Scepsis In June

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In this week's Weekly Insights:

-Scepsis In June
-Conviction Calls: Ord Minnett, Deutsche Bank, MS, UBS, CS
-New Website: Small Caps, Commodities And Other News Categories
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

Scepsis In July

By Rudi Filapek-Vandyck, Editor FNArena

Behind the somewhat lackadaisical price action in the Australian share market in June hides a global community of investors that has become increasingly sceptical.

About the outlook for global growth. About inflation. About long term government bond yields. About China's preparedness to prop up internal economic momentum (in particular post the Communist party's congress later this year). About the Trump administration delivering on its promises of more fiscal stimulus and less corporate tax. About Saudi Arabia/OPEC's ability to keep the price of crude oil above US$50/barrel (at least).

And yes, also about what the true sovereign risk is for owning Australian risk assets now that local politicians appear to have discovered one can legislate extra layers of fees over the highly profitable domestic banks.

With foreign investors accounting for a little less than 50% of ownership in the Australian share market, there has also been an impact from Australia being perceived as less attractive than its peers across Asia. The latter stems from the fact growth for Australian businesses seems to be weighed down by benign consumer spending, a downturn in housing activity and disruption from Amazon, if not governments looking for extra income, instead of experiencing the positive impact from a noticeable pick-up in global growth momentum, as seems to be the case elsewhere.

On FNArena's observation, earnings estimates for corporate Australia continue to trend lower, on average, and investors have started to pay attention. See also last week's Weekly Insights.

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It doesn't help that quarterly and mid-year updates on commodity prices and forward projections have mostly triggered downward adjustments and reductions. In particular forecasts for crude oil have received a knock downwards in recent weeks with many a revised forecast now projecting a glut in global production leading to market surplus in 2018, and potentially in 2019 too.

Irrespective of where share prices are trading, these downward adjustments in price projections, and thus in corporate estimates for producers and related companies, always tend to weigh on share prices as they occur. Commodities bulls can draw confidence from the fact share prices have fallen a fair bit already since early February (and that's putting it mildly) and most updates contained very few negative translations onto corporate views and valuations.

If anything, and this applies in particular to larger sized miners, most resources research teams see "value" in their models.

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A little disconcerting, and certainly adding to the global investor scepsis, is that economic indicators seem to be signaling global growth momentum is slowing. This is a mature cycle annex equities bull market, investment strategists continuously remind us. Better make sure we are not allocating maximum capital towards growth levered assets while momentum might be peaking, and heading down hill.

Lower commodity prices, and in particular lower oil prices and projections, are reducing forecasts for global inflation. As the team of economists at Westpac observed last week, the Federal Reserve has now raised short term Fed Funds by 100 basis points, and is signaling to markets its intention remains to raise more and start reducing its massive balance sheet, but long term US government bonds (10-year) are still less than 50 basis points above their low point from 2016.

A report by Macquarie economists finds despite Fed hikes and intentions, there has actually been no monetary tightening on the ground in the US. Financial conditions remain extremely loose. They are expected to remain loose for longer, and not just by Macquarie.

Bond specialists at Western Asset predict the term "goldilocks" is likely to make a come-back in the second half.

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At the same time, one would have to acknowledge global risks are rising. Central banks are tightening, in the case of the Fed, or at the very least are looking to turn back the extreme stimulus. Globalisation is under threat. The US government is expected to hit the hard debt ceiling before year-end. Europe and the UK have yet to start negotiating separation while many a political observer predicts new elections in the UK will become but necessary "at some point" over the next twelve months.

The Dutch cannot get a coalition together to form a national government. Germany will vote in late September. Macron has the majority in French parliament, but does he have strong support from the electorate to push through painful reform? Iran, ISIS and North Korea are never far away.

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Quite remarkably, 60%-plus of institutional respondents to a Citi survey indicated they believe the odds remain in favour for a -20% correction in global equities, rather than adding another 20% on top of current gains. At the same time, those same institutional investors also said they've been reducing cash holdings and putting more funds to work in equities in weeks past.

According to Citi, the survey has now registered the lowest percentage sitting in cash since this question was being asked in late 2008; at 2.3%.

Meanwhile, Citi analysts observe, institutional investors have raised year-end projections for the S&P500, with nearly 80% expecting the index to surge above 2400 and more than 45% considering 2500-plus.

The irony behind Citi's survey is, however, the S&P500 on Friday closed at 2438.30.

Conviction Calls: Ord Minnett, Deutsche Bank, MS, UBS, CS

Stockbroking analysts have been updating forecasts and projections for commodities and related companies. One easy to make observation is that while price estimates for commodities, in general terms, have been reduced as a result, house views on listed commodities stocks have remained a lot more sanguine.

The latter may have a lot to do with the fact the sector already has been in a downward trend since the beginning of February. No doubt, many a commodities enthusiast is wondering when exactly the sector can start the next sustainable rally, given share prices look "cheap", in particular with where most were trading some five months ago.

The commodities team at Ord Minnett has nominated the following "key picks" in the sector: Rio Tinto ((RIO)), Fortescue Metals ((FMG)), South32 ((S32)), Alumina Ltd ((AWC)) and Whitehaven Coal ((WHC)).

