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Reflation trade & Fortescue (FMG)

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    Reflation trade & Fortescue (FMG)

    “Hi MM Team MM remains bullish commodities & the “reflation trade”. Can you please re-affirm these views in regards to FMG - Current Price $18.12 (YTD High $18.64). Would you continue to hold thru reporting period and dividend payout? When you read the following views: [leaky_paywall_subscriber]“However, given what we view to be emerging downside risks to the iron ore price and that, from our analysis, the current FMG share price implies the iron ore spot price will remain at these levels for the next three years, we are taking the view that FMG is indeed priced for perfection. While we regard a healthy final dividend (BPe A91cps) as locked in, we believe the downside risks around the iron ore price and FMG going ex-dividend (likely early September) are insufficient compared to our underlying valuation to justify holding through to those catalysts. We lower our recommendation to sell. “ TP $12.50” - regards Debbie G.[/leaky_paywall_subscriber]

    Answer

    Morning Debbie,

    Fortescue Metals (FMG) has certainly been in the limelight through 2020 and as you rightly point out a number of analysts are saying its “very rich” at current levels although I would caution that I haven’t read many of them call iron ore to scale its current heights through 2020 – consensus Iron Ore price forecasts for calendar year 2020 are $US90, dropping to $US78 for CY21 & $US67 in CY22.

    Our outlook for Fortescue (FMG) is as a follow:

      1. We remain overall bullish the iron price as China looks to stimulate its economy although pullbacks are inevitable as in all markets. Last August the Iron Ore price fell ~40% in a month.
      2. I’m sure FMG will have another $1.50-$2 (around 10%) retracement before Christmas, after all it is historically a volatile stock. We would still be looking to buy such pullbacks as opposed to selling weakness however taking some ‘off the top’ for existing longs makes sense here

    Whether FMG corrects after its result or later in the year is impossible to know without prior knowledge of its result but I feel at the moment the biggest risk is losing a position in the middle of a strong bull trend.

    Whether investors should consider taking part profit comes down to their individual portfolio construction, we recently trimmed our OZ Minerals (OZL) although we remain bullish, it was in our case a scenario of too many eggs in the one basket.

    MM is neutral FMG after a solid run – The next 10% would become interesting
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