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
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.
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:
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?
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)
Lending to investors is currently in the toilet:
Chart 2: Annual change in housing finance (type of buyer)
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:
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
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.
More on retail sales today.
As expected, May’s retail numbers saw a major lift across the board.
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.
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.