Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul class="">
<li>
Buy Australia for its Defensive Qualities. Australia outperforms during periods of global uncertainty and when global interest rates are falling.  Downside risk to the Banks has been taken out by the RBA and APRA.  Moreover, the threat to housing from a Labor Government did not materialise.  Longer-term headwinds remain, but Australia’s defensive attributes will be cherished during global trade uncertainties.</li>
<li>
Move Underweight Miners and Overweight Energy. We move from overweight to slightly underweight the Miners by removing S32 and WHC.  Global demand is slowing and normally that would hit Resources.  However, supply disruptions in iron ore are continuing to put upward pressure on prices and oil supply seem threatened by US-Iran tension in the Middle East.  We retain overweight positions in BHP and RIO.</li>
<li>
Stay Neutral IT. The global tech sector has been a major casualty from the US-China trade war.  We limit our exposure to the sector with overweight positions in only WTC and TNE.  Like many Growth stocks, TNE has felt the market’s wrath by not raising guidance at half-year results.  We remain along for the ride.  WTC is on track after management said EBITDA would increase by 35% in FY19 and as it expanded into new products and geographies.</li>
<li>
Retain Defensive tilt. We retain our overweight to Property.  It has performed in line with our portfolio as bond yields have fallen and we expect it will perform even better if global uncertainties escalate forcing interest rates down further.  We retain 8.5% of our portfolio in the sector.</li>
<li>
It’s not too Late to Buy Domestic Cyclicals: The favourable election result in May and the RBA interest rate cut in June have lit up domestic cyclicals on the prospects that the cycle will extend further.  Most of these stocks still trade on PE multiples that are not stretched and the market seems to not appreciate how the consumer’s spending power will strengthen before Christmas.  We include JHB and CSR and retain CWY and BIN as for exposure to a better housing and consumer outlook. </li>
</ul>



Buy Australia for its Defensive Qualities. Australia outperforms during periods of global uncertainty and when global interest rates are falling.  Downside risk to the Banks has been taken out by the RBA and APRA.  Moreover, the threat to housing from a Labor Government did not materialise.  Longer-term headwinds remain, but Australia’s defensive attributes will be cherished during global trade uncertainties.

Move Underweight Miners and Overweight Energy. We move from overweight to slightly underweight the Miners by removing S32 and WHC.  Global demand is slowing and normally that would hit Resources.  However, supply disruptions in iron ore are continuing to put upward pressure on prices and oil supply seem threatened by US-Iran tension in the Middle East.  We retain overweight positions in BHP and RIO.

Stay Neutral IT. The global tech sector has been a major casualty from the US-China trade war.  We limit our exposure to the sector with overweight positions in only WTC and TNE.  Like many Growth stocks, TNE has felt the market’s wrath by not raising guidance at half-year results.  We remain along for the ride.  WTC is on track after management said EBITDA would increase by 35% in FY19 and as it expanded into new products and geographies.

Retain Defensive tilt. We retain our overweight to Property.  It has performed in line with our portfolio as bond yields have fallen and we expect it will perform even better if global uncertainties escalate forcing interest rates down further.  We retain 8.5% of our portfolio in the sector.

It’s not too Late to Buy Domestic Cyclicals: The favourable election result in May and the RBA interest rate cut in June have lit up domestic cyclicals on the prospects that the cycle will extend further.  Most of these stocks still trade on PE multiples that are not stretched and the market seems to not appreciate how the consumer’s spending power will strengthen before Christmas.  We include JHB and CSR and retain CWY and BIN as for exposure to a better housing and consumer outlook. 


Aussie Equities Model Portfolio Update (June): Buy Protection and Cyclical Extension

