year loss of 7% posted by the All Ordinaries Index (ASX:XAO).

Roll the clock back five years, and these ASX lithium shares have really shot the lights out.

If you’d invested in the Pilbara five years ago, you’d be sitting on gains of 689%. As for Liontown, its shares have surged an eye-popping 14,550% in five years.

“We don’t see that it will hit the double figures that are being spoken about in Europe and in some other destinations,” Mr Albanese said.

His comments come as economic policymakers walk a narrow path to bring inflation to heel without sparking a local recession, amid decades-high inflation, rising interest rates, a 48-year low 3.5 per cent jobless rate, and record terms of trade that is sparking more record trade surpluses.

The attempt to engineer a soft landing for the domestic economy comes as growing anger at the rising cost of living and falling real wages tests the nerve of the RBA and the government to make tough but necessary calls.

The RBA said headline and underlying inflation would return to the bank’s 2 per cent to 3 per cent target band by late 2024, but a shift in inflation psychology could spark high wages growth in such a tight labor market.

“The effect of high inflation and cost-of-living pressures on wage- and price-setting behavior is a material risk to the inflation outlook,” the bank said.

A driving force behind the strong growth in goods and services prices is gas and electricity bills, which are set to rise 10 per cent to 15 per cent in the second half of the year due to the turbulence in the local energy market.

The RBA this week pressed ahead with a third straight 0.5 percentage point inflation-fighting interest rate rise, taking the official cash rate from a record low 0.1 per cent in May to 1.85 per cent, with more increases to come.

In its quarterly monetary policy update on Friday, the bank downgraded economic growth to 3.2 per cent this year, 1.8 per cent in 2023 and 1.7 per cent in 2024 as higher cost of living and rising interest rates stymie activity.

The bank also forecast the unemployment rate to fall to 3.4 per cent later this year, before slowing rising back to 4 per cent in 2024.

Real wages will not rise for another 18 months

There is currently about one unemployed person for each job vacancy, which, along with soft migration, is placing pressure on businesses.

“Hiring intentions reported by firms in surveys and the bank’s liaison program remain strong,” the RBA said.

“However, firms have also reported that finding suitable labor is a significant constraint on activity, with some expressing concerns about achieving their desired increases in headcount in the tight labor market.

“Firms have responded to labor availability issues by offering higher wage increases for specific workers, emphasizing non-wage remuneration, and hiring less experienced or less qualified staff than previously.”

The tight labor market is expected to slowly flow through to worker wages.

Wages growth is expected to pick up to 3 per cent this year, 3.6 next year and 3.9 per cent in 2024, with the bank’s business liaison program suggesting more than 60 per cent of businesses expected to give pay rises above least 3 per cent, while just over 30 per cent expect 2 per cent to 3 per cent.

But with inflation running well ahead of pay rises, real wages will not rise for another 18 months or more, according to the RBA. Under current assumptions, real wages will fall to 2008-09 levels over the next short while.

Treasurer Jim Chalmers said the result reinforced the need for responsible cost-of-living relief in the October budget, easing capacity constraints and increasing productivity over the long run, while the union movement said 2024 was too long to wait for real wages growth and demanded action.

“The cost-of-living crisis, and now the rapid and brutal hike in interest rates is forcing many workers to deplete their savings. They simply cannot withstand their wages continuing to go backwards in real terms,” said Michele O’Neil, president of the Australian Council of Trade Unions.

Commonwealth Bank head of Australian economics Gareth Aird said at face value, the latest forecasts were not a good news story for households.

“The weaker outlook for real incomes as well the rapid pace of interest rate hikes delivered to date and the expectation of further rate rises has meant the RBA has downwardly revised their outlook for GDP growth,” he said.

CBA tips inflation to fall faster than the RBA

Demonstrating the high degree of uncertainty among policymakers and economists about the economic outlook, CBA is forecasting inflation to fall much faster than the RBA to back within the target band by late 2023.

“We anticipate a number of the forces that have driven the spike in inflation to weaken and/or dissipate in 2023…given we think that the household sector will struggle more under the weight of higher interest rates.”

Some cost-of-living relief may be on the way from global oil prices slumping to pre-Ukraine war levels in later week trading. Brent Crude was trading around $US94 ($135) a barrel on Friday, down from $US110 in late July.

That will flow through to lower pump prices – which, in addition to helping household budgets, will also provide some political cover to the Albanese government to not extend the $3 billion six-month fuel tax cut, which, given the state of the federal budget it is unaffordable.

Mr Albanese on Friday said it was important fiscal policy (the budget) worked in tandem with monetary policy (the RBA’s official interest rate) towards the same objectives.

“One of the things that the government can do is constrain spending through fiscal prudence,” he said.

“One of the reasons why we’re bringing down a budget in October, given there was a budget just in March, is to go through line by line and look for savings that can be made, to rip the waste which is there out of the budget.

