In today’s briefing:
- Prelude to a Correction
- High Foreign Participation Presents Challenges for US Financial Markets Despite Fed Pivot
- LBO Insights: Why These Deep Value Stocks Have Become Even Cheaper
- Fortescue Metals Group (FMG AU): FY24 Slightly Below Expectations, Focus on Iron Ore Price for FY25
- China August PMIs Underperform
Prelude to a Correction
- We are seeing warnings that the market is due for a pullback and correction.
- We pointed out last week that election year seasonality tends to see weakness in September and October, and the current market structure confirms that view.
- While we don’t know what the trigger for a correction might be, investors should be prepared for a period of short-term weakness and a possible buying opportunity in October.
High Foreign Participation Presents Challenges for US Financial Markets Despite Fed Pivot
- US monetary policy conduct remains data dependent following Fed Chairman Powell’s dovish pivot. The US dollar has weakened, but the economic growth outlook for 2025 should increasingly drive currency movements.
- Dollar weakness could force foreign investors to liquidate positions in US financial markets. High hedging costs have raised the spectre of significantly larger losses for foreign investors.
- European private investors have become important marginal buyers of US Treasury securities since early 2023. Higher volatility Treasury yields could occur if foreign hedge funds exit without new marginal buyers.
LBO Insights: Why These Deep Value Stocks Have Become Even Cheaper
- The U.S. stock market appears to be overvalued by a number of metrics, but deep value stocks in the U.S. are still cheap.
- Our list of LBO candidates, which tend to have strong cash positions, strong balance sheets and cash flows, represents a pocket of deep value.
- The retreat in junk bond yields has made these stocks even more attractive as investments.
Fortescue Metals Group (FMG AU): FY24 Slightly Below Expectations, Focus on Iron Ore Price for FY25
- Fortescue Metals (FMG AU) reported a revenue/profit number of 8%/15%, with profits 8% lower than our expectations because of higher depreciation.
- The company guided a mid-point iron ore shipment of 195 million tons (Vs. 192 in FY24) and a capex of 3.2 bn USD in metals/500 mn USD in Green Energy.
- Trading at 6.7x PE with a 10% dividend yield (trailing) with iron ore prices averaging 118 USD in FY24, the focus shifts to a scenario analysis for FY25.
China August PMIs Underperform
- China’s manufacturing activity sank to a six-month low in August as factory owners struggled for orders, pressuring policymakers to press on with plans to direct more stimulus to households.
- The purchasing managers’ index slipped to 49.1 from 49.4 in July, its sixth straight decline and fourth month below the neutral mark of 50, missing the median forecast of 49.5.
- After a dismal second quarter, China lost momentum further in July, prompting policymakers to signal they were ready to deviate from pouring funds into infrastructure, instead targeting stimulus at households.
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