The market undoubtedly is showing some impressive backbone to rally in the face of bad news on both the macro and stock level, yesterday it was Challenger Group Financial (CGF) tapping the market for $300m in fresh equity as they once again increase the risk associated with their investment portfolio (after the market has run!!) - this is a stock we remain bearish on as margins remain pressured.
From a broader perspective, I'm never keen to sell markets that exhibit strength into bad news but I do remain cognisant that it can only absorb so much negativity hence we are considering reducing our overall market exposure if we see a pop above 6200 - perhaps the straw that breaks the proverbial camels back is looming in the months ahead and a 10% pullback can unfold. However short-term with Scott Morrison urging Australia to push ahead with openings despite outbreaks things still look ok for local risk assets.
MM still remains bullish equities short & medium-term.
ASX200 Index Chart
I know a lot of readers wonder why equities keep rallying in the face of adversity and MM often points the finger at huge liquidity injections by central banks like the US Fed, the chart below tells the tale. M2 Money Supply illustrates perfectly the almost exponential amount of liquidity the Fed has pumped into financial markets, which filters down to the likes of you and I, since the coronavirus pandemic. Compared to the GFC its amazing how this year stands out as one where the printing presses have been working around the clock.
On Bloomberg this morning an opinion piece popped up that sourced commentary from Stephen Schwarzman , the Chairman, CEO & Co- Founder of Blackstone, one of the worlds biggest asset managers with +$600b under management. I recently read his book ‘What It Takes’, a really good read on his path to create a huge asset management company from scratch. Anyway, Blackstone are at the pointy end of large scale investment and he sighted the huge support coming from central bank liquidity, which is shown in the chart below. The outcome he believes is supportive for asset prices even though the economy will take time to recover from COVID-19, yes he's talking his own book but it makes sense.
MM is sticking with the anecdote “don’t fight the Fed” for a while longer.
NB: Money supply is the total value of money available in an economy at a point in time.
M2 Money Supply ($US Billion) Chart
Against the backdrop of huge liquidity and central bank support, I think it makes sense to be looking more closely at whats actually playing out at the stock / sector level, there are plenty of opportunities about and if we simply take a blanketed view of the market given the perceived risks, we'll miss some really compelling buys.
This morning we've looking at the Nickel space as activity bubbles away under the hood with OZ Minerals (OZL) buying Cassini Resources (CZI), while BHP Group (BHP) has bought Norilsk’s Honeymoon Well Nickel Project and Western Areas (WSA) bought a cornerstone stake in Panoramic Resources. When we simply glance at the price decline in nickel over the last year its easy to envisage why its catching some people’s attention, especially if they’ve just ridden the huge iron ore bull market.
MM feels the risk / reward for nickel is now switching very much towards the bullish stance.
Nickel Spot ($US/MT) Chart
Panoramic Resources now has a market cap of under $150m and considering its decoupling from Western Areas (WSA) this year it’s interesting to see the $630m nickel producers interest – WSA recently took a 19.9% stake through a capital raise by PAN. We feel PAN is a good “cheeky punt” around current levels for the adventurous.
Western Areas (WSA) v Panoramic Resources (PAN) Chart
The other smaller Nickel company that we’ve been reviewing is Mincor (MCR) which is capped around $300m, a company with a checkered history although less so than Panoramic. MCR is a sort of ‘middle ground’ between the large cap WSA and the small cap / super high risk PAN.
Andrew Forrest owns 14% of MCR while BHP also has reasons to see MCR’s Kambalda Project in WA get off the ground. Importantly, Mincor will produce a nickel sulphide concentrate, and so is exposed to the battery metal thematic.
MM is bullish Nickel
Mincor (MCR) Chart
One of our core views at MM is inflation will gather momentum over the next 12-18 months sending the price of commodities higher, Looking across the commodity deck, we think its time to take some $$ off the table from the high flying iron ore sector and switch to sector laggards like Nickel, while Copper has also lagged.
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