Materials Analyst/Strategist, Janus Analysis

Gaius King

Materials Analyst/Strategist

Janus Analysis

Equity Bottom-Up

<ul>
<li><a href="https://www.smartkarma.com/entities/23731" target="_blank" data-smartkarma-citation="entities:23731:1">Vale SA (VALE US)</a> woes continue, facing another dam collapse</li>
<li>Forecast seaborne iron ore market deficit &gt;100Mt CY19</li>
<li>Chinese house prices up 10% y-o-y</li>
<li>Chinese Government readying substantial investment stimulus</li>
<li>Continue to positively trade large IO miners</li>
<li>5-year gold price continues to be flat</li>
<li>Global Zinc inventories declining rapidly</li>
<li>
<a href="https://www.smartkarma.com/entities/23731" target="_blank" data-smartkarma-citation="entities:23731:1">Vale SA (VALE US)</a>, <a href="https://www.smartkarma.com/entities/5424" target="_blank" data-smartkarma-citation="entities:5424:1">Bhp Billiton Ltd (Adr) (BHP US)</a>, <a href="https://www.smartkarma.com/entities/13" target="_blank" data-smartkarma-citation="entities:13:1">Rio Tinto Ltd (RIO AU),</a><a href="https://www.smartkarma.com/entities/41" target="_blank" data-smartkarma-citation="entities:41:1">Fortescue Metals (FMG AU)</a>, <a href="https://www.smartkarma.com/entities/5124" target="_blank" data-smartkarma-citation="entities:5124:1">Azumah Resources (AZM AU)</a>, <a href="https://www.smartkarma.com/entities/4111" target="_blank" data-smartkarma-citation="entities:4111:1">Peel Mining Ltd (PEX AU)</a>, <a href="https://www.smartkarma.com/entities/19210" target="_blank" data-smartkarma-citation="entities:19210:1">Breaker Resources Nl (BRB AU)</a>, Pensana Metals (ASX: PM8), Axion (ASX: AZQ), <a href="https://www.smartkarma.com/entities/19111" target="_blank" data-smartkarma-citation="entities:19111:1">Alkane Resources (ALK AU)</a>, <a href="https://www.smartkarma.com/entities/1365" target="_blank" data-smartkarma-citation="entities:1365:1">Chesser Resources (CHZ AU)</a>, <a href="https://www.smartkarma.com/entities/2971" target="_blank" data-smartkarma-citation="entities:2971:1">Hawkstone Mining (HWK AU)</a>, <a href="https://www.smartkarma.com/entities/20488" target="_blank" data-smartkarma-citation="entities:20488:1">Liontown Resources (LTR AU)</a>, <a href="https://www.smartkarma.com/entities/4650" target="_blank" data-smartkarma-citation="entities:4650:1">Genesis Minerals (GMD AU)</a>, <a href="https://www.smartkarma.com/entities/28006" target="_blank" data-smartkarma-citation="entities:28006:1">Tietto Minerals Ltd (TIE AU)</a>, <a href="https://www.smartkarma.com/entities/11138" target="_blank" data-smartkarma-citation="entities:11138:1">Hot Chili Ltd (HCH AU)</a>, <a href="https://www.smartkarma.com/entities/12048" target="_blank" data-smartkarma-citation="entities:12048:1">Newfield Resources (NWF AU)</a>, <a href="https://www.smartkarma.com/entities/7068" target="_blank" data-smartkarma-citation="entities:7068:1">Lucapa Diamond (LOM AU)</a>, <a href="https://www.smartkarma.com/entities/8807" target="_blank" data-smartkarma-citation="entities:8807:1">Theta Gold Mines (TGM AU</a>), <a href="https://www.smartkarma.com/entities/16357" target="_blank" data-smartkarma-citation="entities:16357:1">Emperor Range (ERX AU)</a>  </li>
</ul>


Vale SA (VALE US) woes continue, facing another dam collapse
Forecast seaborne iron ore market deficit &gt;100Mt CY19
Chinese house prices up 10% y-o-y
Chinese Government readying substantial investment stimulus
Continue to positively trade large IO miners
5-year gold price continues to be flat
Global Zinc inventories declining rapidly

Vale SA (VALE US), Bhp Billiton Ltd (Adr) (BHP US), Rio Tinto Ltd (RIO AU),Fortescue Metals (FMG AU), Azumah Resources (AZM AU), Peel Mining Ltd (PEX AU), Breaker Resources Nl (BRB AU), Pensana Metals (ASX: PM8), Axion (ASX: AZQ), Alkane Resources (ALK AU), Chesser Resources (CHZ AU), Hawkstone Mining (HWK AU), Liontown Resources (LTR AU), Genesis Minerals (GMD AU), Tietto Minerals Ltd (TIE AU), Hot Chili Ltd (HCH AU), Newfield Resources (NWF AU), Lucapa Diamond (LOM AU), Theta Gold Mines (TGM AU), Emperor Range (ERX AU)  


New J Hutton – Exploration Report (Weeks Ending 17/05/19)