“That’s part of the context of why we are doing that.”

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 I predicted the largest sell-off in commodity stocks was about to follow. In 2009 I suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodity stocks. Post GFC, I have dedicated his research to finding All-Weather Performers. See also “All-Weather Performers” on this website, as well as the Special Reports section.

Rudi’s View | Aug 04 2022

In this week’s Weekly Insights:

-The Non-Recession Recession
-August Preview: Curve Balls, Profits & Forecasts
-Conviction Calls
-Focus on Quality
-FN Arena Talks

By Rudi Filapek-Vandyck, Editor

The Non-Recession Recession

When is a recession not a recession?

I’ll leave the debate to the global community of economists, but needless to say the first two quarters of 2022 did not deliver the recession the US economy had to have, irrespective of the statistical outcomes for the period.

As to why US share markets simply shrugged and moved on, CIBC’s Avery Shenfeld provided the answer:

Rumors to the contrary, economists don’t define two consecutive negative quarters as a recession.

“One needs to see a material decline in a broader range of activity measures, and the key missing ingredient thus far has been in the labor market.

“There can be job-free recoveries for a while, but the very definition of a recession essentially rules out having one without job losses, let alone a recession with a hiring boom.”

When share market commentators, including myself, talk about recession coming, we’re referring to company earnings falling by -20%, or maybe by -10%. Could be zero growth, on average, or a tiny positive number.

We just don’t know yet which scenario is most likely. We might find out between now and February next year.

This year’s August reporting season is too early in the cycle to provide investors with all the answers needed.

August Preview: Curve Balls, Profits & Forecasts

If I were to put in my good-humoured attempt at an old fashioned Dad-joke, I’d start off with:

I am old enough to remember when corporate reporting season in Australia was all about profits, margins, dividends and forward-looking guidance.

It’s not as if reporting seasons in the past have never been closely intertwined with macro-geopolitical, -financial or -economic concerns, but ever since the early days of the pandemic in 2020, corporate results season in Australia has never been simply about corporate health and profits.

If it wasn’t about the virus, or societal lockdowns, the key drivers underneath share price trends have been the return of inflation followed by the normalization in global bond yields.

The power of all four has proven extremely dominant throughout the past five results seasons and ahead of August, investor consensus is for a global recession on the horizon (domestic Australia not included).

We don’t know yet about the exact timing or what will be the severity of the upcoming economic slump, but corporate results will definitely be assessed against the background of (much) tougher conditions ahead.

That is, unless central bankers declare the war on inflation is due for a pause and they stop their rigorous tightening, which adds yet another macro factor into the mix.

An end to the war in the Ukraine could be another macro catalyst, albeit an unlikely one.

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At face value, the Australian share market looks like a bargain hunter’s paradise. The market’s average Price-Earnings (PE) ratio starts with 13x while the average dividend yield has risen to 5% on the back of sharply weaker share prices for large segments of the ASX.

The long-term average PE in Australia is 14.9x including a few years of very high valuations. Prior to those years of elevated multiples, the average PE stood at 14.5x; still a long while off from today’s multiple.

The problem with today’s average is that commodity producers are enjoying exceptionally favorable conditions, to which investors have responded with low valuation multiples (as they traditionally tend to do when confronted with peak-of-the-cycle earnings and cash flows).

BHP Group ((BHP)) shares, for example, with circa 11% the largest index weight in Australia, are trading on 7x next year’s forecast earnings per share. Shares in Rio Tinto ((RIO)) are on 7.3x. For Fortescue Metals ((FMG)) the comparable multiple is only 6.3x. The numbers look pretty similar for the large caps in the local energy sector.

Following the commodities resurgence post late-2020, mining and energy now represent the second largest group in the local index, after banks/financials.

Any experienced and astute investor knows such low PE multiples are not by default a signal of severe undervaluation; they are merely a sign that investors worry about the two years ahead. But having low PEs for such a large index constituent does depress the overall average, artificially creating the impression of a “cheaply” priced share market.

In the largest group, the banks are mostly trading on below-average multiples too; Once again showing the market is concerned about RBA rate hikes, their impact on local housing and the subsequent impact on spending and the local economy in general.

Excluding the two largest index sectors, the average PE in Australia quickly rises above 20x, which, by contrast, still doesn’t look that cheap at all.

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The biggest problem investors are facing today is figuring out what is the correct valuation for companies that mostly have no track record in dealing with an economic recession. For multiple reasons, the brief recession of 2020 is hardly a reliable reference point.

Not making things any easier, the impact of sharply higher bond yields, tighter liquidity and high inflation on economies and companies individually has been gradual, if not slow-paced thus far this year, while supply chain bottlenecks seem to be easing and lockdowns outside China are now a thing of the past, but the pandemic is not.

Combine all of the above and August seems too early to reveal the full impact for every company on the ASX.

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