Passing the 6000 barrier the first step, but now it is time to be resourceful
The stockmarket has broken its biggest hurdle — 6000 points on the ASX 200, with every chance of going higher — but this time round it’s going to be different.
This time the resource sector, which drove the market to a record 6828 a decade ago — has a different story to tell.
Coal, oil and even iron ore are now beholden to environmental legislation, while new opportunities shine for nickel, cobalt, lithium and just about anything related to clean energy.
Back in 2007, the last time we enjoyed the full glories of an unrestrained “bull market”, both banking and mining stocks were firing on all cylinders.
In the months ahead, few expect bank stocks to fire dramati- cally but there is evidence they will at least not be a drag on the market’s performance; indeed, the strong quarterly update from the Commonwealth this week has analysts talking of earnings upgrades at our biggest bank.
Separately, a large volume of cash is waiting to be deployed, with most fund managers holding double or triple their usual levels of cash on deposit.
And though broader expectations of investment yields remain suppressed and China’s economy is largely opaque, the Australian sharemarket, with its 4 per cent dividend yield on the table before any price increase, offers real opportunity. Some brokers — for example Credit Suisse — are calling an ASX 6500 by Christmas on the basis “momentum” is now unleashed. Certainly, history suggests we may have some way to go (See the graph, which rebases the ASX at 100).
But to capture any lift, investors must come to grips with a new format in the resources sector.
For guidance, look at the situation in iron ore, our most important resources sector. There are three major players: BHP, Rio and Fortescue. BHP and Rio have had a rebound in the second half of the year, but Fortescue is not in the game — the share price is falling.
Why? Because of China’s new pollution laws. The way it works in steel mills is that higher grade ore, from BHP and Rio, uses less power than lower grade ore from Fortescue. There was always a discount for the Fortescue product, but the difference between now and 2007 is that the discount is up to four times higher.
In the coal sector many great names of the last cycle, such as Gloucester and MacArthur, have been taken off the market. Players that have survived, such as Whitehaven and New Hope, can still enjoy regular rallies but labour under an uncertain future as government and banks move to boycott the industry. Rio, for example, has already sold key coal assets in Australia and may sell more.
For investors in oil — who traditionally focus on three stocks Woodside, Santos and Oil Search — huge changes are also afoot. No less an authority than OPEC — the Saudi-led oil cartel — published a report this week conceding we would reach peak oil demand in the decade after 2030.
You’ll notice that it is not “peak oil” — the concept that total oil sales will face structural decline in the years ahead. The key explanation, according to OPEC, will be the switch to electric cars, which will have become commonplace within two decades.
But there are always winners in the resources industry and a new breed of miners — once marginal — may now move to centrestage.
Nickel is perhaps the outstanding metal among better known resources. Witness the changed attitude towards Mincor, a midcap player for many years with more than $700 million in revenue. Mincor has often been seen as a goldminer with nickel on the side. But in recent months that perception has reversed, as has the share price, when Mincor’s strong nickel holdings pushed it higher.
In the hyper-speculative end of the market there is tremendous interest in lithium. Both nickel and lithium are used in lithiumion batteries. No doubt the term lithium in that battery type has prompted an influx of speculators this year into a sway of small caps, but it’s worth noting, as Mincor director Brett Lambert points out, that there is eight times as much nickel used in the lithium-ion batteries as lithium itself.
In this next leg of the market, it’s nuggets of intelligence like this that will make the difference to investors playing what is shaping up to be a much more bullish market but set against a very different environmental backdrop.