Resources Carrying Most Growth Momentum

This story features BRAMBLES LIMITED, and other companies. For more info SHARE ANALYSIS: BXB

In This Week's Weekly Insights:

-Resources Carrying Most Growth Momentum
-Temporarily Out Of Fashion: All-Weather Performers
-Count Down To New Era For FNArena
-Rudi On TV
-Rudi On Tour

Resources Carrying Most Growth Momentum

By Rudi Filapek-Vandyck, Editor FNArena

The Australian share market has opened the new calendar year on the back foot.

The Trump-inspired rally has largely ran out of puff as the world's focus shifted from a potential new Reagan-esque policy regime to the more darker characteristics of the populist, self-indulgent, non-conformist, erratic personality that is now the Leader of the (Free) World. (Ahem).

Australian bank shares trading well above stockbrokers' price targets (see Stock Analysis) without a commensurate improvement in analysts' forecasts hasn't helped either, nor does the fact that Chinese authorities might be reining in excessive liquidity in their domestic economy.

Further weighing upon sentiment is most early corporate reports haven't been that flash -think GUD Holdings, James Hardie, Virtus Health- while a number of others surprised with an unexpected profit warning. Brambles ((BXB)) might not be everybody's favourite in today's share market, but it still is a Top20 member, and supposedly a more defensive and reliable option with low risk of a sudden negative shock announcement.

Combine Brambles with Aconex ((ACX)) and GBST ((GBT)) and we already have what might well be the early beginnings of potentially a negative narrative for the whole of February: are political uncertainty and risks in countries such as the UK and USA weighing upon corporate spending intentions?

Add worse than expected economic data (see the latest update on retail spending in Australia) and it probably should not surprise price action coming out of January and leading into the second week of February has been rather lethargic. The gusto and confidence from late 2016 have left the stage, or so it seems.

Positive surprises from CSL ((CSL)) and ResMed ((RMD)) have not been sufficient to offset the negatives.

Here and there strategists have started to mutter: better to reduce exposure to equities. Thus far, quantitative analysts at Credit Suisse have warned loudest. They see "heightened risk of an impending protracted market correction".

Best Profit Prospect In Years

The somewhat lackadaisical market sentiment leading into the February reporting season stands in sharp contrast with the hefty profit upgrades by analysts over the past four months. Depending on whose numbers we take as guidance, average profit growth (EPS) for the Australian share market this financial year increased over that brief period from a mere 6-7% to between 13-19%.

If these numbers still stand by the end of August, the Australian share market might well be about to experience its strongest year for profit growth post-GFC.

Note: a big chunk of this growth won't show up until the August reporting season, but even so the underlying trend is firmly upwards and by then the average might well be a lot higher.

The downside to all of this is that virtually all of the increases in forecasts have occurred in the resources sector and in the resources sector only. The banks, for example, have not enjoyed any noteworthy uplift in forecasts. Their risk profile has improved somewhat, predominantly because Basel regulations might be pushed further out or abandoned altogether.

According to some analysts, bank management teams might anticipate better margins for the second half, which would certainly please investors. It will also further fuel the emphasis on the second half, as will be the case for iSentia ((ISD)), for Vocus Communications ((VOC)) and for a large group of other companies that will be extra-scrutinised this month for any indications about what can reasonably be achieved between now and late June.

As per usual, the largest gains and losses will be for those companies whose financial report genuinely surprises. Which means most among us are unable to predict these events beforehand (it cannot be a "surprise" otherwise). Feedback from the local funds management industry is that many portfolios have been de-risked in recent weeks. Everybody wants to avoid holding the next Aconex when yet another negative surprise hits the ASX website.

This explains the rather erratic price action for many medium sized, high PE industrial stocks leading into February.

General Themes This February

It is likely the dominant question asked by investors this month will be: what are mining companies going to do with all that cash that is flowing in? It was only twelve months ago market speculation was focused on who might be next to go out of business. Today expectations are rife about which company might be handing back cash to shareholders.

Rio Tinto is widely speculated to potentially announce a $3bn share buy back this month, even though a conservative board might wait until August. Maybe a firm hint might do the trick, for now?

