Rudi’s View: Copper, Lithium, Retailers & TechnologyOne

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Updates on strategies, model portfolios, key picks, best buys and conviction calls.

By Rudi Filapek-Vandyck, Editor

Don’t give up. Don’t despair. The world economy should be in a better environment overall this time next year. The process to bring inflation back to target and to normalise central bank interest rates is simply unfolding slower than expected.

Such is the message communicated by Barrenjoey’s team of metals and mining analysts led by Glyn Lawcock (previously at UBS).

A weaker Chinese economy is central in the team’s assessment, as is the much flatter trajectory in the global disinflation process (see also the latest CPI release in Australia this week).

Approaching the half-way mark in calendar 2024, the team has made a number of changes to forecasts, with consequences at the individual stock level. Four mining stocks have seen ratings change:

-Fortescue ((FMG)) moved to Underweight from Neutral
-Liontown Resources ((LTR)) moved to Underweight from Neutral
-Northern Star ((NST)) moved to Neutral from Overweight
-Evolution Mining ((EVN)) moved to Neutral from Underweight – the sole upgrade made.

As far as commodity price forecasts go, Barrenjoey sees iron ore weakness in Q3 (seasonal) followed by a pickup in Q4, but also has sharply lowered lithium price projections (-20%).

Both forecasts for gold and silver have been raised, though the picture for gold miners remains mixed and muddled as weather impacts on production output and margins remain subjected to capex, opex, and operational disappointments.

In the share market, Barrenjoey advocates investors seek out miners with plenty of free cash flow, a strong balance sheet, and growth that does not required additional funding.

Rio Tinto ((RIO)) is preferred over BHP Group ((BHP)), partially because of a cheaper valuation. Copper remains a favourite, with Metals Acquisition ((MAC)) and Sandfire Resources ((SFR)) preferred exposures.

Newmont Corp ((NEM)) is the broker’s preferred gold miner. For playing the battery raw material space, Barrenjoey prefers Lynas Corp ((LYC)), Mineral Resources ((MIN)), Arcadium Lithium ((LTM)), Wildcat Resources ((WC8)) and IGO Ltd ((IGO)).

Overweight-rated stocks include Iluka Resources ((ILU)), Meteoric Resources ((MEI)), Perseus Mining ((PRU)), Predictive Discovery ((PDI)), South32 ((S32)), West African Resources ((WAF)), and Whitehaven Coal ((WHC)).

Equity strategist Damien Boey has trimmed his previous Overweight portfolio positioning towards the mining sector.

In contrast, global strategists at JP Morgan see no reason to waver from their positive view. This week they argued:

“We believe the recent pullback in commodities is just that -a pullback- and we continue to see a 10% appreciation in the broader BCOM Commodities index by year-end. The fundamental backdrop for Eurozone equities is improving, but political uncertainty needs to lift to see sustained outperformance.”

Morgan Stanley‘s latest update on commodities equally expresses concern over the short-term prospects for lithium. Morgan Stanley favours met coal over base metals for the third quarter. Gold remains a “safe bet” and copper and aluminium are preferred among base metals.

Among individual companies, South32 and Deterra Royalties ((DRR)) have been downgraded to Equal-Weight. Rio Tinto also has this team’s stamp of approval, while Mineral Resources remains a Key Pick.

Macquarie‘s update this week also expressed a negative view on lithium and iron ore, with Macquarie equally negative on thermal coal. This broker sees a positive outlook for aluminium, nickel, and met coal.

Among the sector’s large caps, Macquarie’s preference lays wth South32 and Newmont Corp. Among mid-caps, the broker likes Capstone Copper Corp ((CSC)), Nickel Industries ((NIC)), Patriot Battery Metals ((PMT)), Coronado Global Resources ((CRN)), and, for gold exposure, Red 5 ((RED)) and Genesis Minerals ((GMD)).

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Leaving commodities aside, Barrenjoey chief equity strategist Damien Boey has seen sufficient signs the US economy is decelerating this year, and history shows this is likely to weigh on global risk appetite and on commodity prices.

Contrary to most historical precedents, there’s no room as yet for a meaningful Fed easing cycle, because of still relatively stubborn inflation.

In such an environment, Boey suggests, portfolios better hold plenty of defensives.

