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August Valuation Conundrum

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Aug 24 2016

In this week's Weekly Insights:

– August Valuation Conundrum
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV

August Valuation Conundrum

By Rudi Filapek-Vandyck, Editor FNArena

I've always gotten a kick out of oxymorons – phrases that are internally contradictory – such as 'jumbo shrimp' and 'common sense'.
[Howard Marks, Oaktree Capital Management]

There are quite a number of unanswered questions haunting investors right now, such as "is OPEC finally ready to coordinate production" and "is Janet Yellen's FOMC finally ready to lift US Fed Funds from its tepid 0.25-0.50%"?

The answers to both questions will have a huge impact on financial assets and trends witnessed in 2016. Thus far, all we have are expert opinions, empty speculation and lots of noise in financial media.

Financial markets don't really know what to make of it either. The rallies off February lows have been robust. There is not a stockbroker or funds manager walking around without an extra twinkle in his eye. Cash from the sidelines is moving back in. Apart from valuations looking high on historical measures, what's not to like?

Well, see those two questions at the start of this market commentary but before we go there, let's zoom in on the local reporting season to date.

It's A Raging Bull Market, Mate

Whitehaven Coal, up 153% over three months. Fortescue Metals, up 157% from a year ago (62% over three months). Independence Group, up 61% since mid-May. However, the bull market for local equities does by no means stop with resources. a2 Milk shares are up more than 200% over the past year. Credit Corp is up 39% since May and Aconex has added 86% from twelve months ago.

Whoever is drawing up past performance tables these days must be rubbing his eyes. Broader indices are nowhere near reflecting such buoyancy, let alone the performances of most investment portfolios. What is happening? Well, it's a raging bull market, mate, just not in the top part of the share market.

Banks and other financials continue to range-trade between semi-loved (because of dividend yields on offer) and un-loved (because of operational hurdles and a tough outlook). Miners and energy companies have started to make a come-back, but the larger stocks are still down on last year because that's how strong and fierce the downtrend was.

All of this has mattered little for investors who have turned their attention to smaller cap industrials and fresh IPOs. Australian Agricultural Co, up 30%. Downer EDI, up 30%. Bellamy's, up 30%.

This is not a story just about "expensive defensives" and the global hunt for yield, but all roads do start and end with the Federal Reserve chaired by everyone's favourite nanna, Janet Yellen.

Fed is confused and confusing

The Federal Reserve is going to raise interest rates. We all have to believe this is still the case. Because the alternative is way, way worse.

The crucial questions then become: when? and at what pace?

Even if we can believe Yellen on her promise any moves shall be gradual, measured and considered, there still is no clarity whatsoever. We can all speculate and debate the issue at hand until the cows come home, but at the end of the day, both answers matter, and they matter a lot since the bond market is not pricing in anything for a long while and equity valuations in the meantime have surged well above historical norm.

Yellen is scheduled to deliver a speech at the infamous Jackson Hole annual economic policy symposium by the end of this week. Those who finally wish to see some real action on interest rate normalisation should heed the warning to be careful what they wish for. Financial markets are not set up for imminent Fed interest rate hikes, and Janet Yellen knows it. But she also cannot let complacency settle for too long.

For what it's worth: I think the Federal Reserve might hike in December, to save face and to keep the mantra of "gradual and considered" alive. Note my choice of words; "might" not "will". How exactly this is going to translate through her speech later this week and during the remaining four months until the December meeting, I haven't the faintest idea. But neither has anyone else. And that probably includes Janet Yellen.

In the words of CIBC economist Benjamin Tal, "The Fed is confused and confusing". With central banks in the UK, China, Europe and Japan to remain "loose", "supportive", "dovish" and "extreme" (pick your pick), is it feasible the FOMC is ready to spoil the international central banks' liquidity and stimulus party?

Danske Bank thinks not. The strategist there reiterated his view last week the Fed will be keeping interest rates on hold until June 2017.

August Valuation Conundrum

As can be verified from the pie charts that accompany this market commentary, Buy ratings only represent some 38.5% of total stock recommendations from the eight stockbrokers covered daily by FNArena. Hold/Neutral ratings are by far the largest group, making up 46%+ with Sell ratings taking the remaining 15%.

Only one stockbroker out of the eight, Morgan Stanley, still carries more Buy ratings (Overweight) than Neutral ratings (Equal-weight) and this is probably due to the fact that our one-dimensional approach doesn't account for this stockbroker's two-tiered correlation with underlying sector views. Even stockbroker Morgans, traditionally the most bullish among peers under most circumstances, now carries more stocks under "Hold" than under "Buy".

To put these observations into context: back in 2007, Macquarie proved the last broker standing with more Buys than Neutral ratings. The percentage of Hold ratings peaked at 49% while Buy ratings for a long while hovered around 38%. The difference between now and then, I kid you not, is brokers had fewer Sell ratings than they have today.

Forget about companies missing, meeting and beating expectations. The real share market conundrum is captured into these numbers.

Those looking for answers on oil might want to consider the supportive impact from a relatively weak US dollar, as has been the case for commodities in general and, indeed, for risk and risk assets in general.

Rudi On Tour

I will be presenting:

– To Chatswood chapter of Australian Investors' Association (AIA) on September 7, 7pm, Chatswood RSL

– To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017

– Christmas Special for Chatswood members of Australian Investors' Association (AIA), December 14, 7pm

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.

Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon:

See also further below.

Rudi On TV

– On Thursday I will be interviewed on Switzer TV, Sky Business, between 7-8pm
– On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 22nd August 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: or via Editor Direct on the website).



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): 

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until July 31st. Paying subscribers can request a copy at

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