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ASX Shares for 2030: How to Deliver Strong Returns for 2030

Richard Hemming

Deliver Strong Returns For Your ASX Shares 2030

At a Share investing conference I went to recently, somebody suggested we build an ASX Share portfolio that can deliver “strong” returns for the next decade, to which I immediately thought, ASX Share Afterpay isn’t even five years old, let alone its current form Afterpay Touch (ASX Shares: APT), which kicked off in mid-2017. From its re-incarnation, Afterpay’s ASX shares have gone from $2.50 to current levels of over $40, a return I don’t even want to think about.

I started thinking, is it even possible to future proof your ASX Share portfolio? A light switch went on, and guess what, it was battery powered.

Future Proofing Shares: Tesla, Wesfaremers and Lithium ASX Shares


All companies whether a massive ASX Blue Chip or an up and coming Small cap, try and future proof and most visibly this is taking place at Tesla and Wesfarmers (and guess what, they’re related). The Share price of Tesla (NASDAQ:TSLA) spiked on news in the past month that the automaker’s battery manufacturing joint venture with Panasonic had generated its first ever quarterly profit in the fourth quarter of 2019. Share investors took this as a sign that the battery factories across the globe are on the verge of being profitable, sending shares in major lithium producers up by 10% and more. Share Investors are now hypothesising that far from being simply a car company, Tesla can morph into the original equipment manufacturer (OEM) supplier of choice for battery production (and some also hypothesise autonomous driving).
 

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Wesfarmers’ MD Rob Scott insists his group’s $1.5bn bet on lithium is money well spent. The ASX stock took over Small Cap Kidman Resources and is now a partner with global lithium giant SQM in developing the Mount Holland mine in Western Australia and a 45,000 tonne a year lithium hydoxide plant at Kwinana, south of Perth. The thing is, due to weakening lithium prices, the project has been mothballed.
Is it a case of future proofing gone wrong? Wesfarmer’s managing director Rob Scott now calls it a long-term bet.

Small Caps provide Investors ASX shares that the big guys can’t access


The good news is that small cap investors don’t have the capital constraints suffered by these giants. Because capital markets are so liquid, unlike in times gone by, you don’t need to buy a conglomerate to diversify your share portfolio.  Small caps provide ASX Share investors with access to investments that are unavailable at the big end of town and have the potential to transform your share returns.

Lithium long-term demand with Electric Vehicles (EV)


The other good news is that Rob Scott is partially right. In the short term there is a surplus of lithium, but in the long-term there is undeniable demand, which comes from electric vehicles (EV).

In 2019 global lithium supply reached 363k tonnes a year. For the 2025 sales to be reached in EV, you would need 871k tonnes/year, leaving a huge shortfall, unless over 500k a year of new supply comes online between now and then.

The current situation, however, is that the lithium market is oversupplied at about 300k of demand versus 363k of supply. This is the key reason the price of lithium has fallen 50% from its peak in 2016/17 and producers are reducing their supply.

Two important developments have happened recently. The first being the Tesla development and the second was last month when China’s government reversed its position on eliminating subsidies for EV and other clean technology vehicles. To the great relief of lithium investors, the subsidies are set to continue.
EV battery production is growing at close to 20% a year, which is good by any standards, the majority of which is coming out of China.

There is no doubt that the coronavirus will have a short-term impact, as will the current excess supply. The lithium market is not forecast to balance until 2022, where all lithium product is converted into batteries.

Bullish Long-term trend for Lithium ASX Shares


Crucially, the long-term the trend is bullish and is what investors will continue to have an eye on, which provides for buying opportunities. This is for increasing battery production and contributes to a stronger-for-longer lithium price. Adding to this is the correction that is currently occurring in supply. Virtually all the majors have dialled back production in the face of current short-falls; plus, it is highly unlikely that any new production will come on stream in the next two years. As a consequence, if there is a share price spike, the major players can respond relatively easily.

Where I don’t agree with Scott is in the type of lithium producer that will benefit. These developments underline the proposition that the low cost brine producers from South America are in a much better place than the Australian hard rock producers. Small Cap ASX Orocobre is a part owner of a brine operation in Argentina, whereas Small Cap Pilbara Minerals (PLS) owns a hard rock lithium-tantalum project in Western Australia, like the Wesfarmers’ owned Mt Holland. Since early December Small Cap ASX Orocobre’s price has rocketed 47%, having initially climbed over 60%, while Pilbara Minerals’ ASX shares have climbed 15%.

Lithium is crucial in electrification due to its use in the batteries used by EVs and crucially there is no substitute. It’s expected to remain the foundation of lithium-ion EV battery chemistry for the foreseeable future. There are other companies that I like that utilise battery technology, but I think the lithium party is just beginning, which is what Rob Scott also believes (he has 1.5 billion reasons to).

A version of this article written by Richard Hemming appeared in The Australian on Saturday 22 February 2020.
 

About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

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