<ul>
<li>
The RBA appears set to lower the official cash rate for the first time since August 2016 after the Q119 data showed it was moving away from the bottom of its 2% to 3% target band. The Bank will also need to lower its inflation and growth forecasts in its May Statement on Monetary Policy, which is released on Friday inflation.  The policy move is not yet fully priced by financial markets and we expect interest rate sensitive sectors and stocks to rally if we are proven correct</li>
<li>
Australia (2.4%) underperformed many global peers during April, but outperformed Argentina (-11.6%), China B Shares (-2.4%), China A Shares (-0.4%), India (0%), Brazil (1.0%) and the UK (2.3%). Germany (7.1%), Singapore (6.1%) and Europe (5.5%) were the best-performing markets followed by Japan (5.0%) and France (4.9%).</li>
<li>
In Australia, Financials gained 4.4% in the month propelling the ASX 200 2.4% higher. Consumer Staples (7.3%) and IT (7.3%) rallied strongly, while Materials (-52.0%), Property (-1.9%), Utilities (-0.5%) and Consumer Discretionary (1.3%) were the laggards.</li>
<li>
Net downgrades eased in March and have now become net upgrades led by Utilities, Consumer Discretionary, Property, Industrials and Healthcare. However, this has been mainly due to a large decline in downgrades rather than a large increase in upgrades.</li>
<li>
The main exception was Resources where there were more upgrades relative to the long-run average. There was also a large decline in the number of downgrades and this helped bolster the result, despite the weak share price performance of the sector during the month.</li>
<li>
The labour force data remains solid and one argument why the RBA may not lower the cash rate tomorrow. The economy created 25.7k jobs in April, although rising participation meant the unemployment rate nudged up by 0.15pt to 5.0%.  Better global data is also another reason why the RBA may hold fire, with PMI data in China and the US showing the global growth slowdown may have run its course for now.  The Australian bond market rallied strongly last month, and real 10-year yields are close to their lowest level since the mid-1970s.  Indeed, the bond market expects inflation to remain stable and stubbornly low over the longer-term.  The Australian dollar rallied against the NZ dollar but weakened vs the US dollar on the back of broad US dollar strength.</li>
<li>
VEA, BOQ and BKL lowered guidance, while RIO guided the market to lower production in the Pilbara from that announced to the market last month. Disruptions from Cyclone Veronica to RIO's iron ore production in the region were larger than expected.  BOQ is seeing rising costs due to remediation costs from the Banking Royal Commission, but net interest margins and impairment charges seem well contained.  VEA is seeing margin pressure due to rising global oil prices.</li>
</ul>



The RBA appears set to lower the official cash rate for the first time since August 2016 after the Q119 data showed it was moving away from the bottom of its 2% to 3% target band. The Bank will also need to lower its inflation and growth forecasts in its May Statement on Monetary Policy, which is released on Friday inflation.  The policy move is not yet fully priced by financial markets and we expect interest rate sensitive sectors and stocks to rally if we are proven correct

Australia (2.4%) underperformed many global peers during April, but outperformed Argentina (-11.6%), China B Shares (-2.4%), China A Shares (-0.4%), India (0%), Brazil (1.0%) and the UK (2.3%). Germany (7.1%), Singapore (6.1%) and Europe (5.5%) were the best-performing markets followed by Japan (5.0%) and France (4.9%).

In Australia, Financials gained 4.4% in the month propelling the ASX 200 2.4% higher. Consumer Staples (7.3%) and IT (7.3%) rallied strongly, while Materials (-52.0%), Property (-1.9%), Utilities (-0.5%) and Consumer Discretionary (1.3%) were the laggards.

Net downgrades eased in March and have now become net upgrades led by Utilities, Consumer Discretionary, Property, Industrials and Healthcare. However, this has been mainly due to a large decline in downgrades rather than a large increase in upgrades.

The main exception was Resources where there were more upgrades relative to the long-run average. There was also a large decline in the number of downgrades and this helped bolster the result, despite the weak share price performance of the sector during the month.

The labour force data remains solid and one argument why the RBA may not lower the cash rate tomorrow. The economy created 25.7k jobs in April, although rising participation meant the unemployment rate nudged up by 0.15pt to 5.0%.  Better global data is also another reason why the RBA may hold fire, with PMI data in China and the US showing the global growth slowdown may have run its course for now.  The Australian bond market rallied strongly last month, and real 10-year yields are close to their lowest level since the mid-1970s.  Indeed, the bond market expects inflation to remain stable and stubbornly low over the longer-term.  The Australian dollar rallied against the NZ dollar but weakened vs the US dollar on the back of broad US dollar strength.

