In my last note I highlighted many reasons why I am worried about the Australian market in particular the property market and its impact on the banking sector and the broader consumer. We have continued to see weakness in these specific spaces with many consumer stocks reporting poorly and a Four Corners program on the ABC airing this week that showed a small glimpse of the troubles property investors are already feeling.
I did promise to highlight some areas where I believe any broader market volatility presents an excellent opportunity to begin positioning for the next longer-term boom. I see a great deal of opportunities in stock specific companies, some of which I will highlight here over the coming weeks and months – so stock picking as a strategy will be especially advantageous over a broader index linked ETF.
However, I see another bullish wave coming in the broader rare earths sector. We witnessed one occur in 2009-2010 when rare earth prices skyrocketed but I believe the next one could be significantly larger.
For those that truly want to understand the impact of technological change and how it penetrates through society and importantly the stock market should read Harry Dent Jnr’s book “The Next Great Bubble Boom”. That book specifically talks about the penetration of the internet through society and how stockmarkets react as a result. The same can be said for the current transition towards electric cars across the globe.
Politicians – especially in Europe – are hell bent on removing the internal combustion energy from society and replacing it with electrically powered vehicles. France and the UK have set goals of no petrol powered sales of new cars after 2040. If the world is truly going to adopt the electric car as mainstream media will led us to believe then the most important thing for investors to focus on is not the production of Tesla’s, G-Wiz and other electric cars but rather the need for infrastructure to support it.
It’s a bit like the chicken or the egg situation. People will not, en masse, purchase electric cars until there is reliable infrastructure to support it. So if Government’s across Europe are going to begin drawing a line in the sand on where the internal combustion engine will no longer be present on showroom floors, then well before that they need to invest in the infrastructure to allow electric cars to be able to travel long distances, with ease and no delays.
As Harry Dent Jnr points in his book, when the car was first invented and began to sell in volumes, infrastructure needed to be built rapidly that supported the car. Think petrol stations, roads, traffic lights, road signs etc. So as we dawn on a new age with the electric car, charging stations need to be built across Europe that will allow limited queues to charging points and rapid charging as well. The infrastructure currently in existence is pitiful in comparison to what will be required. The electric equivalent of every petrol station will need to be built as a charging station with room to either replace battery packs or charge batteries. And it needs to be a quick charge. Successful penetration will only come if recharging is done in 10 min or less not 30 min or more. Think about that for a second and let the sheer size of such an infrastructure network being built over the next 10-20 years sink in.
So from an investors point of view, the focus should not be on car manufacturers making electric cars but rather Governments demand on rare earth materials required for all this green energy facilitation.
We are only in the very early stages of a rare earth revival. The chart below shows the US-listed Van Eck Rare Earth Strategic Metals ETF (REMX) and it can be seen the huge collapse post the 2009-2010 boom. However, we have started to see this ETF begin to rise to two-year highs as rare earth prices have begun to lift as well.
Rare earth prices have been rising rapidly in China with several rare earth prices gaining 50% or more over the past 12 months. Production cutbacks on illegal mining and the environmental damage created from mining such metals has limited supply somewhat. Moreover, as demand continues to increase prices are beginning to surge once more off very low bases.
When we consider the last rare earth boom came on the back off portal device usage (mobile phones, tablets, etc) and these rates have not declined and now we add the infrastructure boom for electric cars and green energy, there is a real risk that demand will sky rocket and an even larger boom will be in play.
As a result several local explorers and producers look very attractive with Lynas Corp (LYC) leading the group. The stock is extremely leveraged to rising prices and its share price is beginning to breakout from a multi-year base now that is plant is running well and rare earth prices are on the rise. If I am right in my assumptions moving forward then LYC is probably one of the standout plays to the adoption of the electric car. The share price could easily rise many multiples of its current 15c price as a result.
The weekly chart below shows the huge decline LYC had when prices collapsed and also the very low base from which the share price is now breaking out from. Volume has also been increasing with some intuitional buying also witnessed.
Currently there are very few setups on individual stocks (and a sector) that look better than rare earths and LYC. So despite the bearishness I have on the overall market and the Australian economy, this is one place that I would be focusing my attention on over the coming weeks, months and years.