End of Quarter watch, S&P500 commodities companies ripen, lithium stocks vs Tesla

Co-written by Market Strategists Jessica Amir in Australia, Redmond Wong in Hong Kong, Charu Chanana in Singapore.

What’s happening in equites that you need to know?

• Australia’s share market’s (ASX200) started the trading week on the right foot, up 0.1% on Monday  taking the ASX up for the 5^th straight day, and pushing the market further above its 200 day moving average. Meaning, the ASX could continue to rally up, to the next upper level resistance at 7478 points. Meaning, the market could rally up to this level, before heading lower, to potentially coincide with the beginning of the second quarter. Over the longer term, the ASX200 is supported higher though, amid the commodity boom. Today’s best performers include AVZ Minerals (AVZ) up 4.8%, the ASX200 new lithium stock. Lynas Rare Earths (LYC) up 3.8%, and coal giant Washington H Soul Pattinson (SOL) up 3% and Iron ore rising star Champion Iron (CIA) up over 3% as well.

• The Australian dollar (AUDUSD) is continuing to push higher, and has risen up for the 5^th straight day, rising above 0.7530. The next key upper level is the major pivot high at 0.7556. The Australia dollar has continued to rally up in the wake of the Russian invasion of Ukraine, given Australia is the world’s leading LNG exporter, and biggest iron ore producer.

   

• Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) Hang Seng Index and Hang Seng TECH Index (HSTECH.I) recovered early losses from the news of COVID-related partial lockdown of Shanghai.  At the time of writing, Hang Seng Index was up 1% and Hang Seng TECH Index rose 3%.  Chinese Internet stock lead the charge higher.  Meituan (03690) surged almost 13% after reporting better than expected operating margins and smaller than expected loss in 4Q21. Revenue and operating profits from food delivery beat expectations as a result of higher order volume.  Alibaba (09988) and Tencent (00700) were up 5% and 4% respectively.  Coal mining stocks surged.  China Shenhua (01088), China Coal (01898) and Yankuang Energy rose 4% to 9%.  A shares also recovered most of their early losses, with financials contributing most.  Once down almost 2%, CSI 300 was down only 0.3% at the time of writing.

What you need to consider

• Some of the most traded stocks last week in the APAC Region were Tesla, Apple, and Block. On ASX Westpac Bank (WBC), Sayona Mining (SYA) and Core Lithium (CXO) made the most bought list. The most bought futures were in Crude Oil and the E-Mini S&P500. Of note, the S&P500 has increasingly been bid/purchase because ahead of the S&P500 companies handing down Q1 results. As for earnings per share (EPS) growth, 6 of the 11 S&P500 sectors have been upgraded by the market, with energy and mining stocks tipped to see the biggest bonanza in earnings growth. Meanwhile other sectors are likely to be squeezed by inflationary pressures from higher energy and materials costs.

• Telsa (TSLA) was the most purchased stock last week at Saxo, but revenue and profit growth is slowing, which will likely cap share price growth. We need to remember, Tesla is leading the pack in EV production, however its revenue growth is tipped to slow this year amid rising production costs (material costs like lithium, copper, aluminum, nickel are all higher). Remember revenue growth drives shares price growth. The market thinks Tesla’s revenue growth will slow to just 55% growth in 2022, compared to last year’s 71%. Yearly profit growth of 26.5% is expected, vs last year’s profit growth of 25%. If you are trading Tesla, also keep in mind, Shanghai production has been suspended for least a day, due to a surge in covid cases. Tesla shares have rallied up 26% from their March low, as traders are closing shorts and also buying the dip ahead of quarter end. But we think the short term Tesla rally could be capped now, as the technical indicators suggest, plus the market is also factoring in higher costs, while revenue growth will slow.