BHP Billiton is still carrying too much debt, but others might soon be in a similar position as is the cash luxury at Rio Tinto. Think South32, Whitehaven Coal ((WHC)), and others.

Another big change is a reversal of momentum among supermarkets. Analysts are warming towards the idea that Woolworths is taking back market momentum from Coles. Recent price action for Woolworths and Wesfarmers ((WES)) shares is reflecting this.

General momentum for retailers is, once again, murky at best. Expectations are that electronics sales continue to do well with potential for JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)) to come out better than market expectation, but otherwise retail remains a sector filled with minefields, as has been the case for quite some time now. Profit warnings by the likes of OrotonGroup ((ORL)) and Shaver Shop ((SSG)), as well as unlisted apparel shops going into administration do not set a positive tone beforehand.

Former yield investor darlings Transurban ((TCL)) and Sydney Airport ((SYD)) are expected to release strong earnings reports. Too bad general sentiment remains against the sector on expectation of prolonged rallies in government bond yields later in the year.

Stocks mentioned as likely candidates to release a negative surprise include Automotive Holdings ((AHG)), CSG Ltd ((CSV)) and Flight Centre ((FLT)).

The Brokers' Picks

Every reporting season triggers confessions and predictions from stockbroking analysts about who is their sector favourite and who's seen as most likely to disappoint. This exercise always opens up some spectacular misses. Brambles pre-profit warning was Deutsche Bank's sector favourite while stockbroker Morgans not so long ago had Bellamy's ((BAL)) among its Conviction Buy ideas.

Yes, there was also a lot of conviction at Morgan Stanley behind the outlook for Aconex, but that has been extensively reported upon elsewhere.

In many unreported cases stockbroking analysts do get it right, and below are some of the snippets published recently.

Credit Suisse believes JB Hi-Fi is likely to outperform market expectations, as should Myer ((MYR)), while Flight Centre might not disappoint just yet given the heavy skew to H2 in this financial year's guidance.

Over at Morgan Stanley, strategists have updated their "Australia Sustainable Leaders Conviction List"' by removing ResMed post earnings surprise and subsequent share price response. No additions were made so the selection consists of: ASX Ltd ((ASX)), Westfield ((WFD)), AMP Ltd ((AMP)), Dexus Property ((DXS)), Insurance Australia Group ((IAG)), Investa Office Fund ((IOF)), Orora ((ORA)), Sonic Healthcare ((SHL)), Spark New Zealand ((SPK)), Sims Metal ((SGM)), Mirvac ((MGR)) and Henderson Group ((HGG)).

Deutsche Bank analysts are not too keen on Brexit exposures and prefer to remain cautious towards companies relying on consumer spending in Australia. They note for offshore-exposed industrials the tailwind of a weakening AUD is abating.

Deutsche Bank suspects a potential upside surprise from Amcor, Fletcher Building ((FBU)), Harvey Norman, JB Hi-Fi, QBE Insurance ((QBE)), Rio Tinto, Star Entertainment ((SGR)). Potential downside surprise might stem  from REA Group ((REA)) and/or from WorleyParsons ((WOR)).

UBS is not expecting any fireworks from the general insurers but suggests companies could surprise with a better than anticipated outlook/guidance. A similar scenario is thought possible for Computershare ((CPU)). For both IOOF ((IFL)) and Perpetual ((PPT)) the risks are seen as to the downside.

UBS strategists much prefer international growth stories, preferably with US exposure, albeit selected consumer discretionary names are expected to perform strongly this month. They like Harvey Norman, Super Retail ((SUL)) and Costa Group ((CGC)).

The strategists added Boral ((BLD)), Computershare, Origin Energy ((ORG)) and Woolworths to their Model Portfolio, having removed Brambles, Caltex Australia ((CTX)), Healthscope ((HSP)) and Incitec Pivot ((IPL)).

The Top Ten of most Overweight positions held by the UBS Model Portfolio are: Aristocrat Leisure ((ALL)), BHP Billiton, BlueScope Steel ((BSL)), Boral, CSL, Harvey Norman, Lend Lease ((LLC)), Orora, ResMed and Stockland ((SGP)).

