In the wake of the current resource selloff, optimism towards China's near-term growth has tempered, providing an opportunity to accumulate quality sector exposures at a discount.
Commodity Compass and Strategic Insights
Iron ore stands out with surprising strength, closely followed by LNG and met coal, while copper, oil, and lithium chemicals show robust long-term fundamentals.
Preferred Sector Exposures
Discover our top sector picks among large caps, including BHP Group (ASX:BHP), Mineral Resources (ASX:MIN), and Santos (ASX:STO). Small caps present exciting opportunities with key selections like Karoon Energy (ASX:KAR), Whitehaven Coal (ASX:WHC), Strandline Resources (ASX:STA), and Panoramic Resources (ASX:PAN).
Resource Strategy Update
The resource market's value proposition is on the rise amid the ongoing broad selloff; however, a crucial element is still absent with Chinese growth persistently subdued.
This current downturn follows a surge in late 2022 share prices within the resource sector, driven by what we perceived as excessive optimism toward the prospects of a China recovery. It's not that we bear a negative stance on China; rather, we are cautious about paying upfront for a demand recovery without clear visibility.
Remarkably, investor sentiment appears to have swung excessively in the opposite direction, unveiling compelling opportunities within the sector.
While we maintain caution about China's return to growth, we acknowledge this caution is already factored into resource equities' pricing. This confidence in sector value prevails, with a preference for safety over aggressive upside potential.
Commodity Insights
Iron ore stability in view? Our optimistic take on iron ore takes a contrarian stance. Despite the ongoing challenges in China's property market, a surge in infrastructure activity and baseload consumption is poised to bring demand into equilibrium with supply. We anticipate iron ore to remain well-supported within a steady range of US$100-$120/t in CY23, surpassing the highest cost production at approximately ~US$100/t.
Copper emerges as a standout favorite. Despite recent supply increases and a dip in manufacturing and construction activity impacting copper prices, its performance remains superior to other metals. While short-term volatility persists, our long-term bullish outlook on copper is unwavering. Declining average grades mined and limited new supply, coupled with the electrification mega trend, position copper for robust growth.
Coal stands firm in its long-term trajectory. The recent downturn in thermal and met coal prices has been sharp, particularly for thermal coal, where we anticipate further short-term price adjustments. This contrasts starkly with the enduring fundamentals of the coal sector, marked by ESG pressures and sector headwinds resulting in increasingly constrained supply.
Preferred Large and Small Cap Picks
Anticipating ongoing volatility in the short term as markets eagerly await a China recovery, our optimism lies in commodities demonstrating reduced downside risk, specifically iron ore, LNG, and met coal, along with those boasting robust long-term fundamentals like copper, oil, coal, and lithium chemicals. Among large caps, our top preferences are BHP (most preferred), MIN, and STO, while in the small caps arena, key picks include KAR, WHC, STA, and PAN. Emphasizing shareholder returns, we anticipate a focus on earnings or cash flow, acknowledging potential volatility in dividends but expecting them to consistently outperform the market.
