Iron ore

The iron ore price has been a big winner in 2020, surprising many. Currently, the standard 62% grade is fetching ~US $110/tonne. That’s a massively profitable level for Australian producers which have throttled their operating costs in recent years. This can be seen in the prices of major miners; yet pure play Fortescue has shown a clean pair of heels to RIO and BHP.

Chart: RIO/BHP/FMG share price change over past year

ironore

Well played to Andrew Forest and Fortescue. The share price has been a remarkable 10 bagger off its lows in 2015/16. Thank the almighty I exited the short I had at the time with a flesh wound rather than bankruptcy! To me, I think FMG is too hot now to chase – but I’ve been wrong before. BHP/RIO look like sounder value plays. RIO (currently around $103 per share) particularly should be yielding over 6% ff and current prices. The longer iron ore prices can remain over $100, the higher the prospect of special returns to shareholders as well.

The iron ore price strength has come at a good time given the broader devastation to the Federal Budget. It’s hard to see how the damage gets roped back there, but in a world of seemingly no consequences… maybe it doesn’t matter… or not.

Iron ore

Time to enjoy?

A surprise in the recent housing finance data (which was broadly weak as discussed previously) was a large rise in refinancing activity, in original terms:

  • External refinancing: increased by 31.3% over the month – I assume external refinancing means refinancing to another lender.
  • Internal refinancing: increased by 17.9% over the month.

These were large increases. Presumably precipitated by the reduction in official cash rate by the RBA – prompting people to hunt for some better deals. I know I’ll be saving nicely when my fix expires in May next year…

However, it also looks like homeowners have accessed equity in the refinancing process; as evidenced by the surge in nice cars being bought:

EcyAtRKUYAAFTCD

Which for those who have retained their income security makes sense. Say you refinance a loan from $400,000 at 4% to $500,000 at 3% (tapping $100k of equity). Your annual interest expense actually falls from $16,000 to $15,000. Of course you have more principal to pay back, but if you have healthy equity and cash to burn – why not get yourself into the front seat of an Audi?

audi

Time to enjoy?

Housing indicators soften

Lending data for May was weak, with a significant fall in in lending to both owner occupiers and investors.

Chart 1: Monthly housing finance (excluding-refis)

MonthlyFinance

Lending to investors is currently in the toilet:

Chart 2: Annual change in housing finance (type of buyer)

HFtype

and you can see why. Prices are still very high, rental vacancies in investor-centric areas (inner cities) have been rising due to the effects of Coronavirus. That has led to falling rents, suddenly the power has swung to tenants:

https://www.domain.com.au/news/melbourne-apartment-rents-fall-for-the-first-time-in-15-years-as-covid-19-hits-the-market-967505/

The holding costs of property meanwhile are significant – think strata, maintenance, rates, land taxes (in some jurisdictions) and significant transaction costs (both to buy and sell). Personally I’m not seeing a lot of value in the Australian property market currently; as a general rule. Many middle-to-high income earners have also suffered reductions in hours/pay amid Coronavirus – or lost employment completely.

CoreLogic indicates prices have returned to falls after a post-Scomo surge:

Chart 3: Monthly change in Australian dwelling prices

CLMonthly

With lockdowns returns in Victoria (and soon I fear more broadly) in Australia, the outlook for property remains constrained.

There’s still a lot of uncertainty out there – whether it’s restrictions, future immigration numbers, JobKeeper duration or otherwise. It’s an uncertain time.

 

Housing indicators soften

Retail (and holding your nerve)

More on retail sales today.

As expected, May’s retail numbers saw a major lift across the board.

Retailmonthly

Household goods retailers have been a surprise winner in 2020. The restrictions have led to people spending more time at home, and furnishing home offices. Perhaps as well, with entertainment options limited, ‘heading to Bunnings/IKEA’ has become a weekend hobby of sorts.

It’s no surprise that Wesfarmers’ (which owns Bunnings and Officeworks) share price has been performing strongly.

wes

As an aside, I bought WES in the $40.XX in February/March of this year. At the time I was happy with almost 20% off for a quality stock. In my mind I couldn’t see their business being affected negatively much and interest rate cuts by the RBA had further strengthened the case for holding quality dividend paying shares.

A couple of short weeks later I was feeling foolish as I saw the shares dive under $32; more than a 20% loss in a matter of weeks – adding to a bath of blood in my broader portfolio.

However, I held my nerve, trusting my investment thesis. I bought another small parcel in the $35 range to take my average buy in under $40 per share. Now the share price sits a full 15% higher at $46. No-one can time market sell-offs perfectly. Trust your investment thesis and roll with the punches in the meantime.

Don’t crack under pressure.

Retail (and holding your nerve)