Evening Wrap: ASX 200 snaps 4-day losing streak, banks rally + Iron ore hits near 6-month high

The Index recovered from a weak start to break a 4-day losing streak and finish at session highs, Singapore iron ore futures rally to near six-month highs of US$116 a tonne, Fortescue faces a major existential crisis and why tomorrow could be a bumpy day for markets.

Let's dive in.

ASX 200 Session Chart

ASX 200 breaks a four-day losing streak and closes at best levels (Source: Market Index)

Markets

The ASX 200 rallied off session lows of -0.5% to close at session highs. At the sector level:

• Financials carried the market into positive territory, with the Big Four banks all up around 1.0%

• Materials were firmer, majors BHP, Rio Tinto and Fortescue also finished the session around 1.0% higher

• Tech stocks were relatively hard hit, led by Megaport (-9.0%) and Xero (-2.3%)

Is this a bounce from oversold conditions (after a four-day losing streak) or the beginning of a more sustained move towards the upside?

Economy

No major economic announcements.

Latest news

The State of Play for Iron Ore

Singapore iron ore futures rallied 3.0% on Monday to close near six-month highs of US$116 a tonne – Creating a rather complex standoff between a deteriorating Chinese economy and rising stimulus expectations.

We'll list some key data points as noted by ING Economics, below:

• Stockpiles in China are hovering at the lowest levels since August 2020

• Chinese mills are cautious about restocking amid property woes

• From July to August, total iron ore inventories in China fell 16% to less than 120 million metric tonnes

• "However, the arrival of the construction season might encourage domestic mills to start restocking."

• "China's iron ore imports in August were at their strongest in almost three years at 106.415 metric tonnes."

• Outlook: "We're expecting $100/t in the fourth quarter and we see the 2023 average at $108/t. Risks will remain to the downside heading into year-end amid China steel output cuts, an uncertain outlook for the property sector and healthy supply."

Singapore iron ore futures (Source: TradingView)

Fortescue's Bumpy Green Transition

I came across an interesting line from the AFR about Fortescue (ASX: FMG) and the rationale behind its big green switch.

"Mark Hutchinson, the chief executive of Fortescue’s energy division, says the green energy strategy is trying to reset the market’s view of the company, such that it goes from trading on a miner’s price-to-earnings multiple of between five and 10 times to a PE multiple of between 15 and 20 times."

Fortescue trades on a price-to-earnings of 8 and a market cap of $60 billion. The PE multiple re-rate would suggest a valuation between $110-150 billion.

Fortescue's FY23 earnings stated that the 10% of Fortescue net profit set-aside for FFI would no longer apply and all projects would be assessed on a case-by-case basis.

"FMG's ambition of going green and decarbonisation also comes at a cost, as the company has commented that projects from Fortescue Energy would have an IRR of low to mid teens," Macquarie analysts said in a note last week.

"By contrast, iron ore projects in its pipeline would have an IRR of >20%. It is unclear to us how FMG could recover the ~10% return difference as a green premium is not yet evident in the equity market for iron ore miners."

"The FY23 dividend pay-out ratio was 65%; however we see downside risk given capital competition from FFI which is no longer constrained by the 10% of NPAT," Macquarie says.

How much money will Fortescue need to sink into an Energy business? And who decides on what multiple it trades on?

The Worst Performing Day of the Year

A potentially useless stat: Since 1992, September 12 has historically been one of the worst performing day of the year for the ASX 200.

That data has been skewed due to a few outsized declines in:

• 2001: -4.1%

• 2011: -3.7%

• 2016: -2.2%

Interesting news and movers

Trading higher

• +7.0% Syrah Resources (SYR) – Secures $150m loan commitment

• +6.3% Horizon Oil (HZN)

• +5.9% Sovereign Metals (SVM)

• +5.1% Motorcycle Holdings (MTO) 

• +4.4% Magellan Financial (MFG) – Upgraded by JPMorgan

Trading lower

• -36.7% Eroad NZ (ERD) – Capital raise

• -10.6% Sims (SGM) – Market update

• -10.3% Carbon Revolution (CBR)

• -2.3% Myer (MYR) 

• Lithium sector move: Latin Resources (-8.1%), Lake Resources (-7.9%), Global Lithium (-6.5%), Leo Lithium (-5.4%), Sayona (-4.8%), Argosy (-4.6%)

Broker notes

UBS on consumer spending trends (from Evidence Lab which surveyed ~1,000 Australian adults between 10-24 August):

• Spending expectations: “Consumer spending expectations for the next 12 months remain positive yet have fallen to the lowest since mid-21.” 

• Savings expectations:  “Have plateaued, with an increase led by high income earners and stabilisation for middle income earners, with low income earners expecting to continue to draw on savings to fund spending.”

• Spending habits: “The consumer is expected to change spending by: (1) trading down by price point in apparel & general merchandise; (2) trading down by price point to lower $ gross profit private label in food; and (3) shifting to at home vs out of home, with evidence these trends have commenced. We prefer companies exposed to the affluent (TWE), younger (now teens and non-renters) (LOV).”

• Segments at risk: “We also avoid retailers that sell to middle Australia or that have been beneficiaries of a more exuberant consumer during COVID (DMP, PMV, SUL), or are more exposed to higher CODB, notably labour costs (PMV, AX1).”

• Preferred exposures: “Buy rated: LOV (roll-out, youth consumer), MTS (home improvement, resilience in Food), TWE (Penfolds gth, cost savings), WES (market share gains in Retail, home improvement) and WOW (productivity initiatives, well positioned in Food).”

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