Materials Analyst/Strategist, Janus Analysis

Gaius King

Materials Analyst/Strategist

Accelerating Tomorrow’s Independent Research

Boost Research

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Thematic (Sector/Industry)

<ul>
<li>Quantifying nuclear statistics with substantial discrepancies</li>
<li>LT contracts &amp; speculative hoarding driving recent 40% spot price increase</li>
<li>Primary/secondary Uranium supplies currently 112% of 2017 demand</li>
<li>Uranium supply deficits extremely unlikely before 2022</li>
<li>Global Uranium demand to fall 25-40% by 2050</li>
<li> Primary Uranium sector LT SELL</li>
</ul>
We have independently audited global nuclear construction statistics in order to determine future Uranium demand.  Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies.  Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.
Since plateauing and despite strong Chinese growth, nuclear power generation has fallen &lt;2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.
The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.
As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations.  In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases.  Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.


Quantifying nuclear statistics with substantial discrepancies
LT contracts &amp; speculative hoarding driving recent 40% spot price increase
Primary/secondary Uranium supplies currently 112% of 2017 demand
Uranium supply deficits extremely unlikely before 2022
Global Uranium demand to fall 25-40% by 2050
 Primary Uranium sector LT SELL

We have independently audited global nuclear construction statistics in order to determine future Uranium demand.  Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies.  Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.
Since plateauing and despite strong Chinese growth, nuclear power generation has fallen &lt;2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.
The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.
As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations.  In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases.  Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.

Uranium - About to Enter Its Own Nuclear Winter

Chart based progressive global trading strategies, Chart Partners

Thomas Schroeder

Chart based progressive global trading strategies

Chart Partners

Chart Partners objective is to discover medium-term cycle turns and profit opportunities before they unfold, within structural trends while preserving capital with clear degrees of risk. We have real return ideas. 

Markets are dynamic and trading systems must reflect this. It is crucial to determine underlying correlations and lead-lag relationships within global markets and the impact on linked instruments. Our weekly Chartonics product gives you short-term trading strategies that can be applied within the medium and longer term macro trends that are mapped out in our strategy updates. 

Our methodology fuses global market variables and isolates drivers in trends. We specialize in FX, index trade in NY and Asia with a focus on Asian stocks. 

Technical Analysis

We are playing any surprise bounce via Shanghai A 50 futures and the HSCE.RIO tactical bounce trade presented.Duration defensive long set ups outlined with stops and rally targets in China Mobile and SK Telecom.KLSE bear triangle second trade in the making for a press toward 1,620/15.In Europe, Italy is lagging the break down and a prime short candidate for a break below triple lows/out of flat congestion.S&amp;P tactical break points outlined with a bounce set up in the DJI. Base case view is to short a bounce.Higher conviction pivot levels for a USD/JPY short are laid out with action turn levels and risk points.

We are playing any surprise bounce via Shanghai A 50 futures and the HSCE.RIO tactical bounce trade presented.Duration defensive long set ups outlined with stops and rally targets in China Mobile and SK Telecom.KLSE bear triangle second trade in the making for a press toward 1,620/15.In Europe, Italy is lagging the break down and a prime short candidate for a break below triple lows/out of flat congestion.S&amp;P tactical break points outlined with a bounce set up in the DJI. Base case view is to short a bounce.Higher conviction pivot levels for a USD/JPY short are laid out with action turn levels and risk points.

