Morning Report Monday 20 April 2015
The majority of questions I am receiving, unsurprisingly, are around the depressed Iron Ore sector and in particular Fortescue Metals (FMG). Unfortunately, investors prefer to buy stocks that are falling as opposed to ones at highs, which has a negative correlation to performance. I know I have discussed this subject a number of times over recent weeks, but a few thoughts crossed my mind over the weekend that made me want to clarify exactly how I see this space at present.
• Over the weekend, China shifted into stimulus mode with a cut to banks’ reserve ratio.
This weekend’s action is notable being the largest stimulus since November 2008 and entrenching China in the “easing camp” with Europe, Japan and of course Australia. The result is basically Chinese banks will be flooded with money to lend ~$200bn. A pick up in the Chinese economy should help Iron Ore recover some of its recent major losses - see chart 3.Obviously the most important issue for FMG is the collapsing Iron Ore price, which has fallen 65% since late 2013. Interestingly, all analysts are now extremely bearish on the bulk commodity, highlighted by Goldman Sachs forecasting $US44/t in 2016 last week. My opinion of the “pack analysts’” big picture predictions is that it can often create opportunities…they are all bearish Iron Ore now….they did not predict the collapsing oil price that led to QANTAS rallying ~300% since late 2013 – see chart 2.
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