• Lithium stocks in focus ahead of Australian Federal Budget being handed down Tuesday. The lithium sector has been left with little to no Australian government funding, unlike like hydrogen, uranium, and rare earths. So keep your eye on funding likely to go toward helping the local lithium sector boost production. A good place to start is look at Australia’s biggest producer’s Allkem (AKE) and Pilbara Mineral (PLS), – who are producing and selling lithium. You could then look at the lithium companies that were recently added to the ASX200 and ASX200 last week, like AVZ Minerals (AVZ), Lake Resources (LKE), Sayona Mining (SYA), Core Lithium (CXO). But the focus in the smaller end of town, will be on those on smaller lithium companies who can develop their lithium plants, get sales agreements and are in close proximity to ports and major vehicle producers.

• Key US data and Fed speakers to watch in the week ahead. Before the US March jobs report due to be released on Friday, which is expected to come in strong once again, there will be a slew of other economic data to watch out for. February personal income and consumption will be key investor focus, given the Fed targets the headline PCE deflator, and Bloomberg median forecast signals a rise to 6.4% from 6.1%. Overall, US data and Fed lineup of key speakers Harker and Bostic on Tuesday, Barkin and George on Wednesday, Evans on Friday and Williams on Saturday will continue to push for 50bps rate hike in May, and also potentially in June.

• Shanghai partial lockdown.  Shanghai imposed lockdown on the districts east to Huangpu river for 4 days, from today to 1 April 5am and then the districts west to Huangpu river for another 4 days from 1 April at 5am.  That has once sent WTI oil futures down more than 3% to below $110 and China’s stock markets down 2% in early trading but both recovered some of their losses since.

• Industrial Profits in China. China’s industrial profit growth accelerated slightly to +5% YoY in Jan & Feb (Dec +4.2% YoY)  Upstream industries’, such as coal mining, oil and gas extraction and non-ferrous metal mining had the strongest earnings growth and improvement on profit margins. Downstream manufacturing industries’ profits on average fell slightly in January and February 2022 versus a year ago. 

• OPEC+ meet on Thursday. The group will need to decide whether they will stick to their current plan of increasing output by 400Mbbls/d per month or be more aggressive with their production hikes. OPEC+ have had more time to assess the impact of the Russia-Ukraine war and might feel more confident to take action. Meanwhile, US and EU reached a deal where the US would supply the bloc with at least an additional 15bcm of LNG this year.

• PMI releases in Asia to support reopening trade. China PMIs may be headed south due to the increasing Covid restrictions, but PMIs for the rest of the Asian economies could potentially see improvements. Japan’s Tankan index is expected to see a decline in sentiment due to the highly uncertain geopolitical situation, but the labour market is expected to make some gradual progress after the Omicron peak. While North Asian economies may continue to face threats of supply disruptions, India and Southeast Asia PMIs will focus on reopening of the economies. Singapore will ease restrictions substantially from Tuesday, and Singapore Airlines (SIAL) and Sats (SATS) will be a key focus. Casino stocks in Singapore (Genting, 36T) and Malaysia (Genting, GMALY) may also see interest

• China Telecom & China Mobile. U.S.’ Federal Communications Commission (FCC) on Friday added China Telecom (Americas) Corp, and China Mobile International USA Inc. to the list of companies deemed as a threat to the US.’ national security. Under the Secured Networks Act enacted in March 2020, US telcos which receive federal subsidies from the Universal Service Fund cannot purchase or use equipment or services from companies on this FCC list. In March 2021, five Chinese telecommunication equipment companies, Huawei, ZTE, Hytera Communications, Hangzhou Hikvision, and Dahua Technology were put on the list. 

• The China and US  yield gap collapses to zero. With treasury rising fast, The 5-year China Government Bond vs 5-year U.S. Treasury Note yield spread has collapsed to almost zero.  This may weaken the renminbi and limit the People’s Bank of China’s room to cut interest rates.

