Two Big Factors to Impact the ASX in 2020: Big Miners and Big Banks

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ASX in 2020
Two Big Factors to Impact the ASX in 2020: Big Miners and Big Banks

They say that Mr Market is a moody fellow. Some days he’s feeling glum and won’t offer much for shares.

At other times he can’t help but offer lavish inducement for you to sell.

Mr Market is even more complex than that. Some days he doesn’t know what he wants.

It’s hard to know what he’s feeling right now.

The market feels neither heavily bearish nor wildly bullish.

Former mini ‘narratives’ around lithium, fintech and housing have stalled or withered away.

We’re bobbing in the sea, with no strong waves to pull us in any direction.

That’s not a bad thing. A bit of calm can help us think about whether clear skies or storms are brewing…

There was one notable piece of news this morning that crossed my desk.

Morgan Stanley has come out and said it expects iron ore to fall back to US$70 a tonne next year.

It’s currently over US$90.

I like to pay attention to forecasts like these.

You might remember that last week I mentioned another investment bank going bearish on iron ore.

That’s not to say I think they’ll be automatically right.

But it allows us to benchmark an expectation around pricing.

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You can make money when expectations shift largely in the markets.

Imagine if something happens to drive iron ore away from this consensus to back over US$110 or higher.

Or, conversely, iron ore drops precipitously to US$40.

Iron ore stocks will reprice dramatically either way.

That’s what happened at the beginning of the year — despite the ongoing fear around China.

A deadly collapse in a Brazilian iron ore mine took everyone by surprise — and shook a major supplier out of the market.

It would be unlike the market to offer up a second shot, in the same market, in such a way for 2020.

I’ve already nominated oil as the market I expect to upend expectations in the next six months.

But today we’re pondering what the ASX might look like in 2020…

Two big factors for the ASX in 2020

There are two major influences that spring to mind here. It’s the outlook for the big banks and the big miners.

I reasoned at the start of the year that the big banks would steady and the miners would lift the index back towards new highs.

It played out. But whither things for the ASX in 2020?

We can see the investment banks are calling iron ore down.

This scenario would suggest the market repricing BHP and Rio Tinto earnings down, or at least flat.

That could leave a lot of heavy lifting to the banks. And yet there seems little reason to suggest the market repricing bank stocks up in a big way.

They do still offer juicy dividends. I can’t deny that. But the very factor that makes those yields compelling — low interest rates — hurts the margins that deliver them.

We also have this persistent idea that the Reserve Bank of Australia (RBA) will conduct ‘QE’ (quantitative easing) sometime in 2020.

The Governor of the RBA, Phillip Lowe, is supportive of this ‘unconventional’ policy.

This could lead us into a lot of flim flam and hogwash…

How QE fooled US investors

Between 2008 to about 2012, a veritable forest of paper was expended as writers and commentators debated the merits of QE on the US dollar, gold and US monetary policy.

Now it seems it’s Australia’s turn. There could be a lot of danger here.

The effect of QE fooled a lot of US investors after 2008.

Some expected raging inflation, a weak US dollar, a soaring gold price and the bond market left in tatters.

Hindsight reveals there was no inflation. Gold fell. The US dollar rose. The bond market boomed.

What was the mistake?

The Fed was said to be ‘printing money’ with QE and leaving the banks with trillions in excess reserves that could pour into the economy at any time.

Logic implied this would drive up inflation and gold.

But this money does not enter the real economy in the way it was presumed.

The reserve balances of the banks that QE inflates exist in a closed loop with the central bank.

That’s not to say QE can’t be inflationary. It depends how the RBA implements the policy and what the private banks are doing, too.

Suffice to say, QE from the RBA will deserve close attention in 2020 if it happens. The consequences could be profound. Stay tuned!

Regards,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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