FYI | Jul 22 2015
By Peter Switzer, Switzer Super Report
The chief economist of the broker Morgans, Michael Knox, is regarded as a legend of the mining industry because he has a great handle on commodity prices. I mentioned on Saturday that he has the oil price at $US100 a barrel over the next two years! This is not only good news for oil company shareholders, who have patience, but those playing LNG, simply because there is a price-relationship between the two commodities.
Quizzing Knox at the Noosa Mining Conference, I asked how he gets that good price for oil in the future? I pointed to the current average price, which is in the low $US50s a barrel region, and wondered how his price rise would happen? There is now a sea of shale oil from the US and we will do so well with LNG that we will surpass Qatar as the world’s biggest supplier over the next few years? How does rising supply help prices go up? It doesn’t.
He recognized all of these developments and indicated that all of these obvious market issues were accounted for but he still stuck with his call. Knox has a good record of being right, so when I disagree, it is done with respect.
What time is it?
Others in a panel at the conference, which I hosted, pointed to rising world demand as countries such as the US and Great Britain are on an economic comeback. Japan is showing some promising signs, and even despite Greece, so is Europe! Others pointed to the too easily, but unwisely, ignored Indian economy and don’t forget the Chinese authorities are throwing everything but the kitchen sink to get China growing, with recent numbers for GDP, retail, exports and industrial production reminding us that the world’s second biggest economy should not be written off!
Global demand will underpin rising commodity prices with a number of expert presenters at the conference arguing that it was around 4 o’clock on the mining investment clock, also called the Lion Clock. The one I have below was for 2013 and that’s when we were in the “look” phase, but now we are getting into the “buy” phase with mergers likely to be on the rise.
But all of this is predicated on a global economy getting better, stronger and faster growing. So, is this believable?
The growth factors
Well, both the US and Great Britain look close to embarking on their first interest rate rise. The chief economist of Goldman Sachs, Jan Hatzius, has the US growing at 3%, despite some soft patches in recent economic data, and a lot of this is related to a rising greenback, which is spooking some analysts.
Fed boss, Janet Yellen, is hinting at an upcoming rate rise this year, even if the market does not agree. She plans to raise rates slowly and in small lifts, and Knox says the first rise will probably mean a month of falling stocks followed by a year of rising share prices!
Despite some better economic growth signs in the Eurozone, the European Central Bank President Mario Draghi is committed to low interest rates and says his monthly 60 billion euro asset purchasing will go on until September, 2016! This will power growth and encourage investors to chase stocks with rates bound to remain low.
Japan looks a bit hard to call but a CNBC story recently revealed a Societe Generale view, which said "Our overall assessment of the new growth strategy is now 'A-,' improved from the previous assessment of 'B+'. Japan has entered a positive economic cycle."
According to the Bank of America Merrill Lynch global fund manager survey for July, “Japan ranks second, after Europe, for the market investors most want to be overweight, the survey found, with a net 70% of Japan equity specialists saying the economy is improving.”
So, will all of this be good for our stock market? I think the answer is yes with the mix of good dividends and a falling dollar bound to attract foreign buyers of our shares.
And the evidence
Need proof? Just look at the purchase of Toll by Japan Post where they paid a huge premium, but remember Toll’s dividend was close to 5% while government bond rates in the Land of the Rising Sun are close to 0.5%! And the Toll deal happened when the dollar was higher than it is today, so a lower dollar should attract more foreign buyers of our stocks.
Some people are worried about the S&P 500 with a forward PE of 16.5, compared to a historical level of 15. But you need to compare PEs to an interest rate to see if stocks are more appealing to a safe return in a bond or a term deposit. Rates are historically so low that stock market PEs can run a lot higher before smarties will start dumping stocks.
One thing in our favour is the scepticism towards stocks right now and as one guy called it, we have a lot of “reluctant bulls”, which suggests that stocks can go on for longer. If they were full on, irrationally exuberant bulls, they’d take stocks really high — too high — and a crash would eventuate.
And don’t forget central banks from the US to the UK to Europe to Japan, and even here, are underwriting a stock market boom on the hope that the real economy will respond. This is why I watch economies closely and the general conclusion is that we are seeing slow, but steady, improvement and that’s why I remain optimistic on stocks.
Sure commodities could fall before they rise — I never promised these were a short-term play — but as long as the world economy responds to QE-worldwide, then commodity prices must respond.
And don’t forget this — OPEC won’t always be flooding oil markets. They could restrict supply more when their customers are stronger and demanding a whole lot more energy. That’s when oil might go to $US100 a barrel.
By the way, I noticed that UBS thinks Origin Energy is well placed with its LNG play in a falling dollar environment. It sees earnings rising 25% over the next three years, with a grossed up dividend over 5.5%. They must see things a lot like Michael Knox.
Remember the clock and hope that I am reading the time properly.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
