Rudi's View | Feb 03 2016
This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL
In this week's Weekly Insights:
– The January Effect: Omen Or Nonsense?
– FNArena's Reporting Season Coverage
– Change. Investing In A Low Growth World
– Nigel NoMates #selfie
– All-Weather Performers Performing
– Rudi On Tour
– Rudi On TV
The January Effect: Omen Or Nonsense?
I have a very simplistic, but oh so logical explanation as to why investors believe there's a predictive relationship between share market performance in January and for the rest of the year.
Most calendar years take off on a positive note. Most calendar years generate a positive return. History shows a few examples of shares starting off on a negative note with returns never recovering over the subsequent twelve months.
Tadaa! It really doesn't get much more complicated than that, in my view. For the same reason commentators are every year talking about the danger that lurks in October when more often than not equities take a turn for the better in that month.
We all still remember 2009, when the relentless bear market continued its downtrend until March 6. That was one year in which a bad January proved in complete contrast to what happened after that first week of March. History also shows opposite scenarios. In 1974 shares gained more than 10% in the first month, but by late December total returns were close to double digits in the negative. That's the kind of stuff that makes a bear market.
This year January has clocked off with losses of some 6%, triggering public debate about whether there is, or there isn't, a genuine January effect.
Luckily we have Macquarie analysts going through the numbers from the past. As expected, if there were a correlation between January and the rest of the year, it would be an inconclusive relationship. Shares can and do turn around at any point during any calendar year, depending on what impacts on the underlying direction.
However, Macquarie's research also suggests January seldom takes off with losses greater than 5%. Whenever it does, total return for the calendar year as a whole remains below average. Note: it doesn't mean the return will be negative. Even the exceptional 2009, marking the end of probably the worst bear market in modern history, merely turned out a rather "average" year by December 31. It felt like a fantastic year, of course, because February and early March had pushed indices to ever lower levels, thus the subsequent recovery and rallies felt like a rocket taking off from Cape Canaveral.
In conclusion: Macquarie's data collation suggests spurious predictive powers of share market performances in January, but when the year opens on a decisive negative note, as it did in 2016, history suggests relatively benign returns are likely for the full year. Ignore at your own peril.
About Macquarie's chart: the grey bars show the January performance for the year. The corresponding bullet point shows the return for the full calendar year. All negative January starts are on the left.
FNArena's Reporting Season Coverage
Later this week FNArena will publish a general preview on what investors should expect from the February reporting season. In the meantime, colleague Greg is making preparations for our daily excel sheet updates, as has become usual practice during local reporting periods.
Stay tuned, we are gearing up to serve you the best insights on what is happening inside corporate Australia, and its potential impact on the outlook for Australian equities.
Those readers/subscribers who are as yet not familiar with FNArena's efforts in the past can use the following two stories in relation to last August's season as reference point:
Change. Investing In A Low Growth World
My book "Change. Investing in a low growth world" has been well-received since publication in early December last year. Below are some of the feedback messages.
Paid subscribers get a free copy. Others can purchase their copy through Amazon or most other online distribution platforms for eBooks.
I just wanted you to know how much I enjoyed reading your ebook over the Christmas break.
You are spot on and the start of 2016 has re-iterated a lot of the key themes you wrote about.
Wishing you the best in 2016 and I look forward to all the great content and interviews you put out there
your book was fantastic, thank you so much for your insight.
I read it over Xmas and enjoyed it so much I may read it again.
All the best for 2016!!!
Those who know and enjoy Rudi's frequent appearances on Australia's Sky Business channel will expect a good read here – and they won't be disappointed!
Nigel NoMates #selfie
Nigel is one of those acquaintances who come and go in an unpredictable fashion. I am sure we all have at least a few of such contacts in our social lives.
Nigel is quite a nice guy, but you have to get to know him first. He usually spends a lot of time on his own, thinking nobody really likes him. Because he's a bear. I think he's right.
I also think Nigel is here to stay a little longer. Expect more updates on social media, on TV, or here in my written updates.
See also my story from last week: Who's Afraid Of The Big Bad Bear?
All-Weather Performers Performing
It doesn't take a genius to figure out that when selling orders become a flood, and indiscriminate selling is the order of the day, there are but few places to hide in the share market. But look through the rubble of the January sell-off and one finds CSL ((CSL)) shares are up for the year (yes, up!), and so are shares in Domino's Pizza ((DMP)), and in Hansen Technologies ((HSN)), and in Amcor ((AMC)), to name but a few.
No wonder thus, the FNArena/Vested All-Weather Model Portfolio equally stood its ground when few others did. The Model Portfolio extended its market outperformance from 2015 into the new year, but couldn't avoid suffering small losses. At the end of January the month's performance stood at -2.5%. From its early beginnings in December 2014, the portfolio has generated a positive return since inception and nobody who joined over the past 14 months is under water.
I reckon the chart below is what every investor/manager of funds would like to see in terms of market outperformance:
As evidence of a complete lack of complacency at our end, we have raised cash levels significantly and concentrated the portfolio's composition around strong thematics with solid, long term growth trajectories and growing dividends built upon reliable, expanding cash flows. We find ourselves in good company too. According to data collected by BA-Merrill Lynch, the world in general has shifted a lot more into cash throughout the second half of last year, with the trend extending in the opening weeks of 2016.
The Australian Investors' Sentiment Survey for January, organised by FNArena in cooperation with Australian Investors' Association (AIA), also showed rising cash levels in investor portfolios. You can read the latest results here: https://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=D9348334-BECE-C7DA-CB9C99D94F144F87
Equally eye-catching was the news Australia's Future Fund, considered one of the best investors in the world, has lifted total cash holdings in its $118bn international, multi-asset portfolio to 20%. This is the highest level since inception of Australia's sovereign wealth fund. Managers of the Future Fund reportedly see elevated risks and relatively low returns. I'd say: investors pay attention.
FNArena has updated the monthly excel sheet on All-Weather Performers until January 31st. Subscribers who would like a copy can send an email to firstname.lastname@example.org
Rudi On Tour
– I have accepted invitations from Perth chapters of both Australian Shareholders' Association (ASA) and Australian Investors' Association (AIA) for presentations on Monday 9th May, both afternoon and in the evening.
– I have accepted an invitation to present at the Australian Investors' Association's (AIA) National Conference in August on Queensland's Gold Coast.
Rudi On TV
– on Wednesday, Sky Business, Your Money, Your Call Equities (host), 8.00-9.30pm
– on Thursday, Sky Business, Lunch Money, noon-1pm
(This story was written on Monday 1 February 2016. 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: email@example.com or via Editor Direct on the website).
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. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?
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