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Date : 01/06/2022

Three Themes playing out in the Markets

Three Themes Playing out in the Markets

There has been a galore of content with negative sentiment recently. We figured we’d move away from the negatives of inflation, interest rate, and the tech routs and have a look at emerging themes that could last a few years – defining and shaping the markets in the medium term.

The everything bull market is certainly over. With changing economic conditions due to an array of macroeconomic factors affecting global economies, it’s time to sit down, re-calibrate, and re-position share portfolios or SMSF portfolios to capture some of the positive trends and effectively manage risk.

Without further ado, let’s dive straight into the themes that are reshaping markets.

Agriculture will be a sweet spot for the next few years

Elevated agriculture prices fuelled by robust demand and tight supply are helping some companies fight surging input costs, but not all businesses are proving capable of protecting profits. This makes picking winners slightly tricky.

The agriculture sector is having a renaissance moment. Even before the Ukraine crisis, demand for soft commodities increased by about 20%. Prices of agricultural produce and support products that facilitate the agricultural sector, such as fertilizers and crop chemicals, started to rise.

The food security concerns only increased the strength in crop markets from the supply chain bottlenecks that the pandemic induced. The Russia-Ukraine war meant that this imbalance would only exasperate.

Russia’s invasion of Ukraine has disrupted trade flows from the two agricultural powerhouses, squeezing global supplies. This has coincided with unfavourable weather conditions in major grain-producing countries, further injuring output.

Meanwhile, concerns about global food shortages are boosting demand, triggering sharp increases in the price of key staples such as wheat, rice and corn, and boosting the revenue of local producers.

With farmers now earning more than they have in decades past, the outlook is positive. Despite rising input costs, it has not slowed down the agriculture sector.

On the ASX, GrainCorp (ASX: GNC) and Elders (ASX: ELD) have recently made solid gains.

How to Play the Agriculture Theme

At Shares in Value, we caught the agriculture theme before it began, and we are now positioned to benefit from the sector’s renaissance.

In January, we recommended Costa Group (ASX: CGC) as a top pick for 2022. Costa is Australia’s leading grower, packer, and marketer of fresh fruits and vegetables. The stock has begun its march towards its fair value. Our analysis points towards more upside for Costa in the coming months. The company said it was working to offset the impact of higher costs through increased domestic and export pricing, a strategy that even Goldman Sachs says is being implemented successfully.

Another stock that we are bullish on is Incitec Pivot (ASX: IPL), which has already returned over 40% to our members. Incitec Pivot supplies the essential fertilizer to global markets. The company has benefited from rising fertilizer prices, and its dividends have grown 10x. IPL shares are now trading with a dividend yield of over 5%.

Natural Gas is at a Critical Moment

For as polluting as they are, coal and natural gas have seen heightened demand since the world began recovering from the pandemic. Again, the Russia-Ukraine crisis only exasperated the supply crunch.

Renewable and Natural Gas energy in Australia is now at a pivotal moment with Labor’s win in the election.

Natural gas is expected to face shortages and price spikes. According to data modelling from experts, gas prices are projected to be unaffordable in Victoria by the end of the decade, with shortfalls in supply onward 2023. A forecast spike in wholesale gas prices in Victoria of more than 50 times normal levels has prompted the Australian Energy Market Operator (AEMO) to impose a price cap. After a polar blast hit Victoria, this drove household demand to record levels, coupled with more gas used for power generation. The surging gas prices come on top of big jumps in wholesale power prices that have swept the National Electricity Market.

AEMO has capped prices in the Sydney and Brisbane markets over the past few days. It imposed a price limit in Victoria on Monday after spot prices were set to soar to an incredible $382 a gigajoule.

What does this mean for Australian gas and electricity users? The Australian gas prices are steadily increasing due to the prices paid for exports and reliance on gas power to fill the gap where coal has failed. This creates further demand for gas, pushing prices up as supply gets squeezed.

Gas is forecast to play a significant role in the integrated energy system, including a critical role in the gas generated electricity in the National Electricity Market. This will particularly be the case as coal generation is discontinued.

In contrast, gas generation is projected to support renewable energy generation, help meet the National Electricity Market’s energy needs, and provide power system services to support grid security and stability. Gas will also be an essential instrument to provide a dispatchable source of capacity to meet extreme demand conditions.

Almost unnoticed, regional forward electricity contracts for late 2022 and, especially, for 2023 have risen significantly over the last few weeks, heralding further utility bill hikes. An extraordinary spike in wholesale gas prices in Victoria of more than 50 times normal levels has prompted the Australian Energy Market Operator to intervene and impose a price cap.

The AFR reported that Shell and Seven Group Holdings (ASX: SVW) have given the go-ahead for a multi-billion-dollar natural gas project off the coast of Western Australia to supply the Prelude floating LNG plant and meet the rising demand for the fuel as the world shuns supplies from Russia.

Meanwhile, the green hydrogen shift is being stepped up in Australia. With both clean energy and natural gas in high demand now, a couple of unique players on the ASX can successfully profit from both these trends!

How to Profit from the Energy Theme

Australia’s gas pipeline giant APA Group (ASX: APA) is essential to the country’s electricity infrastructure. They keep reminding investors that it wants to be heavily involved in Australia’s energy transition.

APA Group (ASX: APA) sees all sorts of potential roles for itself, including electricity transmission, renewables, hydrogen and using its existing gas infrastructure.

The company’s 15,000km of natural gas pipelines connect sources of supply and markets across mainland Australia. The company operates and maintains networks connecting 1.4 million Australian homes and businesses to the benefits of natural gas. Moreover, APA owns and has interests in gas storage facilities and gas-fired power stations.

APA’s investments include over $750 million in renewable generation, making them the 8th largest renewables investor in Australia. APA has high voltage electricity transmission that connects Victoria with South Australia and New South Wales with Queensland.

We recommended APA Group (ASX: APA) to our members, and we have managed to capture 30% of the upside already, and our analysis points to further upside potential. Additionally, APA also trades with a 4.8% dividend yield. This is the best ASX stock to take advantage of the gas shortage and the surging electricity prices. APA’s renewables push is the icing on the cake for long-term investors.

Commodity Markets to be Buoyed as China Emerges from Lockdown

A two-month lockdown in Shanghai appears to be coming to an end, which has helped reassure investors that growth could begin to pick up. To supplement this, China’s cabinet announced a package of 33 measures covering fiscal, financial, investment, and industrial policies on Tuesday to revive its pandemic-ravaged economy. It will also inspect how provincial governments implement them.

The stimulus package flagged by China’s State Council in a routine meeting last week underscores Beijing’s shift toward growth. This is a recovery play in one of the largest markets in the world. Given the huge industrial capacity of China and its importance to its economy, we expect an increase in demand for commodities. China is also home to over a billion people. As they emerge from lockdowns, energy demand is also set to increase. Coal, crude oil, and iron ore are commodities that will be in focus as the Chinese economy is being boosted back up to growth!


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