Here in the West, we worry about inflation and the economy running too hot.
That’s not China’s problem. Its economy is running too cold.
This is one reason why commodities have been subdued in recent months.
Let’s go back to the start of the year.
There was a lot of optimism around the China reopening and what that might mean for demand, especially around oil, for example.
Hedge fund manager Pierre Andurand made the case for oil to go back to US$100 a barrel…if not more!
That’s not working for him. Reuters reported last month that his fund is down more than 30% this year.
There doesn’t seem any reason right now to get bullish about oil, even with the Saudis trying to prop up the price.
Copper, nickel, and iron ore are all a bit listless as well. That makes sense when the biggest commodity importer — China — isn’t firing.
However, that might be about to change…
The Chinese central bank is cutting rates and adding money to the Chinese money markets to stimulate the economy.
The Financial Times reports:
‘The People’s Bank of China cut the seven-day reverse repo rate, used to manage short-term liquidity in the banking system, in a move analysts said probably signalled more substantial monetary easing and stimulus measures to come.’
Now, that’s interesting.
One thing holding back the Aussie market relative to the US is that we don’t have a hot tech sector with global reach that makes billions every day.
We have big miners and big banks. You and I know that the big banks are facing headwinds around low credit growth and tight margins.
Our big miners make great money, but the world is only prepared to pay so much for them. They’re certainly not going to trade on a P/E multiple of 200 like Nvidia does.
My friend, Hedley Widdup, from Lion Selection Group showed the discrepancy between US tech and commodity producers in a recent presentation.
In 2022, the top stocks in each sector paid out about US$32 billion in dividends.
However, look at how the Nasdaq has outperformed the commodity stocks over the last 20 years:
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| Source: Lion Selection Group |
But there is a case to be made that resource stocks might close this gap up a little in the next five years.
Commodity stocks might be trendless now, but I don’t see how the world can meet its decarbonisation and renewable goals without resource prices going higher.
The market needs to stimulate more investment in future supply, and the way to make that happen is via higher prices.
There just hasn’t been the required investment over the last 10 years. Investors, especially in oil and iron ore, demand big dividends and not big projects.
Resource stocks lost a lot of trust with the market in the last mining boom with poor capital spending.
Generally, the world has got away with this. The period between 2010–20 was deflationary and low growth generally.
However, now we have big net zero goals and a surging India to contend with.
For Australia, one thing that has struck me about the last few years is how strong the iron ore price has remained despite China’s economy and property market going through the wringer.
Even today it’s around US$110 a tonne — a very good price relative to the weak period from 2015–19.
We saw the iron ore price go over US$200 a tonne back in 2021 and I see every chance of that happening again in the next few years.
The outlook for copper also looks very bullish once the global economy gets firing again.
It’s very hard for the resource industry to find copper at scale and with good grades.
All in all, to me it makes accumulating stocks like BHP Group [ASX:BHP] and Rio Tinto [ASX:RIO] a nice strategy while we cycle through this current weakness. They pay good dividends while you wait.
However, for the real fun in a budding resource bull market, the juniors are the most exciting.
Right now, I like smaller resource stocks that produce free cash flow. The real speccy explorers are on the nose currently.
The good news is the current trough in the Aussie market is a great time to get set for better times to come.
I’m releasing my latest small-cap report tomorrow with a copper play primed to monetise the Chinese stimulus coming down the line.
If that sounds interesting, you can get started here.
Best wishes,
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Callum Newman,
Editor, Money Morning
