In Brief: EVs Crash The Lithium Party

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Brokers take the knife to lithium prices; Morgan Stanley sours (again) on big Aussie banks; Rabobank explains how we can keep smashing the avo toast and a noisy US election on the cards.

-How secular EV tailwinds turned into secular headwinds for lithium
-RBA’s challenging cocktail of higher rates, lower savings and consumption
-Can Australian banks continue to outperform?
-Uncertainty is the word when it comes to the US Presidential Election
-Avocados, once a rich man’s treat, now a positive free-for-all
-Food for Thought, what caught my eye

By Danielle Ecuyer

This week’s In Brief has a new special “Food for Thought” quote. 

If you find any interesting investing quotes that spark the creative investing juices, email them to info@fnarena.com with your name, if you are happy to be published alongside the quote with a brief sentence on why you think it is great.

Lithium market more than stumbles, is it in free-fall?

This week’s In Brief cannot turn a blind eye to the ongoing collapse in lithium prices. 

Citi calls it “lithium in freefall” with data pointing to an increase in inventories of around 70kt since the start of 2024.

Prices have declined by -70% over the last twelve months as demand stumbled and slowed to 14% growth in 2024 from 28% in 2023.

Changing global trends away from electric vehicles (EVs) to hybrids and US/EU sanctions on Chinese EVs are major contributors to the deterioration in demand for lithium.

The global automotive team at Citi has downgraded EV adoption estimates no less than twice in the last six to nine months.

Is it any wonder Tesla has let go of -14% of their staff.

Morgan Stanley also waived the red flag for investors this week, pointing to the possibility for the lithium price to “overshoot” to the downside.

Macquarie downgraded earnings forecasts and target prices across the board for its universe of lithium stocks and remains underweight the sector. The broker reduced 2024/2025 spodumene prices by -24%/-35%, respectively and lithium carbonate prices by -27%/-35%, over the same period.

No improvement is expected until 2026 when the market starts to rebalance (fingers crossed).

Citi points to a slowdown in supply growth to 18% in 2024 from 40% in 2023, but believes there is a lot further to go, before lithium consumption improves from 2025.

Ord Minnett also joined the lithium bear pit, cutting the spodumene FY24 price forecast by -14% to US$1000/t and FY25 estimate by -25% to US$1100/t, citing oversupply and uncertainty around EV demand.

Secular trends do not move in a straight line.

The tussle between savings, consumption, and RBA rate hikes

RBC Capital observes Australia’s household savings rate at 0.9% in 1Q24, well below the pre-covid 10-year average rate, which is attributed to income tax bracket creep, a relatively robust labour market and an elongated services recovery post the harsher covid lockdowns, compared to other developed economies.

The broker points to little tolerance from the RBA for a further pick up in consumption in the second half as highlighted at Governor Bullock’s recent press conference.

RBC accentuates the risk of a further decline in household savings if per chance household consumption picks up over the second half of 2024.

Post the higher-than-expected May CPI print, UBS and Morgan Stanley now forecast the RBA to hike the cash rate by 25bps to 4.6% at the August meeting, which at minimum, Morgan Stanley observes, will be bad for investor sentiment.

RBC stated “At a minimum, rate cuts are not remotely on the horizon. We push back the start of some RBA easing to Q2-25 from Q1-25 but stick with just two 25bp cuts and modest adjustment.”

Aussie banks not coming up roses

Although Morgan Stanley does a mea culpa regarding this year’s performance of domestic banking stocks (like many brokers they have been too negative), the broker does expect a de-rating of the sector on the back of a further RBA rate hike.

The bottom line is the broker sees too much optimism priced into the sector.

Globally, Morgan Stanley continues to like the financials with the view capital markets activity is in recovery mode. In contrast to Australia, a US rate cut, and the return of M&A activity, provide positive tailwinds for financials.

In Australia, Morgan Stanley Global highlights an Overweight on Macquarie Group ((MQG)) and adds it to the Financials’ Finest List.

Election 2024: volatility and uncertainty the name of game

The first Presidential debate this morning will no doubt give investors a peek through the looking glass of what’s in store in the run up to the November US Presidential election.

Morgan Stanley stresses “uncertainty” around the outcome will be front and centre, with a deeply divided US public colliding with tight polls and an increase in mailer votes, which will serve to delay the eventual results.

Expect volatility, the broker predicts, with the likelihood of a stronger US dollar, and divergent moves across the Treasury markets. Trump policies are singled out as having both short-and longer-term implications.

Immigration and tariffs will play a significant role in the debates and election outcome, as well as the Republican versus Democrat policies.

CEO of the US Chief Executive Leadership Institute highlighted to CNBC’s Andrew Ross Sorkin that not one of the Fortune 500 CEOs is supporting President Trump in the upcoming November Presidential election.

He stated it is completely without precedent and points to potentially highly inflationary economic policies, including 10% import tariffs across the board, which may increase inflation by 3%.

Morgan Stanley expects the election will be too close to call even into the final days and suggests investors “lean into” those sectors with potential positive impacts, including defence via a rise in the national security agenda and industrials/telecoms for tax cuts.

The good oil, keep smashing those avocados

The Global Avocado Update 2024 from Rabobank points to a 20% lift in Australian avocado crop production in 2023/24 and leaves it at an all-time high.

Local demand continues to expand at an annual compound rate of 10% p.a. but remains oversupplied with prices wallowing at low levels.

More than 1500 hectares of avocado plantings are forecast to achieve maturity this year with a further 4000 hectares maturing in the next five years.

Rabobank points to export markets as the growth opportunity, which account for 13% of total production and rose 55% year-on-year in 2023.

Mexico is the largest global avocado exporter, but the rate of expansion is forecast to slow under water and land pressures.

Weekly Food for thought: Is 6300 possible on the S&P500 by year end?

Apparently yes, according to Goldman Sachs with 6300 at the bullish end of the target range and 5600 penciled in as probable.

While many experts continue to scratch their heads about how expensive some US stocks are, Lance Roberts from RIA Advice posted some interesting comments on why valuations have been trending higher over time.

“There are many reasons why valuations have shifted higher over the years.

The increase is partly due to economic expansion, globalization, and increased profitability.

However, since the turn of the century, changes in accounting rules, share buybacks, and greater public adoption of investing (aka ETFs) have also contributed to the shift.

Furthermore, […] the massive monetary and fiscal interventions since the “Financial Crisis” created a seemingly “risk-free” environment for equity risk.”

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