Investors proving immune to Chinese virus, so far

Can both news reports and the flow of money be correct?
7th February 2020
Tim Treadgold

If you only read media headlines over the past week you might believe that the world is facing a great economic crisis caused by the China coronavirus, but if you skipped the headlines and looked only at share prices you might believe that nothing happened.

Can both news reports and the flow of money be correct?

Yes, they can, because the great unknown in the China virus panic is where it’s heading and it is that uncertainty factor which can weigh heavily on investor confidence.

On the negative side of the situation there is no doubt that the virus has provided plenty of fodder for news reports with entire cities in China in quarantine, cruise ships in isolation, and people being evacuated on emergency flights.

Pictures which accompanied those stories encouraged doomsayers such as high-profile London writer, Ambrose Evans-Pritchard, telling his readers in The Daily Telegraph yesterday that: “The workshop of the world is closed”, under this headline: “China’s coronavirus is not remotely under control and the world economy is in peril”

No prize for guessing that a large share of Australia’s economy depends on selling raw materials to China and if it’s closed then Australia has a big problem, which is why Westpac warned yesterday that the virus could stall economic growth in the current quarter.

But even as the pessimists were doing their best to frighten people, share prices, and key market indices, marched higher. Stock prices in New York hit record highs mid-week as investors shrugged off the China virus as just another variation of flu.

Watchers of the Australian stock market had a see-saw ride with the all-ordinaries index ending up virtually where it was at start of the week and up a pleasing 4% over the past month.

The metals and mining (XMM) index performed the same trick as the all-ordinaries, steady on the week and up a tiny 0.4% on the month.

Gold was the surprising loser, perhaps because it rose too far, too fast in the early stages of reporting about the virus, slipping 3.7% lower over the week but up slightly over a month.

Ray Dalio, founder of Bridgewater Associates, one of the world’s biggest fund managers, advised caution but also seems to side with an argument that reporting about the China virus verges on being an “infodemic” – too much ill-informed information.

The challenge for all investors is sifting the news because it would be unwise to write-off the potential for a significant economic slowdown given a number of companies are seeing shipments delayed or disrupted.

Manganese specialist, OM Holdings, warned during the week that there was the potential for supply-chain disruption caused by Chinese authorities interrupting truck movements. That report initially rubbed 2c off the OM share price, before it bounced back to roughly where it started at 42c.

While China’s reaction to virus outbreak was the big event of the week, there were other developments, most of which were not reported, including:

  • A re-awakening of the electric-car story with British Prime Minister Boris Johnson proposing a ban on the sale of new petrol and diesel cars from 2035 while Tesla, the EV leader, enjoying a spectacular share price rise of 112% since January 1, putting it on equal valuation terms as Toyota and five-times more valuable than Ford.

 

  • Lithium miners reacted positive to the improving EV situation, but not excessively. Pilbara Mines added 2.5c to 32.5c. Galaxy was up 10c to $1.14 while Orocobre led the way with a rise of 65c to $3.74, driven in part by a research report from UBS which posed the question as to whether lithium prices have found a bottom.

 

  • Mining leaders gathered in Cape Town for South Africa’s annual Mining Indaba conference where the Australian head of Anglo American, Mark Cutifani, said he was bullish on copper and platinum group metals. Another leader in the headlines was Ivanhoe Mines boss, Robert Friedland, who refreshed the case for the emerging Kamoa-Kakula copper project in the Democratic Republic of Congo. On the Canadian market, Ivanhoe added 6.5% to $C3.62.

 

  • Gold miners had a roller coaster ride as the market mood flipped between fear and greed. Northern Star was a case study, starting the week with a bang (and a rise of 50c to $13.10) before imitating a boat in a lumpy sea, rising and fall as sentiment ebbed and flowed to close at $12.92 for a 32c gain.

 

  • Nickel and copper stocks, which are seen as potential victims of a slowdown in the Chinese economy, especially if manufacturing is on hold, had a mixed week. Among the nickels, Mincor was up 3c to 68c while Western Areas was down 2c to $2.56. Among the coppers, OZ was up 14c to $10.28 and Sandfire was down 30c at $5.33.

 

  • Iron ore stocks, which could be heavy losers if China delays ship unloading, showed little virus pain. Fortescue was down 22c to $11.15 while Mineral Securities was up 25c at $17.41.

 

  • Titanium minerals miners were mixed. Base, which is hosting a media and analyst visit at its Kwale mine in Kenya this week, was up 2c to 25c while Sheffield Resources, which continues to struggle with funding for its Thunderbird project in WA, touched a 12-month low of 18c before closing down 5c at 20c.

 

Overall news flow during the week was down, perhaps because so much was said last week during the quarterly reporting season and also because management is wary about saying (or doing) anything that might be seen as a wrong move in a climate of uncertainty.

 

An assortment of market moves and news events included:

  • Oklo Resources added 1c to 25c after reporting more high-grade gold assays from drilling at its Dandoko project in Mali with a best hit of 30 metres at 8.54 grams a tonne.

 

  • Chalice Gold reported infill drilling at the Karri target within the broader Pyramid Hill project near Bendigo in Victoria with a top intercept of 4m at 4g/t. On the market, the stock added 2c to 28c.

 

  • Highfield Resources slipped 5c to 70c after reporting that it had signed a non-binding memorandum to supply potash from its proposed Muga mine in Spain to a Swiss trading company, and

 

  • Lynas restored interest in the rare earth sector after winning major-project status from the Australian Government for its proposed first-stage processing facility to be built near Kalgoorlie in WA, a move which lifted Lynas by 7c to $2.27.

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