VEA, BOQ and BKL lowered guidance, while RIO guided the market to lower production in the Pilbara from that announced to the market last month. Disruptions from Cyclone Veronica to RIO's iron ore production in the region were larger than expected.  BOQ is seeing rising costs due to remediation costs from the Banking Royal Commission, but net interest margins and impairment charges seem well contained.  VEA is seeing margin pressure due to rising global oil prices.


Aussie Equities Month in Review (April 2019)

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Thematic (Sector/Industry)

<ul>
<li>China implements coal import caps specifically targeting Australian producers</li>
<li>Unclear as to how widespread these restrictions will eventually be</li>
<li>Thermal and metallurgical coal exports affected</li>
<li>Impacting ~A$8.4Bn of metallurgical coal exports; or 4.4% of national income</li>
<li>Thermal coal exports affected worth ~A$3.8Bn; or an additional 2% of national income</li>
<li>Collectively, thermal and metallurgical exports equate to ~0.9% of Australian annual GDP </li>
<li>Actions appear to be a response to blocking Huawei bidding for the 5G network</li>
<li>Recent Chinese cyber-attacks harden Australian Government's resolve</li>
<li>Expect similar Chinese measures (in time) to be applied to other commodities and industries</li>
</ul>


China implements coal import caps specifically targeting Australian producers
Unclear as to how widespread these restrictions will eventually be
Thermal and metallurgical coal exports affected
Impacting ~A$8.4Bn of metallurgical coal exports; or 4.4% of national income
Thermal coal exports affected worth ~A$3.8Bn; or an additional 2% of national income
Collectively, thermal and metallurgical exports equate to ~0.9% of Australian annual GDP 
Actions appear to be a response to blocking Huawei bidding for the 5G network
Recent Chinese cyber-attacks harden Australian Government's resolve
Expect similar Chinese measures (in time) to be applied to other commodities and industries


Confluence of Politics - China Bans Australian Coal Imports (Flash Note)

Over 25-yrs in Global Materials & Soft Commodities

Charles Spencer

Angang Steel Co Ltd (H) / Equity Bottom-Up

INVESTMENT VIEW:  The outlook for Angang’s profitability in 2019 is deteriorating quicker than consensus forecasts, we believe.  Chinese steel demand and pricing are forecast to be weak in 2019, yet raw material costs remain high.  We recommend staying short <a href="https://www.smartkarma.com/entities/203" target="_blank" data-smartkarma-citation="entities:203:1">Angang Steel Co Ltd (H) (347 HK)</a> shares with a PT of HK$5.

INVESTMENT VIEW:  The outlook for Angang’s profitability in 2019 is deteriorating quicker than consensus forecasts, we believe.  Chinese steel demand and pricing are forecast to be weak in 2019, yet raw material costs remain high.  We recommend staying short Angang Steel Co Ltd (H) (347 HK) shares with a PT of HK$5.

Australia

Rio Tinto Limited is an international mining company.  The Company has interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock, diamonds, talc and zircon. Dually-listed company with RIO LN.

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Rio Tinto Ltd (RIO AU)

Aussie Equities Model Portfolio Update (June): Buy Protection and Cyclical Extension

Buy Australia for its Defensive Qualities. Australia outperforms during periods of global uncertainty and when global interest rates are...

Shane Lee

New J Hutton – Exploration Report (Weeks Ending 17/05/19)

Vale SA (VALE US) woes continue, facing another dam collapse Forecast seaborne iron ore market deficit >100Mt CY19 Chinese house prices up 10%...

Gaius King

Aussie Equities Month in Review (April 2019)

The RBA appears set to lower the official cash rate for the first time since August 2016 after the Q119 data showed it was moving away from the...

Shane Lee

Confluence of Politics - China Bans Australian Coal Imports (Flash Note)

China implements coal import caps specifically targeting Australian producers Unclear as to how widespread these restrictions will eventually...

Boost Research

Angang Steel: Headwinds Intensify

INVESTMENT VIEW: The outlook for Angang’s profitability in 2019 is deteriorating quicker than consensus forecasts, we believe. Chinese steel...

Charles Spencer

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