Stockbroker Morgans has now removed GBST from its High Conviction List. Still on the list are: Westpac ((WBC)), Orora, South32, ResMed and ALS Ltd ((ALQ)) from the Top100 and from outside the Top100 Evolution Mining ((EVN)), Corporate Travel ((CTD)), Speedcast ((SDA)), Kina Securities ((KSL)), Catapult Group ((CAT)) and Impedimed ((IPD)).

Shaw & Partners advocates a cautious ("neutral to underweight") balanced portfolio weighting towards the Australian share market. The stockbroker recently communicated to its clientele "The spectre of rising long term interest rates, potentially harmful trade policies emanating from Washington, event risk around reporting season as well as the cocktail of geopolitical risk from Brexit to the EU makes us nervous".

The recent model portfolio update saw the removal of both Telstra ((TLS)) and Westpac and the inclusion of QBE Insurance and Northern Star ((NST)).

FNArena is publishing daily updates on the impact of corporate results on stockbroker ratings, valuations and forecasts. See website.

Temporarily Out Of Fashion: All-Weather Performers

One year ago today, share market indices were tanking and it appeared a genuine prospect financial markets were repeating the 2008 experience. It had been reported the start to fresh calendar year 2016 was the worst ever on record and records kept go back more than one hundred years.

The experience from the FNArena/Vested Equities All-Weather Model Portfolio was nowhere near as bad. At that time, owning stocks outside financials and resources stocks proved a true blessing.

The double edged sword of investing in a small share market like is Australia's, is that one's portfolio does not have to imitate whatever is happening with the highly concentrated ASX200 or even the All Ordinaries. Hence twelve months ago we missed out on the gut wrenching moves to the downside that put the fear into so many investor hearts.

Twelve months later, the Model Portfolio still is not mimicking the major day-to-day moves that characterise Australia's key market indices. But this time we are not benefiting as such. This time we feel the neglect as investor focus has narrowed to a small group of stocks only, with little attention (if any) for anything outside miners, energy producers, engineers and contractors, and, yes, the banks.

To put it in simple parlance: it's a raging bull market for resources and for financials, but it's an annoying bear market for most of the rest in the market. This also happens to be the main message of my latest book, Who's Afraid Of The Big Bad Bear?, available via Amazon and other channels, but paying subscribers at FNArena receive a free copy as a bonus.

As I argue in the book, and as remains on display in the Australian share market every day, price action and investor attention show a lot more gusto when it comes to the likes of Rio Tinto ((RIO)), Fortescue Metals ((FMG)) and South32 ((S32)), even though prices have pulled back lately, in comparison with, say, CSL ((CSL)), Amcor ((AMC)) and Bapcor ((BAP)).

Not that there's anything wrong with the latter three. Profit growth should be healthy, as has been the case in years past, and the upcoming reporting season should provide more evidence of this. CSL already proved the doubters wrong with an upgrade to guidance last month. It was a Big Upgrade, mind you.

But right now the market narrative does not fit in with these solid, reliable All-Weather Performers. I could potentially write yet another book about the virtues of owning such stocks for the longer term, it won't change the fact that Australian and global investors, right now, are simply not interested.

Post CSL's positive market surprise, I spotted a twelve month price target of $138.50 for the stock, issued by CLSA who maintains the company's performance, as well as the shares remain poised to outperform market expectations. This is well possible, but market sentiment will have to change dramatically before CSL shares can even remotely think of rallying that high this year.

CSL's "disadvantage" in the present market context is that, even on CLSA's upgraded market expectations, the company is only projected to grow earnings per share (EPS) by 22% this financial year and by 14% in each of the two following years. Market consensus sits at 11% this year, followed by 17%. (see Stock Analysis).

Mining companies like BHP Billiton ((BHP)) and Rio Tinto are offering much higher growth, still at cheaper valuations, and with an in-built promise of more upgrades to follow because analysts still are not using today's spot prices in their modeling.

Understand this dynamic and thou shalt not find it difficult to see why investor focus is on BHP and not on CSL, on Rio Tinto and not on Amcor, and on Fortescue Metals and not on Bapcor.

It is not a rejection of high quality, high performing industrials in an absolute sense. It's a relative preference for the Champions of today, with little room left for anything else.

Note that on my observation, many stocks of the second category continue trading below the 200 moving average and in case of a short term rally, as occurred in December, share prices are rejected to the downside whenever they attempt to climb above the trend line.

