The Point

Mid-caps: Re-energised lithium price could power up ASX producers

Lithium prices made a sharp comeback in May after steep falls this year.

That could be good news for battery metal stocks, which are commonly found among ASX midcaps.

The price rebound – about 80% in May – should persist in coming months as an oversupply in key Chinese markets dissipates, believes Pendal’s Brenton Saunders.

“The falling lithium price was largely due to quite a significant de-stocking in China – principally in the battery part of the lithium value chain, which seems pretty close to clearing now,” says Brenton,  who manages Pendal  MidCaps Fund.

“That’s being driven by a step-up in demand for electric vehicles again, partly due to extended subsidies and incentive support from China’s government.”

The result is a more balanced supply chain of batteries and battery precursor materials, which has allowed prices for lithium to start to rise again.

“We expected this to happen, but it’s possibly coming through a little bit earlier than expected.”

Midcap case study: Lithium producer Allkem is well positioned for a rebound in lithium prices

Among Australian mid-cap stocks, few companies get more media attention than lithium producers.

And as last week’s announced merger of ASX-listed Allkem and New York-listed Livent shows, they’re getting plenty of corporate attention as well.

What does the mooted $16 billion merger tell us about the lithium market, particularly in the wake of a price fall since late last year?

“Our view is that there is a rebound coming in lithium prices,” argues Pendal investment analyst Jack Gabb, citing higher demand for electric cars and an end to destocking in China.

Pendal holds Allkem shares in Pendal Midcap Fund and Pendal Horizon Fund.

One of Allkem’s advantages is its diversification of products, says Jack.

“It’s majority lithium carbonate but also has exposure to spodumene and lithium hydroxide. That’s all three lithium products while other producers are picking one or two.”

Global equities: What investors are missing about south-east Asian banks

Global equities investors might be wary of US and European bank stocks right now.

But this year’s slow-burn banking crisis in the West – which has seen the collapse of three US banks and the demise of Credit Suisse – has so far left Asian banks relatively unscathed, points out Pendal’s Samir Mehta.

Resilience among Southeast Asian banks indicates a growing maturity among regulators and governments in the region that may be missed by investors, says Mehta, who manages Pendal Asian Share Fund.

Experienced investors will recall Southeast Asia’s currencies, markets and banking systems were heavily impacted in the 1997 crisis and GFC.

But the environment for banks has improved in Singapore, Indonesia, Malaysia and even Thailand, says Samir.

Brenton Saunders: ASX mid-caps offer exposure to fast-growing sectors such as battery metals

Australia finally has a national strategy to “encourage greater use of cleaner, cheaper-to-run electric vehicles”.

The new ALP policy, alongside similar plans around the world, should help boost demand for “battery metals” such as lithium, produced by a range of ASX-listed miners.

What’s the best way to get exposure to quality stocks in this sector?

Pendal PM Brenton Saunders argues in favour of Aussie mid-cap portfolios.

Mid-cap portfolios are typically less concentrated and offer access to fast-growing industries such as cloud computing, medical innovation and battery metals.

Medium-sized companies tend to offer higher earnings growth than large-cap companies, often with less risk than small caps, says Brenton.

Brenton manages Pendal MidCap Fund, which invests in the 100 biggest companies outside the ASX50, with market caps ranging from around $1 billion to $10 billion.

“It’s really the sweet spot of corporate Australia. It’s a very useful addition to any balanced portfolio.”

Brenton and Australian lithium industry pioneer Ken Brinsden explained the opportunities in a recent webinar.

Aussie equities: What we can expect from earnings in the second half

Australia’s economic cycle has gone on longer than expected – and it showed in the recently ended ASX earnings season.

Somewhat surprisingly, most parts of the economy are still in reasonably good shape despite a string of interest rate rises.

The strong jobs market is a factor, helping prop up consumer spending.

“But the expectation is that higher interest rates will likely hurt earnings in the rest of the financial year,” says Brenton Saunders, who manages Pendal MidCap Fund.

“Across the market as a whole, revenue beats were pretty widespread even though many companies missed earnings forecasts at the bottom line. Revenue beats were much higher than profit beats.

“We saw profit margins reduce and that relates to higher costs. In many cases, despite high product price increases, costs increased at a faster rate, resulting in margin pressure.”

Why passive investing isn’t as passive as you may think

Passive investing has become popular due to low costs and high diversification.

But it often means owning poor performers that an active manager can avoid, argues Pendal’s Samir Mehta.

Many investors fail to appreciate the process of selecting securities for an index is an active investment process that carries a level of risk, says Samir, who manages Pendal Asian Share Fund.

“Investors should think about this presumption that passive investment is really passive.

“There’s a group of people deciding which stock goes into which index, in what proportion — and there is a timing element as well.

Samir points to Tesla which was added to the S&P 500 in 2020 after a ten-fold share price rise. Index fund investors who passively bought the shares then are now down on their investments.

“Active managers contribute not only by identifying good businesses, but also by taking a view on what not to own,” says Samir.

Brenton Saunders: what to watch in ASX earnings season

Company outlook statements will heavily influence share performance in the ASX half-year earnings season, says Pendal’s Brenton Saunders.

Australian listed companies will report results for the December half over the next few weeks.

Reporting season comes against a backdrop of uncertain global macro-economic data which has the markets on edge as investors try to assess the outlook for inflation and interest rates.

“Most of the focus is going to be on the outlook statements rather than the results companies produce on the day, says Brenton, who manages Pendal MidCaps Fund.

Companies with strong retrospective earnings results and weak outlook statements could be sold off by a market “trying understand what 2023-24 will look like”, says Brenton.

“In general, we expect a complicated reporting season and no real trends.”