China Mobile and SK Telecom Defensive Plays and Top Trade Set Ups

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
A Correction and Not and End-Cycle Sell-off. In our note dated 20 October – “It’s Not Over Yet, But Lift the Bar on Defence” - we argued that the global equity market sell-off was likely a correction and not the beginning of an end-cycle sell-off.  We retain this view, but think better news on trade tariffs is needed if the market is to bounce back.  The US equity market PE derating is more a fundamental adjustment to slower earnings growth rather and better news on costs would be well-received.  The Fed will probably remain unfazed by the October risk-off period, so tightening financial conditions remain a headwind for equities unless the Fed pauses. </li>
<li>
Risk-off Underpinned by Fundamentals: US reporting season has shown that underlying late-cycle cost pressure has been managed relatively well.  However, the large lift in tariffs by the Trump Administration has added to these pressures and the prospect of more tariffs is weighing on the outlook.  The BXB quarterly result showed how these forces are coming together.  Global equity markets fell by 7.3% in the month, with Japan, the US and Asian markets particularly hard hit.  The Australian market began its decline in September (-1.4%), but saw a smaller decline in October than most other developed markets (-6.1%).  Emerging markets in Latin America, apart from Brazil, were also hit hard. </li>
<li>
Cost Pressures Seem to be Modest. During AGM season management has generally guided earnings estimates for FY19 a little lower on the back of higher costs.  Industrial stocks with US operations are under cost pressure (eg. BXB), but higher oil prices are reaching into areas such as airline ticket pricing (FLT).  The Miners are in a sweet spot – production has generally been solid against the backdrop of high bulk commodity prices and a weaker Australian dollar.  The Banks are reimbursing customers for overcharging in an attempt to front-run the recommendations of the Royal Commission.</li>
<li>
The Earnings outlook Still Looks Solid. The Upgrades: downgrades ratio for the market is above average and FY19 earnings growth is tracking similar to FY18 and around 8%.  In our latest model portfolio update, we increased the number of stocks in the portfolio and bought in a defensive earnings tilt.  The Tech sector (-11.5%) was swept up in the global sell-off in the sector and our exposure to WTC has been a drag on the portfolio, but the outlook for the stock seems positive, with management upgrading FY19 guidance.</li>
<li>
The Sell-off Ramped up Short Positioning. Short positioning generally increased during the sell-off.  The most shorted stocks in the ASX 200 are JBH, ORE and GXY.  ING, CSR and IFL saw the largest increase in short positioning, while CYB, AHY and VOC saw the largest falls in short positioning.</li>
<li>
Solid Economic Data Shows the Economy is on a Solid Path. Strong employment data indicates the domestic economy is still growing above trend.  Weak building Approvals and housing finance data highlighted the softness in housing, while weak inflation data for Q3 reinforced the RBA’s rates-on-hold policy agenda.  The Miners and weak currency helped deliver a strong trade surplus in September leaving Australia’s call on global savings relatively small.</li>
</ul>



A Correction and Not and End-Cycle Sell-off. In our note dated 20 October – “It’s Not Over Yet, But Lift the Bar on Defence” - we argued that the global equity market sell-off was likely a correction and not the beginning of an end-cycle sell-off.  We retain this view, but think better news on trade tariffs is needed if the market is to bounce back.  The US equity market PE derating is more a fundamental adjustment to slower earnings growth rather and better news on costs would be well-received.  The Fed will probably remain unfazed by the October risk-off period, so tightening financial conditions remain a headwind for equities unless the Fed pauses. 

Risk-off Underpinned by Fundamentals: US reporting season has shown that underlying late-cycle cost pressure has been managed relatively well.  However, the large lift in tariffs by the Trump Administration has added to these pressures and the prospect of more tariffs is weighing on the outlook.  The BXB quarterly result showed how these forces are coming together.  Global equity markets fell by 7.3% in the month, with Japan, the US and Asian markets particularly hard hit.  The Australian market began its decline in September (-1.4%), but saw a smaller decline in October than most other developed markets (-6.1%).  Emerging markets in Latin America, apart from Brazil, were also hit hard. 

Cost Pressures Seem to be Modest. During AGM season management has generally guided earnings estimates for FY19 a little lower on the back of higher costs.  Industrial stocks with US operations are under cost pressure (eg. BXB), but higher oil prices are reaching into areas such as airline ticket pricing (FLT).  The Miners are in a sweet spot – production has generally been solid against the backdrop of high bulk commodity prices and a weaker Australian dollar.  The Banks are reimbursing customers for overcharging in an attempt to front-run the recommendations of the Royal Commission.

