Lithium and rare earths tipped for 2023 gains; share markets sink in 2022


Australian and US markets suffered as a strong US dollar, red-hot inflation and rising interest rates hit.
Image: WILLIAM WEST/AFP via Getty Images

2022 saw the worst annual performance on the S&P/ASX 200 since 2018, according to CommSec, with a -5.5% drop in the value of the index for the 12 months to the final trading day of the year on 30 December, compared with a gain of 13% in 2021. The All Ordinaries was down -7.2% for the year, compared with a gain of 17.7% in 2021.

Only three sectors rose in 2022, Energy (+39.7%), Utilities (+24.2%), and Materials (4.8%), while Technology saw the biggest decline, down -34.3%. The best performer on the ASX for 2022 calendar year was Whitehaven Coal (ASX:WHC), up 260.9%, while the biggest drop came from Novonix (ASX:NVX), down 84% for the year.

In the US, the Dow Jones Industrial Average fell -9% for the year, while the S&P 500 fell -20% and the tech-heavy NASDAQ was down -34%. It’s the first year since 2018 that the three indices dropped, and the worst year for markets since the 2008 financial crisis.

Photo by Noam Galai/Getty Images

The index demise came with inflation in Australia running at close to 8% and the Reserve Bank of Australia raising interest rates from a record low 0.1% to 3.1% from May to December at the fastest pace since the early 1990s.

The Australian dollar finished the year trading around US67.77 cents amid surging energy prices and a strong US dollar, having dropped from US76.50 cents earlier in the calendar year. Crude oil prices rose by 78% in the first two months of the year as Russia went to war in Ukraine, pushing Brent to a 20-year high by early March at around US$139 a barrel. The gold price ended the year steady, oil closed up 6% and Bitcoin fell 64% in the 12-month period.

Residential property prices in Australia dropped -5.3% for the 12 months in 2022, the first annual decline in the Home Value Index since 2018, according to CoreLogic data. The US 10-year bond yield rocketed from 1.5% to a two-decade high of 4.34% by October.

Chief Economist at Westpac Bill Evans says, “The key theme which we promoted through most of 2022 was that 2023 was going to be the year when bond rates would fall and the appetite for the USD would wane. We had thought US 10-year Treasuries would fall towards 3.2% by end 2023 from the 4% starting point by end 2022, while the AUD would lift from US0.65 cents to US0.72 cents in 2023.

“We did not sufficiently count on the propensity for markets to be pre-emptive. Once the headline inflation rate in the US appeared to peak, markets factored in a lower terminal federal funds rate – a rational response to the sustained expected weakness in the US economy – and this move spread to Australia.

“Those anticipated falls in bond rates and increased aversion to the USD, including support for the AUD, were partially brought forward to the final quarter of 2022. We have only made a slight reduction in the end 2023 target rate for US 10-year bonds, from 3.2% to 3.1%, with the fall from 4%+ occurring more in late 2022 than 2023. We have revised up our end 2023 [AUD] forecast from US0.72 cents to US0.74 cents.”

IPOs 2022 and the ASX

Listings on the Australian Securities Exchange recorded their slowest 12 months in a decade, dropping from a record 241 initial public offerings in 2021 to 104 in 2022 with inflation and rising interest rates smashing valuations, and reducing go-to-market confidence as sharemarkets globally were punished.

Materials groups made up 63 of the 104 IPOs, with energy and industrials in second and third place. Fintech Beforepay, which raised $35 million in its January 2022 IPO was the worst performer in value of the technology floats, losing more than 80% from its $3.41 listing price.

Omega Oil & Gas (ASX:OMA) made its ASX debut in October 2022, following an oversubscribed IPO that saw the billionaire Flannery family join the register as a cornerstone investor. In December, major US-based oil and gas investor Tri-Star E&P Pty Ltd invested $4.9 million at 20 cents a share, a premium to the current share price. The company’s focus for 2023 is to work towards unlocking a potentially transformational deep gas resource in southeast Queensland.

Grady Wulff, Market Analyst at Bell Direct, notes lithium prices soared +180% in 2022, as the global green movement ramped up, alongside rising demand for electric vehicles.

Wulff says Mineral Resources will be one company to watch early in 2023 to see whether the company proceeds with the demerger of its lithium assets and dual lists in the US to better compete with lithium-specific companies like Piedmont Lithium (NASDAQ:PLL).

Increased demand is being observed for rare earths in the global electrified future, with NdPr the key elements catching the eyes of both miners and investors, including mining magnate, Australia’s richest billionaire Gina Rinehart who recently poured $60 million into acquiring a 10% stake in Arafura Rare Earths (ASX:ARU).

Countries including Japan and Germany are pushing on with their nuclear power plants amid the current global energy crisis and consequently, the price of uranium is set to peak at US$100 a pound in the near-mid-term, forecasts Wulff. Companies like Boss Energy (ASX:BOE) and other uranium producers are in a strong position to capitalise on the rising price of the commodity, she says.

The price of gold in AUD held relatively strong in 2022, and with reports the US dollar is set to turnaround in 2023, Wulff predicts that Aussie gold miners are well placed to ride the gold run when the US dollar turns. 2022 ASX debutant Far East Gold (ASX:FEG) shares rose 116% in 2022 and the gold miner is just one of the many gold companies that might benefit from the commodity’s price outlook in 2023, Wulff says. 

US Dollar and fixed income

Independent investment management firm Invesco notes that in 2022, the US dollar was very strong.

“One of the drivers has been a climbing interest rate differential between the US and the rest of the world. The strong-dollar cycle will likely cease as the US Federal Reserve signals a pause in its tightening cycle,” Invesco forecasts. “Given how expensive the dollar has become, we would expect it to weaken once the Fed pivots.”

State Street Global Advisors’ Head of Investments, Australia, Jonathan Shead thinks that the US dollar, strengthened by rising relative yields and its appeal as a safe haven during a tumultuous time since the end of 2020, will reach its peak and begin to decline in 2023.

“The strong US dollar is a headwind to international equities; emerging markets are most negatively affected by a strong dollar,” he says. “The US dollar is at historic heights, which might suggest a reversal is on the way.”

Shead notes that rising interest rates, market volatility, and widening spreads across sectors have pressured fixed income total returns with an intensity that few expected, leading to one of the most trying years for fixed income investors in recent memory.

But he says that “while 2022’s macroeconomic and market turmoil has resulted in negative total returns in most fixed income sectors, the widespread sell-off and continued volatility have opened up some attractive opportunities for fixed income investors with longer-term horizons”.

This article represents the views only of the interviewee and should not be regarded as the provision of advice of any nature from Forbes Australia.  The article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. Past performance is not necessarily indicative of future performance. You should seek independent financial and tax advice before making any decision based on this information, the views or information expressed in this article.