China is rattling its trade war sabre at Australia and is threatening to bar imports of a range of products into its country.

But the market is brushing aside such fears when it comes to Australian iron ore. You can tell how relaxed investors are with the Fortescue Metals Group Limited (ASX: FMG) share price surging 6% to a record high of $13.30 in after lunch trade.

Its two bigger competitors are outperforming the S&P/ASX 200 Index (Index:^AXJO) too. The BHP Group Ltd (ASX: BHP) share price jumped 4.3% to $33.04 while the Rio Tinto Limited (ASX: RIO) rallied 6.2% to $90.64 at the time of writing.

Trade war comes to Australia

Investors are less confident about soft commodities and Chinese visitors. China is moving closer to slapping a up to 80% tariff on Australian barley and there’s speculation that beef and wine exports might be next.

China’s ambassador to Australia, Jingye Cheng, also threatened to stop his fellow countrymen from coming over for holidays or to study.

But experts believe China cannot afford to alienate our iron ore producers even though China is their only customer.

No one else to dance with

The problem facing the Chinese is replacing Australian ore, which UBS estimates account for 60% of the country’s supply. This contrasts to Brazil’s 23% market share, the only other country with the potential to make up the shortfall from Australia in any meaningful way.

However, it’s unlikely that Brazil can step up to the plate.

“Channel checks suggest absenteeism in Brazil is driving weak production ahead of any [government] enforced mobility restrictions,” said UBS.

“In the week to 11 May 20, Brazilian iron ore shipments were 4.2Mt [million tonnes], with YTD shipments at 87.1Mt, down 12% y/y.”

Brazilian production not up to the task

At the going rate, Brazil’s annual production volume is likely to be around 240Mt a year, or nearly a third below 2019.

Even if demand in Europe and other major markets like Japan were to drop due to COVID-19, the iron ore market is forecast to remain tight unless Brazil finds a way to significantly crank-up production.

But UBS thinks this will be a long shot for the Latin American (LATAM) country.

“The UBS LATAM team have [sic] taken a look at Brazil in terms of the spread of Covid-19 suggesting the spread from large cities to small towns may be increasing,” explained the broker.

“New Google Mobility data shows adherence to stay-at-home measures remains low in Brazil.”

High iron ore price in good and bad times

What’s more, one of the coronavirus hotspots is the Para State, which is the second largest iron ore producing states in the country.

On the demand side, China’s inventory of the mineral is low and that explains why the price of the commodity is holding up despite the looming global recession.

“On balance we expect the iron ore market to remain tight and support an iron ore price above US$80/t through 2020e,” added UBS.

“Substitution away from Australia at the current time appears difficult, but we note China has begun to invest in iron ore in Guinea, albeit 5+ years from first production.”

Looks like China needs our iron ore majors as much as they need China.

More reading

• 3 top Warren Buffett quotes to start off your week
• How is the ASX 200 soaring despite rising unemployment?
• Is it time to buy ASX 200 gold shares?
• Fortescue share price hits a record high: Is it too late to invest?
• The 5 ASX shares that were last week’s biggest fallers

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Why ASX iron ore miners like BHP aren’t afraid of the China trade war appeared first on Motley Fool Australia.

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The Afterpay Ltd (ASX: APT) share price run has left the returns of the S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO) as an afterthought. However, as its share price flirts with record all-time highs, could this spell the end of a spectacular run or does Afterpay have more to give to its shareholders? 

Solid business update 

Afterpay’s business update provides much-needed insight as to how the business and broader buy now, pay later sector is performing amidst the coronavirus epidemic. Its online sales in March represented 88% of total global underlying sales, demonstrating the business’s significant exposure to online spending. March showed strong underlying sales across all markets, with average daily underlying sales up 12% on January and February. 

However, underlying sales in the second half of March moderated at a Group level. Global underlying sales in the second half of March versus the first half of March were 4% lower. March could arguably be the trough of sales performance – the first two weeks of April in all markets saw average daily underlying sales up approximately 10% on the second half of March.

