Rudi’s View: China Scepsis, Energy Preferences & The US Election

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By Rudi Filapek-Vandyck, Editor

“[…] feedback from our recent investor meetings across New York and London suggests positive commodity and share price momentum may continue near term but most investors are looking to fade the rally in the Dec quarter.”

That quote from a recent Goldman Sachs research update on the status and outlook for bulks, base metals and steel illustrates the ruling skepsis around the globe about China’s intentions and the related outlook for commodities.

Many believed shares in BHP Group ((BHP)), Rio Tinto ((RIO)) and others across the sector had been sold down too far, but a swift rally on institutional portfolio switching and China stimulus enthusiasm has poured cold water over too high expectations for what may follow next.

Those previously under-valued share prices have quickly rallied by double-digit percentages. Maybe it all went too quickly?

As far as Goldman Sachs is concerned, the analysts see little reason to still be optimistic about iron ore when the price is near US$110/tonne, but they do like prospects for metallurgical coal, with their constructive view confirmed during a recent India trip.

No respite is still seen for battery-related materials, which might well need another 12-24 months to get on a sustainable up-trend yet again, suggests Goldman Sachs.

In a broad sense, Goldman analysts argue the supply side has done most of the heavy lifting in 2024. The onus is now on demand to pick up and fundamentally improve conditions for miners and developers, and adjacent services providers.

Are currently Buy rated:

-Rio Tinto
-BHP Group
-South32 ((S32))
-Coronado Global Resources ((CRN))
-Champion Iron ((CIA))
-Deterra Royalties ((DRR))
-Lynas Rare Earths ((LYC))
-Iluka Resources ((ILU))
-BlueScope Steel ((BSL))

Both Fortescue ((FMG)) and New Hope Corp ((NHC)) are rated Sell.

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Wilsons’ Focus Portfolio has replaced Woodside Energy ((WDS)) with Santos ((STO)) shares and the reason why might catch investors’ attention.

Previously, Woodside had been chosen because of its discipline in capital allocation, less onerous capex requirements, and less project-specific risks, in addition to a more attractive free cash flow yield outlook.

Wilsons believes that thesis no longer holds.

Recent capital investments made are seen as of “questionable” merit with the anticipated internal rate of return “uncertain at best”. Wilsons bemoans the fact this money would have been better spent on buying back shares in the company (as that would have been guaranteed beneficial for shareholders).

Woodside’s free cash flow outlook has deteriorated due to a greater capex burden, argue the analysts. Even if management would find a buyer for 50% of the equity in Driftwood, Wilsons still believes Santos offers the superior free cash flow outlook.

In contrast, Santos’ attractiveness has improved with key projects de-risked over the past six months.

Santos has also been added to Morgan Stanley’s Asia-Pacifix Ex-Japan Focus List, “for its positive exposure to an upside surprise in energy prices”. Other factors mentioned are, indeed, an increasingly appealing free cash flow outlook while decarbonisation initiatives look “promising”.

Morgan Stanley’s least preferred ASX-exposure to the Energy sector is Beach Energy ((BPT)).

The most recent update of Global Energy Best Ideas by analysts at RBC Capital still includes Woodside. RBC’s Top30 Global Ideas for 2024 includes one ASX-listing; Brambles ((BXB)). The broker’s list of Global Mining Best Ideas for Q4 has added Northern Star ((NST)) and Bellevue Gold ((BGL)).

De Grey Mining ((DEG)) has been removed while retaining its Outperform rating (Buy equivalent).

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The US presidential election is officially still too close to call, but if we can rely on client-brokers discussions on Wall Street, it seems two possible outcomes in particular have investors’ attention:

-Kamala wins with a divided congress
-Trump wins in a landslide giving him a Republican majority in both chambers

As per recent JP Morgan commentary, investors who’d like to see little changes happening throughout the next presidential term prefer the first option. Major changes will require bipartisan agreement, and that virtually guarantees nothing much will change.

Trump winning with a majority in Congress, however, seems like a recipe for upheaval and lots of volatility. As per JP Morgan: “it would be a more meaningful departure from current policy”.

What about Kamala’s plan to increase corporate taxes to 28% from the current 21%?

JP Morgan acknowledges, if put in practice, this could halve the gain in corporate profits in 2026. But given the low chance of the Democrats grabbing majority in the Senate, this is also a low-chance outcome.

The latter reason also explains why strategists at ClearBridge see a landslide victory by Trump as a net positive for US equities; it preserves corporate tax treatment and builds on tax elements that have expired. A Harris win, with divided Congress, is labelled as “mildly negative”.

ClearBridge does emphasise, underlying the trajectory of the economy is and remains the most important driver for equity markets. The advice to investors is to take the lead from the Fed cutting interest rates. That’s a good thing for the economy (and thus for the share market too).

