The Weekly JMP Report

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What are we reading

What’s the market outlook for 2022

Dr. Shane Oliver, Head of Investment Strategy and Economist, AMP

 

Despite the rough and uncertain start to the year there is reason to be optimistic about the share market in 2022. Economies are recording solid economic growth, profits are rising and monetary policy, notwithstanding increases in interest rates this year, will remain easy.

But 2022 is unlikely to replicate last year’s very strong investment returns and low volatility. And that’s partly because 2021 was a great year for diversified investors, with average balanced growth super funds returning around 14 per cent, compared to around 3.6 per cent in 2020.

Global Economic Growth

Growth is crucial to the outlook for financial markets, and there’s reason for optimism.

COVID could finally be moving from a pandemic to being endemic. Vaccines, especially when booster shots are administered, are providing protection against serious illness and new treatments are on the way. Past COVID exposure is also providing a degree of protection against serious illness. And while Omicron is more transmissible, it’s less harmful than Delta was (and the same appears to apply to the latest Omicron sub-variant). That’s good news for continued reopening and ultimately economic growth.

Another reason for optimism on economic growth is the excess savings of around US$2.3 trillion in the United States, and US$250 billion in Australia, which will boost spending. Also, while the US Federal Reserve and Reserve Bank of Australia (RBA) will tighten this year, policy will still be easy. It’s usually only when policy becomes tight that economic cycles and bull markets tend to end. And that’s a fair way off.

Inventories are low and will need to be rebuilt which will provide a boost to production, and in turn, help growth. Positive wealth effects from the rise in share and home prices will help boost consumer spending. China is likely to ease policy to boost growth. And while business surveys are down from their highs, they remain strong and consistent with good growth.

Global growth is likely to slow this year but to a still-strong 4.55 per cent, with Australian growth of around 4 per cent, despite the Omicron wave resulting in a brief set back in the March quarter.

Financial Markets Outlook

Global shares are expected to return around 8 per cent this year but investors will likely see a rotation away from growth and tech heavy US shares to more cyclical markets.

Australian shares could start to outperform. That will be helped by leverage to the global cyclical recovery and the search for yield. Relative to near zero deposit rates, a grossed-up dividend yield of around 5 per cent looks attractive.

Still very low yields, and a potential capital loss from a rise in yields, are likely to again result in negative returns from bonds. There could be some weakness in unlisted retail and office property, but industrial property and unlisted infrastructure is likely to be strong.

Australian home price gains are likely to slow with prices falling later in the year as poor affordability, rising fixed rates, higher interest rate serviceability buffers, reduced home buyer incentives and higher listings impact borrowers.

Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1 per cent. While the Australian dollar could fall further in response to COVID and the Federal Reserve tightening cycle, a rising trend is likely over the next 12 months, helped by still strong commodity prices and a decline in the US dollar. We expect the local unit to hit $US0.80 later in the year.

Volatility

One attribute of all financial markets over the next year will be greater volatility. There are several reasons for that. While inflation is likely to moderate this year as production rises and goods demand subsides, there is a risk that it stays higher for longer.

Also, the start of US Federal Reserve and RBA rate hike cycles and quantitative tightening could cause volatility. But it’s unlikely that the tightening will be severe enough to threaten the economic recovery and cyclical bull market.

The US mid-term elections could also trigger volatility. Mid-term election years normally see below average returns in US shares, and since 1950 have seen an average drawdown of 17 per cent, albeit with an average 33 per cent gain over the subsequent 12 months¹.

Geopolitical tensions involving China, Russia and Iran could also be another trigger. A partial Russian invasion of Ukraine could lead to even higher European gas prices.

And finally, shares are no longer cheap. The easy gains are behind us and calmer years like 2021 tend to be followed by volatile years.

As always in financial markets, there are plenty of unknowns. Heading the list this year, again is COVID. Any new variants could set back the recovery.

If inflation continues to increase, and long-term inflation expectations rise, central banks will have to tighten aggressively putting pressure on asset valuations. Political polarisation is likely to return to the fore in the US, posing the risk of a deeper than normal mid-term election year correction in shares. China issues are likely to continue with the main risks around its property sector and Taiwan. And an invasion of the Ukraine by Russia could add to European Union energy issues.

The Australian election, due before the middle of May is another unknown. But if the policy differences remain minor a change in government would have little impact.

 

 

 

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Tesla applies to build giant new cathode factory for battery production next to ‘Gigafactory Texas’

Fred Lambert

 

Tesla has applied to build a giant new facility, seemingly to produce cathode materials for battery manufacturing, next to “Gigafactory Texas” in Austin.

In 2020, Electrek first revealed that Tesla is going to build its next Gigafactory in Austin. Later, it was confirmed that Tesla acquired over 2,000 acres of land around the Colorado River east of the city. Two years later, Tesla has now built a giant building for the main factory at what is now called “Gigafactory Texas”.

Last month, it was confirmed that production of the Model Y has started at the new factory, and the automaker also deployed part of a battery cell production in the building. But with over 2,000 acres, Tesla has been expected to deploy several new projects around the main factory.

Last year, it was revealed that Tesla was working on a new “Project Bobcat” on around 97 acres at the site. Now, Tesla has applied for another project, codename ‘Project Cathode’, on 32 acres at the site.

