Evening Wrap: ASX 200 suffers third straight week of losses, Magellan shares plummet

The Index finished the week down -1.3%, led by declines from Energy and Utilities stocks. Trading volumes on the ASX fell 14% in September, Magellan reports a sharp drop in FUM to levels not seen since 2014, BHP says its coal mine generated 33 times more earnings than its nickel business, lithium stocks continued to sell off after Thursday's onslaught of bearish broker notes and a few Macquarie notes of interest.

Let's dive in.

ASX 200 Session Chart

ASX 200 higher but closed off session highs (Source: Market Index)

Markets

The ASX 200 rallied from a soft open to finish near session highs on Friday but still down 1.3% for the week. The Index's strength was relatively concentrated towards heavyweight stocks like banks and miners. While energy, growth and yield sensitive sectors continued to underperform. Despite the Index trading higher, 59% of the stocks in the All Ords either declined or finished breakeven.

Markets remain in a vulnerable and fickle place. Let's see how things shape up next week, ahead of some key data points such as US PPI and FOMC (Wed), US inflation (Thu) and China inflation (Fri).

Latest news

Market Volumes A Little Dry

The ASX (ASX: ASX) – It always feels weird typing ASX three times – reported its trading stats for September and things were pretty dry.

• Cash market total trades: 29.5 million, down 18% vs. September 2022

• Cash market total trades: 91.5 million year-to-date, down 15% vs. prior period

• Cash market total cash value: $131.8 billion, down 14% vs. September 2022

• Total futures and options volume: 15.27 million contracts, flat vs. September 2022

• Value of CHESS holdings: $2.63 trillion, up 7% on pcp

Something I learnt today: I've always known that a big chunk of the market's volume occurs during the closing auction (which takes place between 4:10 pm and 4:11 pm Sydney time). But what I didn't know was just how much it was. The cash market value for September notes:

• Open trading: $61.2 billion

• Auction trading: $38.4 billion

• Centre Point: $10.5 billion

• On-market value: $110.5 billion

So auction trading accounted for 34.8% of on-market trades.

Magellan Gutted

Magellan (ASX: MFG) shares spiraled almost 20% lower on Friday after an update flagged $35bn in funds under management (FUM) in September, down from $39bn in August. The fund manager hasn't seen FUM this low since 2014.

A Goldman Sachs notes from 20 August forecasted FUM to sit at $36.4bn in the first half of FY24.

Here's how the stock performed today

• Stock opened 4.7%

• Hit a low of -10.7% by 10:10 am

• Bounced to -5.2% by 10:45 am

• Trended lower all the way to -21.1% by 3:15 pm

• Closed 18.5% lower

Magellan intraday chart for Friday, 6 October (Source: Market Index)

Energy Transition vs. Profits

It's been a very rough period for battery metals (outside of lithium). And this line from the AFR takes the cake about the current trade off with investing in the energy transition vs. profits.

"The thermal coal mine that BHP plans to shut in NSW, Mt Arthur, delivered almost 33 times more earnings over the past year than BHP’s WA nickel business."

BHP's (ASX: BHP) FY23 results noted a 4% rise in nickel production to approximately 80,000 tonnes while average prices rose 3% to US$24,021 a tonne. Higher production and sale prices should imply more profits right?

Wrong.

Underlying nickel earnings fell 61% year-on-year to US$164 million due to factors including inventory drawdowns to support the supply chain, WA-cost inflation and lower realised prices for intermediate products.

This is probably why I'm slowly turning into a fan of the coal sector (but please don't cancel me).

Lithium Stocks Under More Pressure

Several lithium stocks continued to bleed on Friday after a slew of bearish notes from investment banks including JPMorgan, UBS and Morgan Stanley on Thursday.

The key takeaways from those notes include:

• Morgan Stanley: “Our strategists see supply rising 29% in ‘24, outpacing demand growth of 18%, driving a 118kt surplus in ‘24 ... The market surplus is expected to remain until '28 where our strategists predict a market deficit of 17kt, after which, the deficit is projected to rise to 585kt in '30."

• JPMorgan: “Taking stock of the looser balance going forward, we struggle to see a catalyst for prices to rebound."

• UBS: "We are perhaps most concerned with demand expectations out of China being tested against persistent macro weakness."

Both Morgan Stanley and JPMorgan downgraded IGO (ASX: IGO) shares. Morgan Stanley viewed Pilbara Minerals (ASX: PLS) as a key Underweight pick.

Interesting news and movers

Trading higher

• +11.3% Red 5 (RED) – Quarterly update (Thu)

Trading lower

• -18.5% Magellan Financial Group (MFG) – September FUM

• -7.4% Pexa Group (PXA) – Proposed acquisition of Smoove (Thu)

• -4.4% IGO (IGO) – JPMorgan downgrade (Thu)

• -2.2% Adbri (ABC) – Downgraded to Sell by Goldman Sachs

Broker notes

A few standalone Macquarie notes of interest:

Carnarvon Energy (CVN) – Underperform with $0.10 target ($0.15 at 5 Oct)

• “Legal challenges to offshore energy have made new projects uninvestable, until consultation requirements can be better defined.”

• “We see few catalysts for CVN to re-rate, given Dorado FID appears to be on hold until the regulatory environment improves.”

• “Down to Underperform. Dorado likely to face delays, and CVN may be tempted to deploy cash balance (~$180m) on low quality M&A.”

Megaport (MP1) – Outperform with $14.10 target ($11.35 at 4 Oct)

• “Revenue guidance easily achievable. Recent product launches support FY24 sales. Sales staff additions in 2HFY24 provide incremental upside.”

• “Operating leverage more than offsets cost growth in 2HFY24 from FTE

• adds. We estimate EBITDA margins on incremental revenues are ~70%.

• “Capex sustainably lower. MP1 portal data suggests continued network optimisation. Upside to asset-level returns. We also break down capex.”

PEXA (PXA) – Outperform with $15.20 target ($10.90 at 4 Oct)

• “Smoove acquisition further de-risks UK roll-out, but business is loss making and questions around the execution strategy remain.”

• “Remortgage and Sale & Purchase penetration targets have been reiterated, although current share price attributes ~$2 of negative value to the UK.”

• “Australian transfer volumes continue their recovery to mid-cycle levels.”

Scans