Australia | Dec 06 2016
Editor's note: Fairmont Equities publishes a report each week from which FNArena selects the technical perspective on one particular stock. This week Fairmont founder and resident chartist Michael Gable has provided a lengthy appraisal and outlook for the Australian stock market which, in lieu of choosing one stock, we have published below.
By Michael Gable
It’s not quite the end of the year but some wild moves in the last week has prompted me to put together some thoughts on the year that has passed and what to expect for 2017. Many are calling 2016 as a year to forget, but if we stick to the share market, it has definitely been one of surprises. We started the year off with the market falling to under 5000 and overseas hedge funds calling our banks the next biggest short. Our banks, and our market, decided to do the opposite and they rallied for the first few months of the year. Then came the unexpected results of Brexit and the Trump victory – all the opposite of what was expected. That seemed to have set the scene for some market nervousness. Any company that did something to disappoint the market, or even fail to exceed its lofty expectations has been hit harder than many would have thought.
During these last six months, we have seen huge drops in companies such as Estia Health, Japara Healthcare, Healthscope, APN Outdoor, iSentia, Acrux, TPG Telecom, Ardent Leisure, QBE, Vita Group, REA Group, Carsales.com, Henderson Group, CYBG, Medibank Private, and recently Vocus and Bellamy’s. The list is not exhaustive, so I would say almost any investor in the market has felt some recent pain. If you are the 1% that hasn’t owned a stock that has dropped dramatically, then all I can say is your time is yet to come. And here we are talking about decent companies, not basket cases like Slater & Gordon, or sectors in a structural decline. So even trying to stick to the right sectors is never risk-free. Show me a company and I will name a risk. We can’t control everything that happens in the market, only our responses to it.
I speak to a lot of brokers and fund managers and all of them have been hit in the last few months. You can’t escape it. I was at a presentation in the Bloomberg Sydney office a couple of weeks ago and Kerr Neilson who has grown Platinum Asset Management into a powerhouse with $22bn of funds under management (FUM), was asked a question from the MC. He wanted Mr Neilson’s response to media reports that his fund has been underperforming recently and FUM has gone down. I have to paraphrase but his response was essentially along the lines of “I don’t understand why you journalists ask dumb questions like this, I am only concerned about the things I can control. If people leave the market, then there isn’t anything I can do about it”.
Not everyone can handle the share market. Everyone is wired differently. Anyone with two of more children of their own would have noticed first-hand how one child is always completely different to the other. Some handle markets better than others. Some panic in volatility, others try to understand it and be pragmatic. It reminds me of a couple of quotes from the great American trader Peter Brandt – “An investor needs to understand he will be underwater (equity drawdowns from highs) far more days than above water” and “Prolonged drawdowns force a trader to doubt the validity of even the most proven trading approach”.
The volatility here reminds me of five years ago when the Australian market had fallen from 5000 to under 4000. I saw investors throw in the towel. They sold their shares. Back then, as an example, no-one wanted to buy CSL. You couldn’t recommend it. It was falling from $40 to $30, and only had a yield of 2%. As you know, the cream rises to the top and those that stuck in there were rewarded with the shares going up nearly four times in value. A $100k holding in CSL five years ago is now worth nearly $400k. But even CSL is down nearly 20% in the last few months. No-one is immune. So what is happening out there? Why are stocks being hit so hard? Why are good quality stocks lagging in the short term, causing legends like Kerr Neilson to defend his long-term reputation to some journalist focused on some short-the greatest we’ve seen since those days back in 2011. Back then we had the EU doing whatever it takes to support member countries and interest rates started to fall. CBA had dipped to under $45 back then.
As we all know, it then started to rally – and rally hard. As did many other stocks. Initially there was a fear that the rally in banks was all due to lower rates and that it would not last. Well as we all know, CBA rallied to over $90, paying some nice dividends along the way. That initial scepticism played into the hands of the nervous investor. Those people who are not wired to invest in share markets decided to walk out the door, and I saw it happen first hand. These are people who wanted a better lifestyle in retirement. They sold their banks, sold their quality stocks. I don’t know what they are feeling right now. But many investors did the opposite. They rolled up their sleeves, stayed in the market, got proactive, and chipped away at it every year since. They don’t want to be retiring on the aged pension.
Like in 2011, we are seeing big changes in share markets. This time we have bond yields going back up. The UK and US are heading down the road less travelled. GDP growth is now looking to be higher than expected. Macro events are once again pushing share markets around in a way that is immensely frustrating for investors, brokers, analysts, and fund managers. The best response is to try to understand it and get on top of this apparent inflection point in markets.
I wrote recently of how the top 20 stocks initially get the market moving, and then the mid caps take over. This is still true but looking through to the 2017 opportunities, we need to take something else into account and I’ve been spending a while researching and thinking about it. As always, the cream will rise to the top and quality companies will have their day again. Money will flow back into mid caps once this short-term outperformance of the top 20 has run its course. But with GDP growth ticking up, this means that for the first time in a long time we don’t need to pay up for high growth companies.
It means that we can also get a bit of growth elsewhere. This is why the money is not yet flowing into quality growth stocks, but is instead leaking into beaten down stocks. This is because they now suddenly have a chance of a bit of growth. How big is this rotation going be? How long will it last? It is hard to say, but we are probably talking about years not months. It is still early days and although you don’t need to be the first to indentify it, it’s always better to know sooner rather than later. Remember, we are talking about a phenomenon that started to really kick into gear a few weeks ago after Trump got elected, but we have months or years ahead of us to take advantage of the opportunities – we are still at the beginning of the curve here.
What I can surmise by considering all of this is that those with the ticker for the share market and some patience, will always do well holding quality stocks – just as those that stuck with some decent stocks five years ago are probably laughing at what all the fuss was about (Greece still hasn’t left the Euro!). But when it comes to new opportunities, it means we can afford to look for those stocks that are perhaps very cheap. Maybe we can afford to look at larger cap stocks again. Even though they’ve gone nowhere in the last two years, perhaps they are going to have a bit more upside. Perhaps oil is the commodity of 2017, just as iron ore and coal was for 2016? The last few months feels like a major inflection point, as we experienced five years ago.
Like when CBA started rallying from $45 – it’s OK to doubt the sustainability of it initially, just don’t doubt it all the way up to $95 and then buy it. As long as we recognise the changes early enough, then we should profit from what lies ahead in the next few years or so. For those that are wired to invest in the share market, I’m pretty sure that when you look back a year from now, deciding now to stick with it, understand what is going on, and get active about it, while others are quitting will have felt pretty good – just like those investors that didn’t throw away their CSLs.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Michael Gable is managing Director of Fairmont Equities (www.fairmontequities.com)
Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.
Michael is RG146 Accredited and holds the following formal qualifications:
• Bachelor of Engineering, Hons. (University of Sydney)
• Bachelor of Commerce (University of Sydney)
• Diploma of Mortgage Lending (Finsia)
• Diploma of Financial Services [Financial Planning] (Finsia)
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2
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Disclaimer
Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.
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