Why UBS' bullish view on lithium stocks just got more bullish

The Morning Wrap

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.


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So here we go. The very last earnings season wrap for the month - and what a month it was too. For our exclusive analysis of some of the top ASX companies, click here:

How the brokers' top reporting season stocks stacked up

In the meantime, here's the last earnings wrap. Woodside Energy (ASX: WDS) hiked its dividend and reported a 400% jump in profits and soaring revenues. But you would expect that after the year crude oil has had right? So is it still a buy for Hendrik Bothma? Find out here. IGO (ASX: IGO) meantime posted a 34% jump in full-year revenues to nearly $1 billion but saw profits slump. The final dividend was also cut in half but Mathan Somasundaram says that's no excuse not to wait for a good entry point. In the meantime, the baby formula shortage has, as expected, done wonders for Bubs Australia (ASX: BUB) after it saw revenues double and net losses trimmed. Finally, Healius (ASX: HLS) cut its final dividend despite a - get this - 600%+ rise in net profits. What a way to send August out.

And now that's over with, we can all have a respite. 


Today, the stock to watch is a whole sector. UBS has penned a sector-wide note on the ASX lithium space. And to say they have a bullish view is probably a disservice.

The team has analysed more than 100 projects across the ASX space, and as a result, they lifted their lithium price forecasts by as much as 38%. As the supply side continues to struggle to meet demand, they believe some battery-grade lithium could go for as much as $15,000 per tonne in the not-too-distant future. Here are analysts Levi Spry and Lachlan Shaw:

We see supply growth coming from both brownfield expansions and new greenfield projects but at higher cost and risk, underpinning our higher long term prices. Consequently we are lifting our long term prices. 

China is, of course, the elephant in the room on the lithium debate. The country dominates the global supply chain for lithium-ion batteries. One estimate from BloombergNEF suggests the figure could be as high as 80%. Not to mention the fact that 6 out of the world's 10 largest battery producers are based in the tiger economy. 

But the problem with that kind of domination is that producing ex-China makes life more difficult and costs much higher. Hence, if companies try to source away from there, the time and effort to do so will just add to the cost curve. 

Hence why these forecasts are so important now.

So what does that all mean for lithium stocks? Buy them all, say UBS! Allkem (ASX: AKE), IGO (ASX: IGO), and Mineral Resources (ASX: MIN) are all a buy. And before you ask, Pilbara Minerals (ASX: PLS) and the smaller players in the Australian space are not covered by the broker.


The European energy crisis is Europe’s subprime moment.

This quote from Jonathan Pain of The Pain Report really just puts the sting in the tail. And he's also not wrong. Think about the ramifications this war has had on the Eurozone economy. The Euro is below a 20-year low against the US Dollar. Gas prices are through the roof across the continent. Anecdotal evidence suggests that electricity prices are going through the roof in the UK - including at this humble cafe in Leicester:

Now, again, this war was dismissed as a short-term conflict. It's rapidly become a continental nightmare where the noise is no longer able to be ignored.


And speaking of Europe, it's Eurozone CPI night tonight. The forecast for headline inflation is - get this - 9%. Even core inflation is sitting at over 4% so the base effects are feeling the heat as well. How severe will this war's prolonged effects last on European households and businesses?

Also happening tonight are the Canadian GDP and the US ADP employment report. The latter is interesting only because, in the past, it's been a clue as to the general direction of the US labour market. Recently, it's been less reliable (especially when it comes to the core figure of how many jobs are actually created per month). 


Two charts to consider today - and both are the bond market following Jerome Powell's Jackson Hole speech. If you think the bond market doesn't send signals or doesn't matter, have I got some news for you. First, let's take a look at the US 2-year yield over the past year:

It's hardly a spike when the run-up has been so strong. (Source: Bloomberg)

If you know anything about the US yield curve this year, it's that it's been defined by huge runs at the short end of the curve. Now, consider the next chart, which deals with historic inversions and their proximity to recessions:

You may have to squint for this chart but all you need to know is that the yield curve had inverted at every point before each red arrow on the chart. 

That, in itself, isn't really remarkable. I've talked about yield curve inversions in this wrap and on Signal or Noise. But what is interesting is that the inversion we are seeing now is actually worse than the one before the Global Financial Crisis of 2007/08. Conclusion? The bears still have reason to roar.


Is it too early for a drink?
Is it too early for a drink?

Today's report was written by Hans Lee.


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The Morning Wrap
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Australia's most comprehensive markets wrap is back for 2023, with a fresh look and a new emphasis on getting you and your money ahead of the curve. Available each weekday morning at 8:30am AEDT. Written by Chris Conway, Kerry Sun, and Hans Lee.

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