For the constant angst about China, they still buy a lot of iron ore after all these years.
There’s that lovely price for us Aussies, still over US$95 a tonne.
That’s just under double where the government number crunchers conservatively put it in their forecasts last year (US$55).
Who can blame them?
But the reality versus the previous expectation requires shares to adjust in the direction we want…up!
Ride this Iron Ore cash cow while it lasts
We can see this staggering bonanza in two very public ways.
One is the monster increase in wealth for Twiggy Forrest. He’s currently worth $13 billion.
That’s up $1 billion in about three weeks. That’s one way to start the year!
The second is the rally in the Aussie stock market, which the big iron stocks are driving. The XJO is up nearly 6% in three weeks.
There’s now a very good chance of increased, or special dividends, from the big miners and the market is bidding for them.
All this is perfectly in accord with the investment strategy I laid down last year.
The natural resource sector is booming and it’s pushing stocks higher.
It’s also one reason why you have to be cautious when you read the mainstream press.
For example, an article in the Australian Financial Review points out that Australian shares are extremely expensive relative to their peers around the world.
There’s a catch to this assessment: Aussie shares are the dearest in the world ‘if the financial and material sectors are excluded’.
That’s a big caveat!
These two sectors account for 45% of the index.
Industrial stocks may be expensive on historical metrics.
But iron ore is sending a river of money through the big miners.
That’s where we can juice our returns from stocks right now.
The good news is that it’s perfectly possible to turn this situation to your advantage.
You don’t have to buy ‘the market’.
You can use ETFs to strip out sectors where the earnings growth is unlikely to keep firing and focus on where the healthy price action is.
Right now, that’s the resource and commodities sector.
The banks are more problematic…
A mixed outlook here
Their upcoming earnings results are unlikely to lift them in a big way. They have their recent legacy issues still to deal with.
And now the market is becoming wary of their high margin ‘verticals’ like foreign exchange and mortgages coming under increasing attack from fintechs and other competitors.
They do have one bright spot, however, and it’s good news for mortgage holders, too.
The banks are raising their funding at lower costs than a year ago.
This is a nice development. One of the advantages of experience is you can see these factors play out in cycles.
Back in 2018 these costs were rising for the banks.
How long will these benign funding conditions last? We have no way of knowing.
But the banks are locking in this cheap funding now on a pretty big scale. They’ve been very active so far this year.
That buys them — and the market — some breathing room, at least.
It probably pays to be wary of buying the market today. It would not surprise me in the slightest to see the ASX retrace from here for a bit.
What makes me say that?
It’s to do with the RBA, mostly. The market is split 50/50, whether we get another cut in February or not.
That leads me to think that the market will tread sideways or fall back slightly until the issue is resolved one way or another.
That doesn’t mean you have to cash out of any long-term positions. It’s just the usual ebb and flow of Mr Market.
2020 is already proving most interesting.