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Global strategists at Citi, however, draw confidence from the fact growth is not falling off the proverbial cliff in the US, and the Fed should start cutting rates from September onwards, as should the ECB and the Bank of England.

Citi thus continues to prefer both cyclical sensitive markets as well as the technology sector in the US and in Asia. Concerns over European markets include the French election and risks from tariffs.

In commodities, Citi  remains positive on copper and gold. Energy prices are forecast to drop in Q4, so that sector was downgraded to Neutral. Citi sees downside in the coming months for nickel, lithium, tin and iron ore.

Contrary to the preferences at Barrenjoey and Morgan Stanley, Citi rates BHP Group as Buy and Rio Tinto and South32 as Neutral.

Observed: Citi’s North American Focus List recently added Atlassian shares, together with Coca-Cola, Evergy, and Royal Caribbean Cruises.

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UBS has a habit of surveying Australian consumers about their views and intentions, which is subsequently used by the local equity strategists to update and refine their views and portfolio positioning in the share market.

The latest of such surveys was conducted before this week’s CPI shock, which might well see the RBA hike in August, but it appears Richard Schellbach & team already anticipated some criticism, with their latest update on matters highlighting these surveys have proved to be more accurate throughout the current cycle than market consensus and similar surveys elsewhere.

Bottom line: the average Aussie consumer remains hellbent on continuing to spend and is becoming ever more resilient in his/her spending. UBS points at higher job security and rising asset prices which are both countering cost of living challenges.

Equally noteworthy: it’s the middle-income households, earning $48k to $120k per year, that are the key driver. UBS sees strong indications tax cuts post June will be spent.

The latest survey, combined with discretionary retailers falling out of favour on the ASX, has triggered an upgrade for the sector to Overweight. In compensation, the Energy sector has been downgraded to Neutral.

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Shares in local supermarket operators have not received a lot of love from investors lately, and market strategists at Wilsons have still no appetite for the sector.

Wilsons sees ongoing headwinds from cost of living pressures, easing food prices, plus ongoing regulatory risks. In addition, there’s limited opportunity to deliver above-market earnings growth over the long term, and valuations are not considered “compelling” to start with.

Wilsons prefers better options such as The Lottery Corp ((TLC)) and Amcor ((AMC)) as defensive consumer-related alternatives.

On a broader view on the world and equities generally, Wilsons remains “constructive” on the outlook for equity markets, but more so offshore than locally, despite elevated valuations and some signs of tech exuberance in the US.

Ultimately, so the reasoning goes, inflation will come down, growth outside the US already is improving, and central bank rate cuts will be forthcoming. Wilsons sees no catalyst for a sharp correction, which doesn’t mean unpleasant surprises cannot happen.

Sticking with the US markets, Wilsons sees a mild multiple contraction happening over the next couple of years, but with share prices likely to find ongoing support from solid growth, which will provide offset.

The same cannot be said about the Australian share market, however. Locally, tepid, below-trend growth dominates, while inflation has proved stickier than elsewhere, and the RBA is genuinely an outlier when most central banks elsewhere already are cutting rates, or soon will be.

Wilsons thinks positive moves offshore will pull up the local market, but with prospects more favourable offshore, the recommended weighting for Australian equities has been downgraded to a slight Underweight. To compensate, the strategists prefer to allocate more funds to alternatives, including unlisted real estate, gold, and high quality domestic private credit.

Looking into 2025, it is Wilsons’ conclusion risks are skewed to the downside for iron ore, a view underpinned by structural imbalances in China’s property sector.

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The most recent revision of Wilsons’ Focus Portfolio, communicated mid-month, saw the introduction of TechnologyOne ((TNE)), for which shares in IDP Education ((IEL)) had to be sold. The latter is no longer included. The portfolio’s exposure to Webjet was slightly upgraded.

It was TechOne’s recent interim result that has finally convinced, with Wilsons justifying the decision as follows:

“TNE’s premium PE multiple […] is justified by its long track record, exceptional earnings quality, and strong growth outlook.

“Consensus expectations for TNE to deliver EPS growth of >15% (CAGR) over the next decade are well supported by the fundamentals, providing further comfort in the valuation.”

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Portfolio managers at T Rowe Price have been positioned Underweight the Australian share market, and they intend to keep it that way. T Rowe Price is worried about the outlook for corporate earnings in the second half, while stubborn inflation is keeping the RBA on a hawkish ‘hold’ at best.

