Surging iron ore price to support ASX

William McInnesReporter

Jun 1, 2020 – 12.00am

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Surging iron ore prices could support the Australian sharemarket this week, with cash-loaded funds eager to push money into some of the market's most under-loved sectors.

Iron ore prices shot through $US100 a tonne on Friday, rising 5.5 per cent to $US102.39 a tonne, driven by supply concerns as Brazil is hit particularly hard by the pandemic.

Analysts have expressed concerns over the stability of Brazilian supply, with miner Vale battling to keep its three mines in Para state open, as the nearby town of Parauapebas suffers one of the worst coronavirus outbreaks in the country.

A surging iron ore price could provide a firm support for the local equity market. Brendon Thorne

While ASX futures were down 24 points, or 0.4 per cent, ahead of the market open on Monday, the major miners are likely to remain supported after the strong iron ore price jump, particularly given they are among the few companies likely to pay out strong dividends in a yield-starved market.

"When it comes to resources, iron ore demand from Australia has been supported by stimulus in China and disrupted supply from Brazil," said JPMorgan Asset Management global market strategist Kerry Craig.

This mix doesn’t seem to be changing, so will continue to create a floor to the price and should support names in the material or resources sector. The wild card is the politics between Australia and China, and whether iron ore shipments will be held up in China or not."JPMorgan Asset Management's Kerry Craig: "The wild card is the politics between Australia and China, and whether iron ore shipments will be held up in China or not." The price of iron ore has risen sharply through May, and was up 21.8 per cent for the month. However, the major mining stocks on the ASX have lagged that recovery. Over the past month, BHP rose 7.1 per cent, Rio Tinto firmed 6.7 per cent and Fortescue Metals Group advanced 16.2 per cent.In the past two weeks, investors have shown an appetite for some of the market's under-loved and undervalued stocks, bidding up the banksand travel stocks in a search for value.But that attention could now turn to the major miners, analysts said."The equity rotation is not just driven by the outlook but also the relative valuations amongst the sector, and the forward P/E valuation on the materials sector is nowhere near as advanced as in those sectors which have already run hard off of the low," said Mr Craig."Investors are looking for quality names they can access at a relatively good price."Institutional investors still have relatively large cash allocations after selling heavily through February and March, and barring any major escalation in US-China trade tensions, that money could find its way on to the Australian sharemarket."From the low in March, the rally in sharemarkets has initially been quite defensively based, but recently cyclicals have been doing better and suggest investors have become more confident in the sustainability of the rally," said Ophir Asset Management head of research Luke McMillan."Plenty of dry powder still sits there domestically in institutional multi-asset portfolios, including the industry super funds, to push the Australian sharemarket higher when they decide to rebalance back up from their underweight Australian shares allocations."