April the best month for equities, iron ore looks bullish, why look at Indian oil

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

• Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) are down more than 1.5% and about 0.5% respectively.  Hang Seng TECH Index (HSTECH.I) declined 3%. Shanghai lockdown, weak Chinese economic data, unresolved differences between China and the U.S. over ADR delisting continued to weigh on Hong Kong stocks.  Chinese internet stocks were particularly weak.  Alibaba (09988), Bilibili (09626), Meituan (03690). JD.COM (09618) and Baidu (09888) were off between 4% and 7%. There are another 10 Chinese private property developers and property service companies failed to report 2021 earnings before deadline and announced suspension of trading in the Hong Kong bourse.  Chinse state-owned property developers, China Resources Land (01109) and China Overseas Land & Investment (00688) reported largely inline FY21 results but the latter’s gross margin was worse than expectation. In mainland China, A shares were steady and agriculture, coal mining and bank names gained

• Japan’s weak Q1 manufacturing survey may still be positive for equities. Japan reported its Q1 Tankan survey, signaling an overall contraction for the economy in Q1. The index for large manufacturers eased to 14 from 17 last quarter, and outlook disappointed as well. Still, a positive number may be good for Japanese large caps, and a broadly gloomier outlook means more policy easing so generally good for Japan equities.

• Asia manufacturing PMIs remained broadly in expansion in March, more gains remain likely for April as restrictions and travel eases broadly this month. Japan’s Jibun Bank manufacturing PMI was up to 54.1 in March from 53.2 previously, and Indonesia, Thailand and Vietnam also remained in expansion. Remember that a reading above 50 indicates expansion and below 50 indicates contraction. Malaysia’s manufacturing PMI dipped to 49.6, its lowest level since September 2021.

• The Australia share market (ASX200), is increasingly bullish. On Friday the market took a breather from its new high, after rising 10% from its January low. But, the biggest picture remains rosier; the ASX200 is increasingly bullish (given its market is made up of over 30% commodity stocks), and the dynamics freshly changed in favour of these markets, as lithium stocks are being supported higher again amid fresh US electric-vehicle-mineral-stimulus, and iron ore stocks are also hitting new highs on expectation that China will ramp up iron ore purchases to achieve its 5.5% economic growth target. Today Australia’s biggest lithium producers Allkem (AKE) and Pilbara Minerals (PLS) rose over 8%, not only from US stimulus, but as Allkem (AKE), the 5th biggest lithium producer in the world announced lithium carbonate prices received for their June contracts were priced at around 30% higher than the previous quarter. This highlights the lack of supply and rising demand is continuing to push up the lithium price, and lithium producers shares.  

What you need to consider

• March Caixin Chinese PMI Manufacturing data signals contraction.  Coming in at 48.1 (vs 50.4 in February), China’s manufacturing data was below the 50 expansion/contraction line and weaker than market expectation. Unlike the PMI data released by the China Federation of Logistics and Purchasing which tends to be dominated by large state-owned enterprises, the Caixin numbers give investors a more focused glance into the pulse of the private industrial companies in China.

• Singapore stocks brace for Monetary Authority of Singapore (MAS) tightening. Singapore stocks had a good Q1, up about 3% overall, REITS were among the strongest. Singapore home prices rose at a slower pace in Q1, suggesting the market is cooling on the back of property curbs, higher taxes and economic headwinds from Russia’s invasion of Ukraine. Home prices climbed 0.4% in the March quarter, after 5% gains in Q4. It remains to be seen if the property curbs were a short-term fix as resilient demand and a low supply of new homes continues to underpin. Also, even with MAS tightening likely in April, banking stocks will be on watch as rising global growth risks may mean slower tightening. United Overseas Bank (UOB), DBS Group Holdings (DBS), and Oversea-Chinese Banking Corporation (OCBC) have outperformed global bank stocks recently.

• India’s oil trade with Russia is positive for Indian refiners. India is back in focus for its oil purchases from Russia using a Rupee-Ruble trade as an alternative to the SWIFT payment system. Russia is offering discounts of as much as $35 a barrel on prices before the war to lure India to lift more shipments. This could lift Indian state oil refiners like IOCL, BPCL or HPCL. But we need to watch how far this rally can last, given India's appetite for Russian oil is rather limited as the refineries are not built for that grade of oil particularly.

• The iron ore price (SOCA) hit a new high on expectations China will ramp up steel production, supporting iron ore stock higher. Despite China’s manufacturing data showing its sector cooled, we think the Chinese government will stoke more fire into its economy so it can achieve its economic growth target of 5.5% this year. The market is forward looking remember, and thinks iron ore buying will pick up too, which is why iron ore (the key steel ingredient) hit a fresh $161 high, its highest level since March 14. From a technical perspective, iron ore has now resumed its uptrend, and looks like it will attempt to hit its 2022 high of 171.

Trading ideas to consider

• Resources ETFs are a great addition to a portfolio. For Investors seeing upside, if you believe the iron ore price, lithium, coal and battery metals prices will move higher, like we think they will, consider looking at Australian Resources ETFs like VanEck Australian Resources ETF (MVR). For investors focused on capitalizing on clean/green/battery minerals upside look at ETFs Battery Tech & Lithium ETF (ACDC) or VanEck Rare Earth/Strategic Metals ETF (REMX).

• Cautious towards Hong Kong developer stocks. In its latest Half-yearly Monetary and Financial Stability Report, the Hong Kong Monetary Authority warns against the city’s highly stretched housing affordability.  At almost 20, the price-to-income ratio well exceeds the 15 level in 1997.  The income-gearing ratio (92.9%) was at its highest since 2004.  When interest rates in Hong Kong rise in tandem with the U.S. interest rates in the coming months under the linked-exchange-rate regime, the income-gearing ratio is set to worsen.  It may be advisable to be cautious towards Hong Kong developer stocks.

• US payroll data watch and USD/JPY may be a classic trade. Key data to watch in the Non-farm payroll data release, is the unemployment, but more so average hourly earnings which was slightly soft in February. Any beat on that can clearly turn the market very strongly in favor of multiple 50-bps hikes from the Fed. USD/JPY is a classic trade following the NFP release and it usually shows a large reaction to the NFP data. US yields will move higher if the data is positive, and with Japanese govt bond yields essentially capped at 0.25%, the divergence will widen and weigh on the yen.

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