Barclay’s bull or Pearce take? Commodities strength, and a bullish thesis for this ASX defence stock
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Each Friday, corporate advisory firm Barclay Pearce highlights the key trading themes of the week, along with which companies and sectors Stockhead readers should be keeping their eye on.
Activity this week was led by continued support across the broader commodity space, Trent Primmer said.
While trading in core commodities such as oil and gold was “relatively choppy” throughout the week, Primmer said the underlying drivers of the post-COVID commodity cycle were still in place.
In turn, that flowed through to strong demand for two more IPOs heading into the Easter break.
“We’re still seeing a lot of that same rhetoric around a strong commodity cycle, and that’s manifesting where people are prepared to pay a premium on-market once (companies) hit IPO,” he said.
He cited the examples this week of Kincora Copper (ASX:KCC), which listed at 20c and closed higher on day one.
That was followed by Peregine Gold (ASX:PGD) which had a “cracker of a debut” yesterday, Primmer said, also listing at 20c and trading as high as 28c before closing at 24.5c.
As head of trading at Barclay Pearce, Primmer also keep a close eye on money flows and the where momentum is building in different corners of the market.
This week, he flagged two high-profile global events:
– the ship blocking the Suez Canal which sent prices for US WTI crude back above $US60 a barrel; and
– a brief jump in the S&P500 VIX (volatility index) after secretive investment fund Archegos got closed out of some huge leveraged stock trades.
But for now, neither of those events appear to pose a systemic threat to the broad reopening trade that’s helping to fuel demand for stocks, Primmer said.
He also flagged the ongoing rise in bond yields accompanying the economic rebound.
“Over in the US, the IMF (International Monetary Fund) stated that global economic growth accelerated, led by China and the US,” he said.
“So I think those rising yields are a partial reflection of the fact we’ve got this increased confidence in an economic recovery.”
Also supporting risk appetite on Wednesday was a strong March PMI print (manufacturing and services) out of China, while Democrats in the US continue to work towards a huge infrastructure bill.
“You’ve got household savings rates extremely high, vaccine rollouts, and there’s still plenty of fiscal stimulus which is driving the economy as well,” Primmer said.
“So that’s easing a lot of concerns around the global economy. In that sense I think it’s only natural that longer term confidence is starting to see yields tick higher.”
Among the key industry catalysts this week, Primmer highlighted news on Tuesday of a $1bn defence spending initiative by the Morrison government to build new missiles and guided weapons.
“We’d expect some domestic weapons manufacturers and defence companies to benefit from that,” he said.
“And I think one on everyone’s radar would be Electro Optic Systems (ASX:EOS). They provide remote controlled weapon systems and state-of-the-art weapons units and optics, so if the government is looking domestically they could benefit.”
Elsewhere, he flagged two large cap oil & gas plays that could see a tailwind from broader support for oil prices as economic activity tracks steadily in the direction of growth.
“Santos have been looked at pretty seriously a few times by private equity and they’ve knocked back some bids,” he said.
“So although it’s a large established company, I view it as a decent growth stock which is quite highly leveraged to oil prices.”
In turn, Primmer’s preference for Woodside stems from the fact they have “some of the best and largest exposure in the world to LNG”.
“In my view there’s a benefit to owning those stocks in your portfolio regardless, but particularly when the oil price is tracking higher,” Primmer said.