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Strategists at UBS have gone the extra mile and put together five distinctive scenarios that have the capability to re-shape the outlook for financial markets:

-the Republicans sweep the upcoming US elections
-the Democrats sweep the upcoming US elections
-a significant increase in global tariffs
-economic recession in the USA
-no landing, implying central banks have been cutting interest rates prematurely

The heaviest impact, potentially, could stem from US tariffs on Chinese and other imports, but UBS can also think of scenarios whereby US growth remains positive.

An economic recession generates the widest move in global policy rates, with six central banks, but not the ECB or BOE, returning to extremely low rates.

If, in contrast, central banks need to fully reverse cuts implemented thus far, as will be the case in the ‘no landing’ scenario, UBS sees a correction happening for equity markets in 2025.

Under all these three scenarios, equity markets both in the US and elsewhere are expected to be ‘weak’.

It is the broker’s assessment that any sweep by either of the two parties in the US should be beneficial for US equities, with a Republican sweep seen as slightly more beneficial. A Republican majority should see US equities outperform the rest of the world, the opposite is seen happening when the Democrats grab the presidency and the majority in both chambers of the US Congress.

In the broker’s baseline scenario, US earnings growth is around trend in 2025 but around zero in Europe. UBS has lifted its target for the S&P500 to 6400 for next year, with a target of 6850 for 2026.

Equally interesting, considering how we started this story, is that UBS’s base case expectation is that Chinese growth will remain weak and any more stimulus announcements must be of much greater magnitude than what has been indicated to date to change that outlook.

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As reported last week, Goldman Sachs’s APAC Conviction List is now including Life360 ((360)) but excluding Qantas Airways ((QAN)) and Lynas Rare Earths ((LYC)).

The only other ASX-listing still included in the list is Xero ((XRO)).

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The full list of UBS’s Most Preferred Best Stock Ideas:

In Resources:

-BlueScope Steel ((BSL))
-Newmont Corp ((NEM))
-Orica ((ORI))
-Origin Energy ((ORG))
-Rio Tinto ((RIO))
-Santos ((STO))

In Financials:

-AUB Group ((AUB))
-Dexus ((DXS))
-Medibank Private ((MPL))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))

Industrials:

Brambles ((BXB))
-Car Group ((CAR))
-Coles Group ((COL))
-NextDC ((NXT))
-REA Group ((REA))
-Telstra ((TLS))
-Telix Pharmaceuticals ((TLX))
-Treasury Wine Estates ((TWE))
-Worley ((WOR))
-Xero ((XRO))

The list of Least Preferred exposures:

-APA Group ((APA))
-Aurizon Holdings ((AZJ))
-ASX ((ASX))
-Bank of Queensland ((BOQ))
-CommBank ((CBA))
-Cochlear ((COH))
-Domain Holdings Australia ((DHG))
-JB Hi-Fi ((JBH))
-Reece ((REH))
-Scentre Group ((SCG))

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Morgan Stanley’s Macro+ Focus List in Australia is currently made up of:

-AGL Energy ((AGL))
-GPT Group ((GPT))
-James Hardie ((JHX))
-Santos ((STO))
-WiseTech Global ((WTC))

Plus:

-Aristocrat Leisure ((ALL))
-Car Group ((CAR))
-Macquarie Group ((MQG))
-Paladin Energy ((PDN))
-Suncorp Group ((SUN))

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Morgan Stanley’s Australia Macro+ Model Portfolio is currently made up of the following:

-ANZ Bank ((ANZ))
-CommBank ((CBA))
-National Australia Bank ((NAB))
Westpac ((WBC))

-Macquarie Group ((MQG))

-Suncorp Group ((SUN))

-Goodman Group ((GMG))
-GPT Group ((GPT))
-Scentre Group ((SCG))
-Stockland ((STG))

-Aristocrat Leisure ((ALL))
-CAR Group ((CAR))
-Domino’s Pizza ((DMP))
-The Lottery Corp ((TLC))
-Wesfarmers ((WES))
-WiseTech Global ((WTC))

-James Hardie ((JHX))

-Orica ((ORI))

-Coles Group ((COL))

-CSL ((CSL))
-ResMed ((RMD))

-AGL Energy ((AGL))
-Origin Energy ((ORG))
-Telstra ((TLS))
-Transurban ((TCL))

-BHP Group ((BHP))
-Newmont Corp ((NEM))
-Rio Tinto ((RIO))
-South32 ((S32))

-Paladin Energy ((PDN))
-Santos ((STO))
-Woodside Energy ((WDS))

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Stockpickers at Crestone have equally communicated their selected list of Best Ideas in Australia:

-Ampol ((ALD))
-APA Group ((APA))
-Aristocrat Leisure ((ALL))
-Beach Energy ((BPT))
-Brambles ((BXB))
-CSL ((CSL))
-Goodman Group ((GMG))
-IGO Ltd ((IGO))
-James Hardie ((JHX))
-Macquarie Group ((MQG))
-Metcash ((MTS))
-Monadelphous Group ((MND))
-REA Group ((REA))
-ResMed ((RMD))
-Suncorp Group ((SUN))
-The Lottery Corp ((TLC))
-Xero ((XRO))

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Stockbroker Morgans’ list of Best Ideas.contains the following 33 ASX-listed companies:

-Acrow ((ACF))
-ALS Ltd ((ALQ))
-Amotiv ((AOV))
-Beacon Lighting ((BLX))
-BHP Group ((BHP))
-Camplify Holdings ((CHL))
-Cedar Woods Properties ((CWP))
-ClearView Wealth ((CVW))
-CSL ((CSL))
-Dalrymple Bay Infrastructure ((DBI))
-Dexus Industria REIT ((DXI))
-Elders ((ELD))
-Flight Centre Travel ((FLT))
-GQG Partners ((GQG))
-HomeCo Daily Needs REIT ((HDN))
-Karoon Energy ((KAR))
-MA Financial ((MAF))
-Maas Group ((MGH))
-Mach7 Technologies ((M7T))
-NextDC ((NXT))
-PolyNovo ((PNV))
-QBE Insurance ((QBE))
-Qualitas ((QAL))
-Reliance Worldwide ((RWC))
-ResMed ((RMD))
-Rio Tinto ((RIO))
-South32 ((S32))
-Superloop ((SLC))
-The Lottery Corp ((TLC))
-Treasury Wine Estates ((TWE))
-Universal Store Holdings ((UNI))
-WH Soul Pattinson ((SOL))
-Woodside Energe ((WDS))

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Macquarie Wealth‘s recommended Growth Portfolio:

-Goodman Group ((GMG))
-Seek ((SEK))
-Aristocrat leisure ((ALL))
-Northern Star ((NST))
-CSL ((CSL))
-Computershare ((CPU))
-NextDC ((NXT))
-Flight Centre ((FLT))
-Mineral Resources ((MIN))
-Cleanaway Waste Management ((CWY))
-Steadfast Group ((SDF))
-James Hardie ((JHX))
-ResMed ((RMD))
-Pexa Group ((PXA))
-Treasury Wine Estates ((TWE))
-Viva Energy ((VEA))
-Xero ((XRO))

Macquarie Wealth’s recommended Income Portfolio:

-Suncorp Group ((SUN))
-Telstra ((TLS))
-National Australia Bank ((NAB))
-Westpac Bank ((WBC))
-ANZ Bank ((ANZ))
-BHP Group ((BHP))
-CommBank ((CBA))
-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))
-Amotiv ((AOV))
-Charter Hall Retail REIT ((CQR))
-Amcor ((AMC))

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

-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 ((JHX))
-Cochlear ((COH))
-REA Group ((REA))
-TechnologyOne ((TNE))
-ResMed ((RMD))
-Data#3 ((DTL))
-Pro Medicus ((PME))
-Jumbo Interactive ((JIN))
-PWR Holdings ((PWH))
-Netwealth Group ((NWL))
-Aristocrat Leisure ((ALL))
-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 ((COL))
-The Lottery Corp ((TLC))
-Lovisa Holdings ((LOV))
-CSL ((CSL))
-IDP Education ((IEL))
-Pinnacle Investment Management ((PNI))
-ARB Corp ((ARB))
-Breville Group ((BRG))
-Johns Lyng ((JLG))

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Key Stock Picks for the year-ahead nominated by analysts at Bell Potter:

-Among listed investment companies (LICs); Australian Foundation Investment Company ((AFI)), Metrics Master Income Trust ((MXT)), and MFF Capital Investments ((MFF))

-Agriculture & fast moving consumer goods; Bega Cheese ((BGA)), Rural Funds Group ((RFF)), and Elders ((ELD))

-Technology; TechnologyOne ((TNE)), Gentrack ((GTK)), and REA Group ((REA))

-Diversified Financials; Perpetual ((PPT)), Regal Partners ((RPL)), and McMillan Shakespeare ((MMS))

-Real Estate; Dexus Convenience Retail REIT ((DXS)), HealthCo Healthcare & Wellness REIT ((HCW)), and GDI Property Group ((GDI))

-Retailers; Premier Investments ((PMV)), Universal Store Holdings ((UNI)), and Propel Funeral Partners ((PFP))

-Aerospace & Defence; Electro Optic Systems ((EOS)) and Austal ((ASB))

-Industrials; Brickworks ((BKW)), IPD Group ((IPG)), and Cleanaway Waste Management ((CWY))