The Earnings outlook Still Looks Solid. The Upgrades: downgrades ratio for the market is above average and FY19 earnings growth is tracking similar to FY18 and around 8%.  In our latest model portfolio update, we increased the number of stocks in the portfolio and bought in a defensive earnings tilt.  The Tech sector (-11.5%) was swept up in the global sell-off in the sector and our exposure to WTC has been a drag on the portfolio, but the outlook for the stock seems positive, with management upgrading FY19 guidance.

The Sell-off Ramped up Short Positioning. Short positioning generally increased during the sell-off.  The most shorted stocks in the ASX 200 are JBH, ORE and GXY.  ING, CSR and IFL saw the largest increase in short positioning, while CYB, AHY and VOC saw the largest falls in short positioning.

Solid Economic Data Shows the Economy is on a Solid Path. Strong employment data indicates the domestic economy is still growing above trend.  Weak building Approvals and housing finance data highlighted the softness in housing, while weak inflation data for Q3 reinforced the RBA’s rates-on-hold policy agenda.  The Miners and weak currency helped deliver a strong trade surplus in September leaving Australia’s call on global savings relatively small.


Aussie Equities Month in Review (Oct 2018)

<ul>
<li>
Good outperformance by staying long growth. Our model portfolio has a tilt towards Growth over Value and this has underpinned its solid outperformance since last December.  However, this outperformance is now at a threshold that in the past has given way to underperformance and there are signs this is now occurring.  CSL, COH and ALL have all disappointed in the past month, but we think these stocks will again outperform in the months ahead.  The portfolio (12.6%) outperformed the benchmark ASX 200 (7.3%) since our last update on 2 July and this gives us confidence we on the right path.  Stay long Growth, for now.</li>
<li>
Moving Back to Neutral in Resources. In Resources, we are moving from slightly overweight to benchmark by removing MIN.  We retain overweight positions in RIO, WHC, BHP,  OSH, STO and WOR.  MIN has underperformed since the last portfolio update and even though we like the stock we think there are better opportunities elsewhere.</li>
<li>
Stay underweight Banks. We retain our slight underweight position in Banks.  This position is mainly built upon our large underweight in CBA.  The findings of the Royal Commission are yet to be handed down and this uncertainty remains a headwind for the sector along with weak credit growth.  Funding pressures still exist, but they are being well managed.  However, the sector has valuation support and this limits the extent of our underweight.</li>
<li>
Start to Add Defensive Growth. Our main change in strategy is to begin de-risking the portfolio by adding stocks with defensive earnings characteristics.  In consumer discretionary, we add TAH, NVT and TME, while in Healthcare we add RMD.  TAH,NVT and RMD have a good defensive earnings quality and we think they will be rewarded as the global bull market matures.  TME and WTC provide more Growth.</li>
</ul><ol><li>
We remove JHX and NHF. Reporting season showed the US operations of Australian businesses are under cost pressure and we think these pressures will continue.  JHX is also at risk from the Fed’s tightening campaign and there are early signs it’s beginning to slow housing.  JHX has already seen cost pressures in its fibre cement business and was lucky to escape with a well-received earnings report.  Similarly, lower claims saw a relatively good result from NHF, but private health insurance remains under structural pressure.  We take the opportunity to remove these stocks from the portfolio.</li></ol>



Good outperformance by staying long growth. Our model portfolio has a tilt towards Growth over Value and this has underpinned its solid outperformance since last December.  However, this outperformance is now at a threshold that in the past has given way to underperformance and there are signs this is now occurring.  CSL, COH and ALL have all disappointed in the past month, but we think these stocks will again outperform in the months ahead.  The portfolio (12.6%) outperformed the benchmark ASX 200 (7.3%) since our last update on 2 July and this gives us confidence we on the right path.  Stay long Growth, for now.

Moving Back to Neutral in Resources. In Resources, we are moving from slightly overweight to benchmark by removing MIN.  We retain overweight positions in RIO, WHC, BHP,  OSH, STO and WOR.  MIN has underperformed since the last portfolio update and even though we like the stock we think there are better opportunities elsewhere.

Stay underweight Banks. We retain our slight underweight position in Banks.  This position is mainly built upon our large underweight in CBA.  The findings of the Royal Commission are yet to be handed down and this uncertainty remains a headwind for the sector along with weak credit growth.  Funding pressures still exist, but they are being well managed.  However, the sector has valuation support and this limits the extent of our underweight.