Share prices for BHP, Rio Tinto and the likes are trading well above the 200MA. They could potentially experience a serious correction and they would still be on the right side of the demarcation line between being in a bull or bear market.

Such is the present set-up for Australian shares and it's anyone's guess as to how long exactly this extreme bifurcation in market dynamics can last. Today's market also forces investors to make up their mind: what kind of investor are you? What kind of investor do you want to be?

For instant gratification, there's probably none to be found short term among the CSLs, the Amcors or the Bapcors. But if my assessment is correct, and these companies continue doing what they've been doing for years, then investor interest will return, exact timing unknown.

I remain confident the key constituents of the All-Weather Model Portfolio still offer many more years of excellence, and of shareholder rewards, though the short term might not offer much at all, within the general context as is.

For more information about the FNArena/Vested Equities All-Weather Model Portfolio, send an email to info@fnarena.com

Also: if you are a paid subscriber, and you haven't received your copy of Who's Afraid Of The Big Bad Bear?, ask for your copy via the same address and we'll send it to you via email.

Count Down To New Era For FNArena

It's quite frankly impossible not to show any excitement when looking forward towards the one event that is going to change the future here at FNArena: the launch of the new website.

I have been talking and writing about it for quite a while but, assuming no unforeseen obstacles from left field occur this week, next weekend (Feb 11-12) should mark the death of the old website and the birth of the new one. Let the count down begin!

To all you loyal subscribers who have been with us for many, many years: prepare for something completely different.

It goes without saying, we think we are about to present a much better product and service, with more bells and whistles, better access, upgraded presentation, new tools and additions, but above anything, the new approach I've chosen is very different from the current style and set-up.

To assist you all with finding your way post the switch to the new website, here's a brief guide to the New FNArena:

-Firstly, the new website adapts to mobile phone and other devices smaller than your standard desktop pc. We've come up with some nifty adjustments to make sure it all fits and works, so you can now read FNArena content while on the bus, train, at the airport, near the beach, or wherever you want to stay in touch with the latest broker updates or Tweets from yours truly.

-We have significantly upgraded the search and research capabilities on the website. Make sure you put a few company codes in the improved Search Engine and check out FNArena Windows where more than 400 ASX-listed stocks are grouped together with peers and competitors in modern sector allocations (no more Amcor with Rio Tinto in the same Materials basket, etc).

-A dedicated page for research and updates on All-Weather Performers (only accessible for paid subscribers).

-One exclusive section for paid subscribers to download Special Reports and Bonus Publications, like my recent book "Who's Afraid Of The Big Bad Bear", as well as all Powerpoint slides from my presentations since 2008.

-Much clearer segmentation and presentation of daily news content. All news stories carry price charts of the listed stocks mentioned.

Of course, all your favourite items are still there; the Australian Broker Call Report, Stock Analysis, Rudi's Views, The Overnight Report,… They've all been upgraded and should be much easier to access, to use and to find. The same applies for add-ons including The Icarus Signal, R-Factor and FNArena Sentiment Indicator.

I have little doubt this new website is going to shock most among you: we have even more content than you thought we had. And it now comes in a much easier to digest format.

I hope your enthusiasm, once the new website is up and running, is able to match mine. Cannot wait to read your responses and feedback. Note: this is an important step for FNArena, but it is by no means the end of our path forward. By all means, if you have an idea for improvement, tell us. If you don't like some of our changes, we like to hear that too.

Info@fnarena.com

The count down starts now…

Rudi On TV

This week I shall appear twice on Sky Business on Thursday. First from 12.30-2.30pm and later again on Switzer TV, between 7-8pm.

On Friday I shall skype-link with Sky Business to discuss broker calls at around 11.10am.

Rudi On Tour

I am sending today's email from Perth where I shall present to local members of Australian Shareholders Association (ASA) and Australian Investors Association (AIA) on Tuesday around noon and from 7.30pm onwards, respectively.

(This story was written in Perth on Monday 6th February 2017. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via Editor Direct on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels.
–Who's Afraid Of The Big Bad Bear? Chronicles of 2016, a Veritable Year Extraordinaire

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup 

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