-Healthcare; Telix Pharmaceuticals ((TLX)), Cyclopharm ((CYC)), Aroa Bioscience ((ARX)), MedAdvisor ((MDR)), and Neuren Pharmaceuticals ((NEU))

-Gold sector; Capricorn Metals ((CMM)) and Santana Minerals ((SMI))

-Base metals; Aeris Resources ((AIS)), Nickel Industries ((NIC)), and Mineral Resources ((MIN))

-Strategic Minerals; Alpha HPA ((A4N)), IperionX ((IPX)), and Liontown Resources ((LTR))

-Energy sector; Boss Energy ((BOE)) and Paladin Energy ((PDN))

-Mining services; Seven Group Holdings ((SVW)), Mader Group ((MAD)), and SRG Global ((SRG))

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Morningstar’s selection of Best Buys on the ASX:

-IGO Ltd ((IGO))
-TPG Telecom ((TPG))
-Domino’s Pizza ((DMP))
-Bapcor ((BAP))
-Endeavour Group ((EDV))
-Santos ((STO))
-ASX Ltd ((ASX))
-Aurizon Holdings ((AZJ))
-Brambles ((BXB))
-Dexus ((DXS))
-SiteMinder ((SDR))
-APA Group ((APA))
-Fineos Corp ((FCL))
-ResMed ((RMD))

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The full list of Ord Minnett’s Conviction Calls consists of the following 14 companies:

-Alliance Aviation Services ((AQZ))
-ARB Corp ((ARB))
-Cosol ((COS))
-EQT Holdings ((EQT))
-Electro Optic Systems Holdings ((EOS))
-Lindsay Australia ((LAU))
-Pinnacle Investment Management ((PNI))
-Qoria ((QOR))
-Red 5 (RED)
-Regis Healthcare ((REG))
-SiteMinder ((SDR))
-SRG Global ((SRG))
-Stanmore Resources ((SMR))
-Waypoint REIT ((WPR))

In addition, research analyst Athena Kospetas, recently communicated the following Key Preferred Ideas per sector:

Financials
-Westpac ((WBC))
-Judo Bank ((JDO))
-Insurance Australia Group ((IAG))
-Medibank Private ((MPL))
-nib Holdings ((NHF))
-Pinnacle Investment Management ((PNI))
-EQT Trustees ((EQT))

Resources
-Rio Tinto ((RIO))
-Newmont Corp ((NEM))
-Red 5 ((RED))

Energy & Utilities
-Santos ((STO))
-Strike Energy ((STX))
-AGL Energy ((AGL))

Healthcare
-ResMed ((RMD))
-CSL ((CSL))
-Regis Healthcare ((REH))

Consumer stocks
-Qantas Airways ((QAN))
-ARB Corp ((ARB))

Communication Services & Technology
-Xero ((XRO))
-Seek ((SEK))
-Telstra ((TLS))

Industrials
-James Hardie ((JHX))
-Brambles ((BXB))
-Alliance Aviation ((AQZ))
-SRG Global ((SRG))
-Qube Holdings ((QUB))

Real Estate
-Vicinity Centres ((VCX))
-Waypoint REIT ((WPR))

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Jarden’s Best Ideas among emerging companies (small and mid-cap):

-IPH Ltd ((IPH))
-Temple & Webster ((TPW))
-EVT Ltd ((EVT))
-Dicker Data ((DDR))
-Universal Store ((UNI))
-Nick Scali ((NCK))
-AUB Group ((AUB))
-Webjet ((WEB))
-Integral Diagnostics ((IDX))
-Capricorn Metals ((CMM))
-Michael Hill ((MHJ))
-NRW Holdings ((NWH))
-Light & Wonder ((LNW))
-Pointsbet ((PBH))
-National Storage ((NSR))
-Ingenia Communities ((INA))
-Karoon Gas ((KAR))
-Domain Holdings Australia ((DHG))
-Pepper Money ((PPM))
-Telix Pharmaceuticals ((TLX))

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Barrenjoey’s Top Picks:

-Insurance Australia Group ((IAG)) among financials, as well as GQG partners ((GQG)) and Westpac ((WBC))
-Xero ((XRO)), Pexa Group ((PXA)) and Dicker Data ((DDR)) in the technology sector
-Vicinity Centres ((VCX)) and Abacus Storage King ((ASK)) among REITs
-South32 ((S32)), Lynas Rare Earths ((LYC)) and Perseus Mining ((PRU)) among miners and Strike Energy ((STX)) in the oil&gas sector
-ResMed ((RMD))
-Metcash ((MTS))
-Aristocrat Leisure
-Reliance Worldwide ((RWC))
-Brambles ((BXB))
-Seven Group ((SVW))

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

Weekly Insights this week: https://fnarena.com/index.php/2024/10/09/rudis-view-market-reflects-risk-opportunities/

(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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P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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