Start to Add Defensive Growth. Our main change in strategy is to begin de-risking the portfolio by adding stocks with defensive earnings characteristics.  In consumer discretionary, we add TAH, NVT and TME, while in Healthcare we add RMD.  TAH,NVT and RMD have a good defensive earnings quality and we think they will be rewarded as the global bull market matures.  TME and WTC provide more Growth.

We remove JHX and NHF. Reporting season showed the US operations of Australian businesses are under cost pressure and we think these pressures will continue.  JHX is also at risk from the Fed’s tightening campaign and there are early signs it’s beginning to slow housing.  JHX has already seen cost pressures in its fibre cement business and was lucky to escape with a well-received earnings report.  Similarly, lower claims saw a relatively good result from NHF, but private health insurance remains under structural pressure.  We take the opportunity to remove these stocks from the portfolio.

Over 25-yrs in Global Materials & Soft Commodities

Charles Spencer

Equity Bottom-Up

INVESTMENT VIEW: <a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1">Bhp Billiton (BHP AU)</a> shares have fallen 4% since the end of August, underperforming <a href="https://www.smartkarma.com/entities/13" target="_blank" data-smartkarma-citation="entities:13:1">Rio Tinto Ltd (RIO AU)</a> shares which have gained nearly 1%.  As such, the US$20bn in relative equity market values (EMV) we highlighted in our earlier note has begun to shrink by nearly US$6bn so far. (<a href="https://www.smartkarma.com/insights/us-20bn-in-lost-market-cap-looks-hard-to-justify-recommend-long-rio-short-bhp" target="_blank" data-smartkarma-citation="insights:23456">US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP</a>)
All of this convergence can be explained from a narrowing in the multiple that BHP trades at versus RIO, rather than a significant change in earnings forecasts. 
We look for ~US$10-15bn more in relative gains from our Long RIO; Short BHP trade after doing further analysis on valuation multiple spreads.

INVESTMENT VIEW:  Bhp Billiton (BHP AU) shares have fallen 4% since the end of August, underperforming Rio Tinto Ltd (RIO AU) shares which have gained nearly 1%.  As such, the US$20bn in relative equity market values (EMV) we highlighted in our earlier note has begun to shrink by nearly US$6bn so far. (US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP)
All of this convergence can be explained from a narrowing in the multiple that BHP trades at versus RIO, rather than a significant change in earnings forecasts. 
We look for ~US$10-15bn more in relative gains from our Long RIO; Short BHP trade after doing further analysis on valuation multiple spreads.

US$6bn Regained in Relative EMV; More to Go as BHPs Valuation Premium Melts...

Australia

Rio Tinto Limited is an international mining company.  The Company has interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock, diamonds, talc and zircon. Dually-listed company with RIO LN.

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Rio Tinto Ltd (RIO AU)

Uranium - About to Enter Its Own Nuclear Winter

Quantifying nuclear statistics with substantial discrepancies LT contracts & speculative hoarding driving recent 40% spot...

Boost Research

China Mobile and SK Telecom Defensive Plays and Top Trade Set Ups

We are playing any surprise bounce via Shanghai A 50 futures and the HSCE.RIO tactical bounce trade presented.Duration defensive long set ups...

Thomas Schroeder

Aussie Equities Month in Review (Oct 2018)

A Correction and Not and End-Cycle Sell-off. In our note dated 20 October – “It’s Not Over Yet, But Lift the Bar on Defence” - we argued that the...

Shane Lee

Aussie Equities Model Portfolio Update

Good outperformance by staying long growth. Our model portfolio has a tilt towards Growth over Value and this has underpinned its solid...

Shane Lee

US$6bn Regained in Relative EMV; More to Go as BHPs Valuation Premium Melts...

INVESTMENT VIEW: Bhp Billiton (BHP AU) shares have fallen 4% since the end of August, underperforming Rio Tinto Ltd (RIO AU) shares which have...

Charles Spencer

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