• Yen to remain a key focus with BoJ announcement on bond buying and Japanese year-end approaching. The safe haven appeal of the Japanese yen has eroded during the recent geopolitical crisis, as yield differentials became a key focus. USD/JPY printed fresh six-year highs and is now in close sights of 123 after three consecutive weeks of decline in the yen; AUD/JPY surged above 92 as Bank of Japan has offered to buy an unlimited amount of 10-year JGBs at 0.25%. The second such move in less than 2 months signals BoJ’s commitment to an accommodative policy, which will continue to weigh on yen. Portfolio rebalancing ahead of quarter-end on Thursday may bring some least temporary, flow-based support. We have seen comments from BoJ last week suggesting a weaker yen will not prompt policy action and inflation will remain the driver for policy settings. MoF sounded more concerned with the yen weakness, but it will particularly be volatility that can potentially spark any intervention, not the yen weakness which is actually good for the Japanese economy.

Trading ideas

• S&P at a key inflection point, having crossed above the 200dma. February highs of 4,590 will provide resistance, but a break above could signal the upside could extend back to the record highs posted at the very beginning of the year, and would also suggest that the Fed is failing to make much of an impression yet despite constantly raising the bar of rate expectations over the last few months. For now, equities remain the best option for global investors, particularly compared with bonds. Rotation within sectors will be key, and value stocks like big tech and cash-rich companies will see interest. Earnings forecasts remain upbeat and near-term geopolitical as well as Fed hike risks have been priced in.

• Miners over industrial companies. Amid rising energy, coal and industrial metal prices and the Chines government’s push to become more self-reliant on local commodities, the trend of improving revenues, profit margins and profits in coal mining, oil and gas extraction, and non-ferrous metal mining, smelting and pressing is likely to continue.  Meanwhile, manufacturing industries’ profitability is facing more pressure to contract due to higher material costs. To participate in this trend, investors may consider favouring the Chinese material sector via going long the Global X MSCI China Materials ETF (CHIM:arcx) against industrials such as the Global X MSCI China Industrials ETF (CHII:arcx).

• Amid the Australian Budget behind handing down on Tuesday; the spotlight will be put on clean energy commodities, with expectation formal funding will go toward, uranium, hydrogen, rare earths and fresh funding will go toward lithium. We also expect long term share price growth in these areas. In nuclear power generation (uranium), to back this theme, you could look at the Global X Uranium ETF (URA) or VanEck Vectors Uranium Nuclear Energy ETF (NLR) which invest in world’s biggest 30 uranium/nuclear companies. For Hydrogen keep an eye on Global X Hydrogen ETF (HYDR) or ETFS Hydrogen ETF (HGEN), that invest in the largest 30 global hydrogen companies. For Rare Earths, keep an eye on VanEck Rare Earths/Strategic Metals ETF (REMX) For lithium, keep an eye on ETFs Battery and Tech Lithium ETF (ACDC) and Global X Lithium and Battery ETF (LIT)

Earnings to watch

In Hong Kong & mainland China

• Mar 28: China Reinsurance (01508), CITIC Securities (06030), JD Health (06618), Ming Yuan Clouc (00909), Shengyi Technology (600183), Hangzhou Tigermed (03347), Tsingtao Brewery (00168), XPENG (09868)
• Mar 29: BYD (01121), BYD Electronic (00285), China Construction Bank (00939), Country Garden Services (06098), Dengfeng Motor (00489), Great Wall Motor (02333), Haitong Securities (06837), Innovent Biologics (01801), Powerlong Real Estate (01238), Sunac Services (01516)
• Mar 30: Agricultural Bank of China (01288), Beijing Enterprises Water (00371), Changjiang Electric (600584), China Galaxy Securities (06881), CICC(03908), China Vanke (02202), Hair Smart Home (06690), ICBC (01398), Jiangxi Ganfeng Lithium (01772), Postal Savings Bank of China (01658), SF Holding (002352)
• Mar 31: China Overseas Land & Dev (00688), China Resources Land (01109), Shimao Services (00873).