NEWS + VIEWS – 3/5/2024
MARKETS
Most share markets have taken a breather as we move into the typically weaker part of the year. The exception has been the UK’s FTSE that, apart from one bad day in April, has been pushing higher.
The ASX 200 is down -4% since its calendar year high in early April. The chart below from Wilson Advisory shows those sectors that have fallen the most since they peaked in 2024.
It is no surprise that REITs (property), Materials (miners), Energy and Consumer Discretionary have fallen on expectations of lower economic activity due to higher interest rates.
Perhaps the surprises are Healthcare, Communications and IT. Healthcare is probably impacted by the outsized impact of CSL’s and Ramsay Health Care’s (RHC) languishing share prices.
Unsurprisingly, Utilities and the broad industrials sector have ‘outperformed’ in the falling market.
Of course, those sectors that have fallen the most will also offer the most opportunity and usually the most risk. The biggest unknown as always is ‘when?’
All eyes still on interest rates
Markets are closely tracking news on inflation, employment, economic activity, and their impact on interest rates.
Australian traders are 50/50 on whether interest rates will rise further. In the US, Federal Reserve chair Jerome Powell stated that it would keep rates higher for longer but further rate rises were ‘unlikely’.
The central banks’ problem here and overseas is that government overspending is causing upward pressure on inflation and interest rates. Domestic policies are also detracting from productivity, which is a problem that is showing no signs of abating. Therefore, inflation is likely to stay sticky at higher levels unless economic activity turns sharply down.
Copper, Anglo American and BHP
The ‘jewels in the crown’ behind BHP’s bid for miner Anglo American are the two copper mines in Chile. Anglo’s South African diamond and iron ore operations are likely to be less attractive to BHP.
BHP’s strategic interest in copper is being driven by increasing deficits in global copper production (see chart below). The increased demand arises from the use of copper in electric wiring and grids. AI and renewable energy rollouts are requiring huge increases in infrastructure, soaking up copper supplies.
Source: Bloomberg, Morningstar
Albert Chu from Man GLG explained that 40-60 kW of power is required for AI processing units which have 4 to 6 times more power and cooling needs than a ‘traditional rack’. He went on to state that by the end of this decade, data centres for AI in the US will require 35 GW of power, up from 17 GW in 2022.
One would expect that sort of growth to continue in the US and accelerate in other countries as they try to emulate the US. On the renewable energy side, an offshore wind turbine absorbs 4 to 5 tonnes of copper. An electric vehicle uses around 3 times the copper of a petrol driven car.
Copper demand is only likely to increase, and the long lead time to get a copper mine up and running will exacerbate the copper supply shortfall.
The above trend in copper supply and demand underpins BHP’s interest in Anglo American. As is the case of most ‘hostile’ takeover bids, BHP’s first offer has been rejected. An improved offer is likely and other possible suitors will be running the ruler over Anglo American.
While Anglo American is headquartered and listed in London, there is no doubt the South African government will have their say in the final outcome as significant Anglo assets are located there.
As a further observation, it is interesting that BHP is looking outside Australia for its next major investment. The company has been warning Australian governments that the investment climate here has deteriorated due to regulatory impediments in industrial relations, changes to royalties and environmental approvals. Recently it was reported that resource project approvals had fallen to around a third of previous levels.
Bapcor (BAP) profit downgrade
In a trading update, BAP stated that its second half pro-forma net profit after tax will be between $38.8 million and $42.8 million, below that of the first half ($54.2 million). Trading conditions in its retail business have remained challenging due to weak consumer confidence and lower levels of discretionary spending.
A fall in the share price of 24% to $4.40 was also attributed to the announcement that CEO-elect Paul Dumbrell decided against joining the company the day before he was due to start in the role.
UBS, Morgans, Macquarie and Citi have since reduced their BAP target prices to an average of $4.90 per share. Potential downside risks included further profit downgrades and more management departures. However, according to both Macquarie and Morgans, the company remains a takeover target.
Gerard O’Shaughnessy
P 0423 771 330
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