In the building application obtained by Electrek (hat tip to Vinod), it says that it is going to be used as an “Industrial Use Facility”:

The applicant is proposing an Industrial Use facility along with associated improvements.

Tesla is not directly named on the application, but Michael Loftis of engineering firm Kimley-Horn is named as the applicant, which he and the firm also were named as for previous construction permits at the Gigafactory Texas project. The project is also listed as being on a parcel of land next to the Colorado River where Gigafactory Texas is located.

From the name of the new project, it is fairly clear that it is going to be for a cathode production factory. Tesla originally announced plans to build its own “cathode facility” during its “Battery Day” presentation in 2020.

Drew Baglino, Senior Vice President of Engineering, said at the time:

We’re gonna go and start building our own cathode facility in North America and leveraging all of the North American resources that exist for nickel and lithium, and just doing that, just localizing our cathode supply chain and production, we can reduce miles traveled by all the materials that end up in the cathode by 80%.

Tesla has since made moved to secure lithium and nickel supply from North American sources, including deals with Piedmont Lithium and Talon Metals. Several additional similar deals are expected in the coming years to accelerate the production of critical battery metals in North America.

At Battery Day, Tesla unveiled a new cathode chemistry that allows for a much more simple and cheaper production.

It was later revealed that Tesla acquired the technology from a Canadian startup.

In an update on its progress in producing its new 4680 battery cell last month, Tesla confirmed that it has already deployed battery manufacturing equipment at Gigafactory Texas and some are already in operation. A cathode manufacturing facility next to the factory would localize more of the battery cell production and could help achieve greater volume.

Tesla has previously talked about producing over 100 GWh of battery cells at Gigafactory Texas.

 

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Santos announces booking of CO2 storage capacity

ASX / Media Release Santos Limited ABN 80 007 550 923 GPO Box 2455, Adelaide SA 5001 T +61 8 8116 5000 F +61 8 8116 5131 www.santos.com

Santos today announced a booking of 100 million tonnes of CO2 storage resource in the Cooper Basin in South Australia. This represents a subset of the total prospective storage resource in the Cooper Basin and follows the final investment decision on the 1.7 million tonne per annum Moomba carbon capture and storage (CCS) project in November 2021.

Santos believes this is the first booking in the world in accordance with the CO2 Storage Resource Management System (SRMS) sponsored by the Society of Petroleum Engineers. Santos Managing Director and Chief Executive Officer Kevin Gallagher said today’s announcement of storage capacity in the Cooper Basin is a significant step in Santos’ decarbonisation pathway and carbon storage hub strategy.

“CCS is a critical technology to achieve the world’s emission reduction goals and we only have to look at current carbon prices to see how valuable 100 million tonnes of storage is,” Mr Gallagher said. “Santos sees CO2 storage capacity as a strategic competitive advantage in evolving cleaner energy, clean fuels and carbon markets. This globally significant carbon storage capacity booking is another tangible example of Santos leading the way in establishing the foundations to support the energy transition.”

The announcement forms part of the release of Santos’ Annual Reserves Statement. Proved plus probable (2P) reserves increased by 80 per cent to 1,676 million barrels of oil equivalent (mmboe) at the end of 2021, primarily due to the final investment decision on the Barossa project and the Oil Search merger.

Key highlights:

• 907 per cent one-year 2P reserves replacement
• 355 per cent three-year 2P reserves replacement
• 187 per cent three-year organic 2P reserves replacement
• 2P reserves were added in 2021 from Barossa FID (373 mmboe) and the Oil Search merger (416 mmboe)
• 149 per cent GLNG 2P reserves replacement in 2021
• 2C contingent resources increased by 41 per cent to 3,219 mmboe 2P reserves increased by 835 mmboe before production in 2021.

 

The annual 2P reserves replacement was 907 per cent and the three-year replacement 355 per cent. “Today’s statement is the result of Santos’ disciplined annual reserves process, which include external audit of approximately 94 per cent of total 2P reserves,” Mr Gallagher said.

The merger with Oil Search added 416 mmboe of 2P reserves while the final investment decision on Barossa added a further 373 mmboe. Santos has booked Barossa reserves at a 50 per cent interest following the execution of a binding Sale and Purchase Agreement to sell a 12.5 per cent stake in Barossa to JERA, completion of which is expected in the first half of 2022.

Consistent application of Santos’ disciplined operating model also delivered reserves increases in the onshore assets in 2021. GLNG achieved greater than 100 per cent 2P reserves replacement for the second year in a row, while reserves were also added in the Cooper Basin before production. 2C contingent resources increased by 41 per cent to 3,219 mmboe, primarily due to the Oil Search merger partially offset by the commercialisation of Barossa 2C resources to reserves at FID.

The Oil Search merger added 819 mmboe 2C in Papua New Guinea and 401 mmboe in Alaska. The gross 2C contingent resource in Alaska is unchanged from that previously reported by Oil Search, but in accordance with the 2018 Petroleum Resources Management System (PRMS), Santos has adjusted its net share Alaska 2C resource to remove royalties. Ends. Attachment: This ASX announcement was approved and authorised for release by Kevin Gallagher, Managing Director and Chief Executive Officer.

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We hope you have enjoyed this week’s read, if you would like to explore your investment options, please do not hesitate to contact me

Regards

Chris Hagan,