Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Why this long-short manager is selling Fortescue
Economies around the globe are starting to transition to a post-Covid world, but what they face is a new world riddled with supply chain issues, rising demand for metals used in car manufacturing and high government debt following stimulus and Covid-19 spending.
Sage Capital’s portfolio manager, Kelli Meagher, and chief investment officer, Sean Fenton provided an update on the Australian equities market and the outlook for 2022.
The pair say various issues are starting to emerge from China. Its working age has peaked, there has been a substantial increase in focus on environmental sustainability, iron ore has fallen from grace and demand for a handful of commodities such as magnesium, lithium and nickel, has surged, given that they are essential in the creation of EV batteries used in automobiles.
Looking back, iron ore companies were basically printing money until there was a sharp pullback to its previously levels. Fenton says China is a very important market on the global scale but at the same time. Australia is focusing on reducing its reliance on China. On the flip side, a broad energy transition is underway. The implications for Australia are that steel production and iron ore demand may be peaking; politics is impacting broader free trade; and the energy transition is bullish for commodities like lithium, nickel and copper.
Sage Capital has instituted a ‘short’ position in Fortescue Metals Group (ASX:FMG) as a pure-play iron ore exposure. The reason for its short position is the collapse in the iron ore price; some are calling it the end of the great iron ore boom.
It was only yesterday we were talking about how glorious our economy was, pulling through Covid with the highest GDP recorded in one quarter in history, all thanks to iron ore. In fact, iron ore surged so much that it averaged a record high of US$214 ($291) per tonne in July, well above its mining boom pre-GFC high of US$220. It’s now sitting at US$92 a tonne. Other reasons why Sage wanted to ‘short’ FMG are increased shipping costs, which are squeezing cashflows; and cost blowouts at the Iron Bridge development.
On the long side, Sage Capital is backing the lithium boom. Orocobre (ASX:ORE) is its star pick. “The merger with Galaxy provides diverse supply from brines in Argentina to hard rock in Australia. ORE is positioned towards the bottom of the global cost curve with development upside. The company is investing in downstream projects to capture higher margins from battery grade lithium hydroxide and it conveys a strong ESG focus and culture,” says Sage.
Because Covid-19 became a different sort of a crisis, there were many unforeseen knock-on effects that drove demand for certain goods, as services have fallen. This included the heightened demand for semiconductors and magnesium used in automobiles. Sage Capital says “supply chains have been disrupted with shortages ranging from semiconductors to commodities. More recently the cost of freight transportation and energy have surged.”
Key drivers of portfolio return over the past six months have been:
- Resources Group – Short iron ore names and long ‘green economy’ related names
- Growth Group – Long ResMed (ASX: RMD), Corporate Travel Management (ASX: CTD) and Netwealth (ASX: NWL)
- Other – Short A2 Milk (ASX: A2M) and AGL Energy (ASX: AGL)
Sage Capital’s Outlook for 2022 sees China starting credit tightening and environmental controls remaining in place, with iron ore remaining weak without substantial re-stoking of the stimulus fire.