Their peers at Deutsche Bank nominated both Top Picks and recommended Sells. Top Picks; Rio Tinto, Evolution Mining ((EVN)), Sandfire Resources ((SFR)), Syrah Resources ((SYR)) and Mineral Resources ((MIN)) while the list of Top Sells comprises of Iluka Resources ((ILU)), Regis Resources ((RRL)), Newcrest Mining ((NCM)) and Northern Star Resources ((NST)).

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Meanwhile, those responsible for Morgan Stanley's ASX200 Core Leaders Equity Model Portfolio must be feeling a bit sad given their recent rebalancing for the financial year ahead contained the inclusion of QBE Insurance ((QBE)), only days before the perennial disappointer issued yet another profit warning.

Apart from QBE, Morgan Stanley's portfolio also added AGL Energy ((AGL)), both at the expense of AMP Ltd ((AMP)) and Sydney Airport ((SYD)).

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Share market strategists at UBS are monitoring stocks with offshore earnings (predominantly USD) closely since their own portfolio in Australia is Overweight such stocks. The strategists observe offshore earners have significantly outperformed the broader market thus far in calendar 2017 and one only has to think of Cochlear, CSL, Aristocrat Leisure and Corporate Travel to know this is true.

While the relative outperformance has been significant, and one wouldn't call any of these names "cheap", UBS nevertheless advises investors should stay the course. Right now, macro forces are still supporting the skew and this includes growing scepticism about Australia's domestic economy.

Investing in USD-earners in the Australian share market is not a free lunch, points out UBS, with the strategists highlighting all of Brambles, James Hardie, Ansell, Westfield Group and QBE Insurance have delivered a profit warning this year.

Is there still opportunity for investors who missed out on the theme? UBS continues to like the strong growth outlook for Aristocrat Leisure ((ALL)) and ResMed ((RMD)), while also liking Boral ((BLD)), Computershare ((CPU)) and BlueScope Steel ((BSL)). In terms of the laggards, UBS remains attracted to Brambles ((BXB)) and Incitec Pivot ((IPL)), while pointing out the freshly merged Janus Henderson ((JHG)) also offers substantial exposure with some 60% of annual revenues in USD.

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And finally, Credit Suisse's Long-Short strategy ideas now includes Fortescue Metals ((FMG)) to the detriment of Computershare ((CPU)), which was dumped as a result. Fortescue complements BHP Billiton ((BHP)), Rio Tinto ((RIO)), South32 ((S32) and BlueScope Steel ((BSL)) on the Long (Buy) list, alongside ANZ Bank ((ANZ)), AMP Ltd ((AMP)), Qantas ((QAN)), Caltex Australia ((CTX)), Star Entertainment ((SGR)), Adelaide Brighton ((ABC)) and Eclipx Group ((ECX)).

Strategy Short Ideas (Sell) remain: Sydney Airport ((SYD)), ASX Ltd ((ASX)), Cochlear ((COH)), Northern Star ((NST)) and Shopping Centres Australasia ((SCP)).

Paid subscribers note: all Weekly Analysis updates published since early March have contained updates on stockbrokers' Conviction Calls. See Rudi's Views on the FNArena website for past editions.

New Website: Small Caps, Commodities And Other News Categories

This may not be common knowledge, but FNArena's new website contains a news section dedicated to Small Cap stocks. It's where stories about Quintis, Appen, Nick Scali and others are separated from the bulk that relates to the top end of the Australian share market.

A dedicated section makes it easier for investors looking for ideas/more information about the smaller end of the stock market.

Finding this dedicated section need not be complicated. On the front page of the website, underneath "FINANCIAL NEWS – LATEST" on the left hand side, is a section called 'DAILY FINANCIAL NEWS".

Scroll down from the top of the website and look left.

In between the title and the first news story, one finds a brief list of all dedicated sections available:

 Australia | Book Reviews | Commodities | FYI | International | Small Caps | Technicals | Treasure Chest |

Apart from news stories on Small Caps, investors can click on any of these and access news stories grouped together around central themes such as "Commodities" and "Technicals".

An alternative way to access these dedicated news pages is through the drop down menus from the dark grey horizontal bar next to the home symbol.

Starting from "FINANCIAL NEWS", investors can then click on "DAILY FINANCIAL NEWS" which opens up a page that contains the same sub-divisions.

2016 – L'Année Extraordinaire

It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.

If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).

For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
 

All-Weather Model Portfolio

In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.

This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: info@fnarena.com

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, 12.00-2.00pm, co-host in the studio
-Thursday, between 7-8pm interview on Switzer TV
-Friday, 11.15am Skype-link to discuss broker calls

Rudi On Tour

– I shall be participating as debate monitor at the upcoming National Conference of the Australian Investors Association (AIA) at the Marriott, Surfers Paradise, 30 July-2 August

– I will be presenting in Adelaide on November 14th to members of Australian Investors Association and other investors

(This story was written on Monday 26th June, 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: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) 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.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

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

Click to view our Glossary of Financial Terms