Overall, Afterpay delivered an impressive business update that outlines the businesses versatility in changing business conditions. Its US business experienced a 263% increase in sales on the prior corresponding period and is on track to overtake Australian sales. 

I believe the Afterpay growth trajectory is unhinged. Moving forward, the growth of its US business will be the centrepiece of its performance. 

Tencent’s substantial shareholding pumps up price

Chinese tech conglomerate, Tencent confirmed its substantial shareholding in Afterpay on 1 May. Tencent had acquired approximately $390 million worth of Afterpay shares at an average price of $22.

While this change in substantial shareholding does not mean anything material for Afterpay, it does create a lot of speculation as one of China’s biggest companies has taken an interest. This announcement has pushed the Afterpay share price up almost 40% in 2 weeks. 

Valuation makes buying challenging 

Afterpay currently has a market capitalisation of approximately $11bn. The Tencent announcement alone has added almost $3 billion to its valuation. I believe without further market sensitive announcements such as business updates, the Afterpay share price will struggle to break out above its record all-time highs. 

At the same time, the general index will also influence how the Afterpay share price moves. While the market is volatile, an unprecedented amount of stimulus has buoyed asset prices. With the US attempting to pass a $3 trillion coronavirus relief bill and Australia reopening its economy, the market could continue to trend upwards in a volatile fashion. 

Foolish takeaway 

I love where the Afterpay business is going and the attention it is receiving from global players. However, where its share price stands today makes it a difficult buy case and underwhelming risk/reward. I would wait for its share price to cool down before making an investment. 

More reading

• These ASX 200 shares are up over 40% in 2020
• 3 fantastic ASX shares to buy when you’re young
• Why a buy and hold strategy for ASX shares is best
• ASX 200 up 0.8%: Big four banks push higher but Xero tumbles lower
• Got $5,000 to spend? Here are 5 ASX shares you can buy today

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I’ve been keeping a close eye on what substantial shareholders have been doing recently.

Substantial shareholders are shareholders that hold 5% or more of a company’s shares. These tend to be large investors, asset managers, and investment funds. These shareholders are obliged to update the market when they make any changes to their holdings.

As a result, I feel investors should look to use these notices to their advantage. After all, they show where the smart money is going.

Two notices that have caught my eye are summarised below:

Bapcor Ltd (ASX: BAP)

According to a notice of initial substantial holder, Paradice Investment Management has been buying this autoparts retail company’s shares. The notice shows that Paradice has been buying Bapcor’s shares all year, but stepped up the purchases during the market crash. The investment manager now owns 16,486,120 shares, which equates to a 5.047% stake in the company. With its shares down materially from their 52-week high, it appears as though Paradice sees a lot of value in them at current levels. One broker that agrees with this view is Citi. Earlier this month it slapped a buy rating and $6.00 price target on the company’s shares. The broker believes its expansion into Thailand could surprise to the upside.

Citadel Group Ltd (ASX: CGL)

According to a change of interests of substantial holder notice, Perennial Value Management has been increasing its stake in this information management company. The notice reveals that Perennial has picked up approximately 1.4 million shares over the last few weeks to lift its holding to a total of 6,173,004 shares. This means the fund manager now owns a 7.84% stake in the company. Although Citadel’s shares have rebounded strongly from their March lows, they are still trading 53% lower than their 52-week high. Judging by its investments, Perennial appears to believe Citadel will navigate the pandemic just fine. It must also have faith in management’s decision to acquire UK healthcare software company Wellbeing for $200 million.

More reading

• 3 ASX 200 pandemic winners and 3 losers
• 2 bargain ASX shares to buy with $2,000
• Here are all the ASX 200 companies that have announced capital raisings so far in 2020
• Leading brokers name 3 ASX 200 shares to buy today
• 3 ASX shares that are absurdly cheap right now

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia has recommended Citadel Group Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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