China and Europe are also Underweighted, while Japan is the sole market currently on Overweight. In support of the latter positioning, T Rowe Price argues economic indicators in Japan are reaching new highs in this cycle. But also: a weaker yen helps Japanese companies who have a higher beta to the global economy than their peers, plus corporate governance improvements continue to flow though Japanese companies’ fundamentals.

Strategists at Canaccord Genuity have taken guidance from the broader international trends, which should see central banks delivering rate cuts in the not-too-distant future. Hence, they decided a slightly more cyclical tilt for the Model Portfolio seems but appropriate, without giving up on defensive exposures such as Woolworths Group ((WOW)), Endeavour Group ((EDV)), Sonic Healthcare ((SHL)), and Ramsay Health Care ((RHC)).

Canaccord’s local Model Portfolio has added Santos ((STO)) and Xero ((XRO)) and sold Woodside Energy ((WDS)) and Transurban ((TCL)), while exposure to Wesfarmers ((WES)) was reduced.

Model Portfolios, Best Ideas & Conviction Calls

Ord Minnett this week released an update on its analysts’ Conviction List, now comprising of the following:

-Alliance Aviation Services ((AQZ))
-ARB Corp ((ARB))
-Cosol ((COS))
-EQT Holdings ((EQT))
-Lindsay Australia ((LAU))
-Pinnacle Investment Management ((PNI))
-Red 5
-Regis Healthcare ((REG))
-Select Harvests ((SHV))
-SRG Globval ((SRG))
-Waypoint REIT ((WPR))
-Webjet ((WEB))
-Whitehaven Coal

ARB, Pinnacle, Red 5, and Whitehaven have all been added since the previous update.

Elsewhere, Head of Asset Allocation and Macro Strategist, Malcolm Wood, believes short-term risks of higher and higher-for-longer interest rates makes the Australian housing market unattractive.

Wood remains attracted to James Hardie ((JHX)) and Reliance Worldwide ((RWC)), but would avoid Reece ((REH)) and Brickworks ((BKW)).

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Goldman Sachs’s High Conviction calls for the Asia-Pacific region includes only four ASX-listed companies:

-Lynas Rare Earths ((LYC))
-Woolworths Group
-Qantas Airways ((QAN))
-Xero ((XRO))

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The most recent update for Jarden’s select list of preferred small cap stocks in Australia (“Emerging Companies key picks”) saw Dicker Data ((DDR)) being added, alongside Lovisa Holdings ((LOV)), Siteminder ((SDR)), Nick Scali ((NCK)), Universal Store Holdings ((UNI)), and Temple & Webster ((TPW)).

Other stocks that have the blessing, with conviction, of the broker’s sector analysts:

-Telix Pharmaceuticals ((TLX))
-Regis Healthcare
-Pepper Money ((PPM))
-Inghams Group ((ING))
-National Storage ((NSR))
-Ingenia Communities Group ((INA))
-Karoon Energy ((KAR))
-Domain Australia Holdings ((DHG))
-NRW Holdings ((NWH))

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Morningstar’s Best Equity Ideas for ASX-listed stocks currently contains 14 inclusions. Morningstar’s approach is traditionally centred around ‘cheap value’:

-TPG Telecom ((TPG))
-Domino’s Pizza ((DMP))
-Bapcor ((BAP))
-a2 Milk Co ((A2M))
-Santos
-AUB Group ((AUB))
-ASX Ltd ((ASX))
-Aurizon Holdings ((AZJ))
-Ventia Services ((VNT))
-Lendlease Group ((LLC))
-Pexa Group ((PXA))

As well as Fineos Corp ((FCL)), ResMed ((RMD)) and Newmont Corp among international ideas.

