Rudi's View | Jun 12 2013
By Rudi Filapek-Vandyck, Editor FNArena
It's Monday and my fellow citizens of NSW are celebrating the Queen's Birthday, which is why today's Weekly Insight's email has an unusual format.
Below are seven charts I picked from recent literature that all highlight an important feature about equity markets in June:
1. Global Economic Surprise Index; from April onwards there has been a clear disconnect between, on balance, disappointing economic data and equity markets that simply wanted to move higher, and they did.
Until, at some point, the disappointments started to have an impact. Chinese data continue to disappoint, as well as in Australia but it's pretty much a global phenomenon and the Australian share market, and many others out there, have started to weaken in line with what history shows should have happened a few weeks earlier.
The only market refusing to play according to the script so far are US equities. But how long is that going to last if economic data continue disappointing? Don't ask, as you do know the answer: QE from the Fed.
2. High Yield Stocks; the outperformance from high yielding equities is not something that suddenly happened over the past twelve months. There's a fair argument to be made it started happening in 2010, or at the very last from late 2011 onwards.
UBS's research (see chart below) confirms as much, as well as that the relative outperformance had turned into a very, very steep looking chart since mid-last year, turning even steeper as the calendar moved into 2013.
That is a very steep looking chart indeed, which now raises the obvious question: how low will/can/shall it go now?
3. The Aussie dollar and mining stocks; every time the Aussie dollar weakens there's always a few stockbrokers and market commentators around to point out it's beneficial for the miners. Yet every time the supportive impact on share prices of mining stocks proves fleeting at best. This is perfectly illustrated in the chart below.
Here's a hint about why mining stocks tend to move in line with the currency: it's because of the reasons behind why the currency is strong or weak. This time could be different, though, as the chart below indicates because the currency is weakening without weakening commodity prices, and much faster too.
The only thing that should worry investors at present is that shorting the Aussie has become a very popular, very successful but also very crowded trade.
4. The Aussie dollar and Australian profits; observe the chart below and weep as those consensus earnings forecasts continued to be adjusted to the downside. In January there was an early signal that the trend might possibly reverse this year, but boy, did the market receive a reality test shortly after.
Something has changed, though, and the weakening Aussie dollar is without any doubt the main culprit. Consensus earnings forecasts are on the rise -woohoo!- and that's something the Australian share market hasn't witnessed for a long time now. Improving profits while the domestic economy is looking towards some touchy-feely challenges? You bet! (see below)
5. The Share Market Fully Valued? It's one of those eternally divisive questions NOBODY in the financial sector can ever agree on. Analysts at UBS place the long term PE average for Australian equities at around 14.3x -correct in my view and they need to be commended for it.
Their overview below shows that's where the market was at in May, and then weakness started kicking in. According to FNArena's cleaned data approach the underlying PE was actually much higher and everybody agrees any average masks the fact that a rather small group of stocks is trading on PEs well above historical averages (such as the banks) and a large group of stocks is trading well below (like small miners).
6. Commodities and the supply response; last year I declared 2013 was to become the year of the supply response kicking in for sector laggards copper, iron ore and crude oil. The least we can all conclude as the calendar approaches the half-year point, thus far the facts haven't disappointed (when viewed through the prism of my prediction).
The most obvious milestone to pin down happened in the week past as domestic production of crude oil in the US surpassed foreign imports. A milestone most observers and market analysts would not have thought possible only a few years ago.
7. Things might be improving, on underlying basis, for Australian companies and their profitability, but any benefits from lower interest rates and a weaker AUD won't be equally dispersed across the market. The overview below shows the outlook for profits and current valuations for FY14 and FY15 across sectors in Australia on the basis of analysts' projections at Citi. Observe how low expectations remain for Australian banks.
Observe also how industrials, small industrials in particular, and resources stocks should be looking forward towards double digit growth in the years ahead. Of course, the risks for downward adjustments remain greater for the resources stocks, especially if China remains in no hurry to announce the next stimulus-support package.
This year will be the second negative year in a row for the sector. You'd think this has created the platform for a positive surprise going forward, wouldn't you (all else remaining equal)?
Weekly Insights will resume in its usual format next week.
DO YOU HAVE YOUR COPY YET?
At the very least, my latest e-Booklet "Making Risk Your Friend. Finding All-Weather Performers", which was published in January this year, managed to accurately capture the Zeitgeist.
All three categories of stocks mentioned in the booklet are responsible for the index gains post 2009 and this remains the case throughout 2013.
This e-Booklet (58 pages) is offered as a free bonus to paid subscribers (excl one month subs). If you haven't received your copy as yet, send an email to info@fnarena.com
(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)
If you cannot see any of the tables and charts included in this story, technical issues are to blame. Subscribers can always access the second publication on the website on Wednesday.
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Rudi On Tour in 2013
– I will present and contribute during the 2013 National Conference of the Australian Technical Analysts Association (ATAA) at the Novotel in Sydney's Brighton Beach, June 21-23
– I will present to members of AIA NSW North Shore at the Chatswood Club on Wednesday 11 September, 7.30-9pm
– I will also present at the upcoming Trading & Investment Expos in Melbourne and in Sydney (more info in weeks ahead)