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Morgan Stanley’s Australia Macro+ Focus List contains the following 10 stocks:

-Aristocrat Leisure ((ALL))
-Car Group ((CAR))
-CSL ((CSL))
-Macquarie Group ((MQG))
-Origin Energy ((ORG))
-Paladin Energy ((PDN))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))
-Treasury Wine Estates ((TWE))
-Woodside Energy

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Morgan Stanley’s Macro+ Model Portfolio consists of the following 32 constituents:

-ANZ Bank ((ANZ))
-CommBank ((CBA))
-National Australia Bank ((NAB))
-Westpac Bank ((WBC))
-Macquarie Group ((MQG))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))
-Goodman Group ((GMG))
-Scentre Group ((SCG))
-Stockland ((SGP)
-Aristocrat Leisure
-Car Group
-Domino’s Pizza ((DMP))
-The Lottery Corp
-Wesfarmers
-James Hardie ((JHX))
-Orica ((ORI))
-Coles Group ((COL))
-Treasury Wine Estates
-CSL
-ResMed
-AGL Energy ((AGL))
-Origin Energy
-Telstra ((TLS))
-Transurban Group
-BHP Group
-Newmont Corp
-Rio Tinto
-South32
-Paladin Energy
-Santos
-Woodside Energy

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Wilsons‘ list of Highest Conviction Investment Ideas now includes TechnologyOne.

Other Most Preferred Ideas locally are Worley ((WOR)), Woodside Energy, Aristocrat Leisure, and Collins Foods ((CKF)).

More ideas come with “long term growth” profiles:

-Ridley Corp ((RIC))
-Universal Stores ((UNI))
-ARB Corp ((ARB))
-Neuren Pharmaceuticals ((NEU))
-Pinnacle Investment Management ((PNI))

Among Resources stocks, there are two favoured ideas:

-Beach Energy ((BPT))
-Liontown Resources ((LTR))

And there’s a Speculative basket too:

-Immutep ((IMM))

Since the last update, Clarity Pharmaceuticals ((CU6)) has been removed following a share price appreciation of no less than 130%.

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Wilsons’ Focus Portfolio‘s largest overweight remains towards growth companies, including a large overweight to the healthcare sector. The largest underweight allocation remains for local banks. The Portfolio also holds a slight overweight allocation to resources, but this is due to “active positioning” in green metals and energy (underweight iron ore).

In terms of individual stocks, as mentioned earlier, IDP Education has been removed with TechnologyOne added and exposure to Webjet enlarged. The Focus Portfolio encompasses the following:

Consumer Discretionary
Aristocrat Leisure, Lottery Corp, Collins Foods, Breville Group, Webjet

Energy
-Woodside Energy

Financials
-ANZ Bank, National Australia Bank, Westpac, Macquarie Group, Insurance Australia Group ((IAG)), Netwealth Group, Steadfast Group ((SDF))

Healthcare
-CSL, ResMed, Telix Pharmaceuticals ((TLX))

Industrials
-Worley ((WOR))

Information Technology
-TechnologyOne, Xero

Materials
-BHP Group ((BHP)), Amcor ((AMC)), Evolution Mining ((EVN)), Mineral Resources ((MIN)), Arcadium Lithium ((LTM)), Sandfire Resources ((SFR)), South32 ((S32))

Real Estate
-Goodman Group, HealthCo Healthcare & Wellness REIT ((HCW))

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Macquarie Wealth’s recommended Growth Portfolio has switched The Lottery Corp for Xero since the last update two weeks ago. The portfolio consists of the following stocks:

-Goodman Group
-Seek ((SEK))
-Aristocrat leisure
-Northern Star ((NST))
-CSL
-Computershare ((CPU))
-NextDC ((NXT))
-Flight Centre ((FLT))
-Mineral Resources
-Cleanaway Waste Management ((CWY))
-Steadfast Group
-Arcadium Lithium
-ResMed
-Pexa Group
-Treasury Wine Estates
-Viva Energy ((VEA))
-Xero ((XRO))

Macquarie Wealth’s recommended Income Portfolio currently has the following composition:

-Suncorp Group
-Telstra
-National Australia Bank
-Westpac Bank
-ANZ Bank
-BHP Group
-CommBank
-Premier Investments ((PMV))
-Coles Group ((COL))
-Viva Energy ((VEA))
-Atlas Arteria ((ALX))
-Aurizon Holdings ((AZJ))
-APA Group ((APA))
-GPT Group ((GPT))
-Deterra Royalties ((DRR))
-Metcash ((MTS))
-GUD Holdings ((GUD))
-Charter Hall Retail REIT ((CQR))
-Amcor

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Shaw and Partners Research Monitor for the June quarter shows the broker’s ASX100 Large Caps Model Portfolio consists of the following ten members:

-Aristocrat Leisure
-Domino’s Pizza
-Evolution Mining ((EVN))
-James Hardie Industries ((JHX))
-Pilbara Minerals ((PLS))
-Qantas Airways
-ResMed
-Suncorp Group
-Treasury Wine Estates
-Xero

Preferred exposures among ’emerging companies’ (smaller caps) are:

-Abacus Storage King ((ASK))
-Bannerman Energy ((BMN))
-Black Cat Syndicate ((BC8))
-Global Lithium Resources ((GL1))
-Helloworld ((HLO))
-Metro Mining ((MMI))
-Retail Food Group ((RFG))
-Vista Group ((VGL))
-Tyro Payments ((TYR))
-Webjet

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Back in December, Bell Potter analysts released their stock picks for 2024, ranked by themes and market segments:

-For Listed Investment Companies (LICs); Australian Foundation Investment Company ((AFI)), Plato Income Maximiser ((PL8)), and MFF Capital Investments ((MFF))

-Agriculture & Fast Moving Consumer Goods; Bega Cheese ((BGA)), Rural Funds Group ((RFF)), and Elders ((ELD))

-Technology; Life360 ((360)), WiseTech Global, and Task Group ((TSK))

-Diversified Financials; Perpetual ((PPT)), Regal Partners ((RPL)), and PSC Insurance ((PSI))

-Real Estate; HMC Capital ((HMC)), Dexus Convenience Retail REIT ((DXC)), HealthCo Healthcare & Wellness REIT ((HCW))

-Retailers; Cettire ((CTT)), Propel Funeral Partners ((PFP)), and Accent Group ((AX1))

-Industrials; DroneShield ((DRO)), Austal ((ASB)), Corporate Travel Management ((CTD)), IDP Education, IPD Group ((IPG)), and The Environment Group ((EGL))

-Healthcare; Telix Pharmaceuticals, Cyclopharm ((CYC)), Clarity Pharmaceuticals ((CU6)), Clinuvel Pharmaceuticals ((CUV)), and Immutep ((IMM))

-Gold sector; Regis Resources ((RRL)), and Santana Minerals ((SMI))

-Base Metals; Aeris Resources ((AIS)), Nickel Industries ((NIC)), Mineral Resources, and IGO Ltd ((IGO))

-Strategic Minerals; Lynas Rare Earths ((LYC)), Talga Group ((TLG)), Liontown Resources ((LTR)), and Alpha HPA ((A4N))

-Energy; Boss Energy ((BOE)) and Strike Energy ((STX))

-Mining services providers; Chrysos Corp ((C79)), Matrix Composites & Engineering ((MCE)), and GenusPlus Group ((GNP))

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Also in December, Shaw and Partners released its 10 Best Ideas to benefit from the anticipated small caps’ revival in 2024.

The selected ten:

-AIC Mines ((A1M))
-Austin Engineering ((ANG))
-FireFly Metals ((FFM)), previously AuTeco (AUT)
-Chrysos ((C79))
-Gentrack Group ((GTK))
-Metro Mining ((MMI))
-MMA Offshore ((MRM))
-Peninsula Energy ((PEN))
-ReadyTech Holdings ((RDY))
-Silex Energy ((SLX))

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Macquarie’s ASX Quality Compounders

The highest quality ‘compounders’ as identified by Macquarie quant research inside the ASX300:

-James Hardie
-Cochlear ((COH))
-REA Group ((REA))
-TechnologyOne
-ResMed
-Data#3 ((DTL))
-Pro Medicus ((PME))
-Jumbo Interactive ((JIN))
-PWR Holdings ((PWH))
-Netwealth Group ((NWL))
-Aristocrat Leisure
-Spark New Zealand ((SPK))
-Codan ((CDA))
-Clinuvel Pharmacauticals ((CUV))
-Redox ((RDX))

Given Macquarie’s research strong leaning on the past five years, with high barriers to match, the following 11 companies fell just outside the above list:

-Fisher & Paykel Healthcare ((FPH))
-Medibank Private ((MPL))
-Coles Group
-The Lottery Corp
-Lovisa Holdings
-CSL
-IDP Education
-Pinnacle Investment Management
-ARB Corp ((ARB))
-Breville Group ((BRG))
-Johns Lyng ((JLG))

My research and All-Weather stock selections are 24/7 available for paying subscribers: https://fnarena.com/index.php/analysis-data/all-weather-stocks/
 

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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