Time For A Pause

This story features ANZ GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: ANZ

In this week's Weekly Insights:

-Time For A Pause
-FNArena All-Weather Model Portfolio
-Adelaide, Here We Come!
-New Website: Earnings Forecasts In Foreign Currencies
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

Time For A Pause

By Rudi Filapek-Vandyck, Editor FNArena

"Central banks have created huge distortions in the markets, which are going to be difficult to unwind. But we think they are going to talk hawkish and walk dovish."
Colin Graham, chief investment officer of multi-asset solutions at BNP Paribas Asset Management quoted in Wall Street Journal

A sudden turn in sentiment right on the final day of June meant Australian share market indices scraped through the first half of calendar 2017 with a small positive gain which -surprise, surprise!- essentially translates into dividends paid, and then a tiny little more on top. The ASX200 Accumulation Index, showing total investment return instead of simply capital gain/loss only, recorded a gain of 3.1% for the six months, of which 0.2% was booked in June.

Luckily, the index fully participated in late last year's reflation trade, so total return for the financial year ending June 30th rose to 13.8%.

[graph: CommSec]

Most investors would have been pleased with such outcome given the rather disappointing performances for the local market in previous years. The last time total returns ended up in double digits was in mid-2014, but back then virtually all gains had evaporated by December, leaving most return averages for the full calendar year in the hands of dividends paid.

Craig James, Chief Economist at CommSec, reports the performance over the past financial year puts Australia on top of the worst quartile of all global equity indices monitored by CommSec. The ASX ranks 55th out of a total of 73 bourses ranging from Zimbabwe, to Venezuela, Oman, South Africa and Qatar.

Given the rather firm underperformance of Australian shares since January 1st, we can but wonder how low Australia's ranking has been over the second six months period? (Understandably, analysts like James are never going to tell us, as they like to keep the overall story as positive as possible). An update published by the Wall Street Journal upon the end of the first six months of 2017 gives us a good insight into where Australia stands in the world when it comes to share market performance:

Global stock markets collectively had their best opening half-year since 2009, reports WSJ, with many stock markets achieving double-digit returns. According to in-house research, the newspaper reports in the past 20 years only four first-half rallies have been as widespread or better than the one witnessed thus far in 2017. Two of these (1999, 2007) preceded sharp market crashes, while two others (2003, 2009) came at the beginning of multiyear bull markets.

Take your pick. Time to either get worried or extremely excited!

Australia: What About 6000?

At face value, Australia's two most important index constituents -banks and miners- certainly don't look overvalued post what can only be described as a rather disappointing performance for both over the past six months. Which makes Macquarie's assessment, published on Monday, suggesting the major banks are still in a position to slightly outperform market expectations this year a timely reminder of the banking sector's resilience in Australia.

Macquarie analysts slightly raised estimates and valuations for the Major Four on Monday, while upgrading ANZ Bank ((ANZ)) to Outperform and National Australia Bank ((NAB)) to Neutral. At the same time, however, those same banking sector analysts at Macquarie also offered some sobering thoughts further out for investors in Australian banks:

"We continue to believe that banks' medium term earnings outlook remains challenging, as system volume growth slows, underlying margins deteriorate and the cost of the bank levy is absorbed. Moreover, we expect investor sentiment to remain impacted by regulatory/political uncertainty and emerging pressures in the housing market."

Macquarie has now upgraded the banking sector back to a Neutral stance, but investors should maybe pay more attention to a second report those same analysts released on the very same day, titled "Australian Banks – Enjoy it while it lasts". Subtitle: "Housing can't support growth forever".

I am certain you all know the gist of what is in that second sector report.

Post share price weakness, three of the Major Four Australian banks are trading on a Price Earnings (PE) ratio that starts with 12, while offering franked yield between 5.6% and 6.2%. While not extremely cheap, these numbers look a lot more attractive than what the sector had to offer at the start of May.

But nothing beats resources stocks when it comes to relative valuation. According to multiple sources, on a relative comparison with US equities, commodities have seldom been as cheap as they are today (see chart below).

This too can be explained from multiple angles. In the months ahead, and irrespective of relative valuations, I'd argue the medium term outlook for this part of the share market remains closely tied to whether China decides to put extra liquidity/stimulus through its economy, or not. My present inclination is they won't.

Meanwhile, stockbroking analysts continue to, on balance, reduce earnings estimates for Australian companies. See also FNArena's "Weekly Ratings, Targets, Forecast Changes" on the website. At present, consensus estimates remain for a meaty double-digit EPS increase in FY17, but, as things stand right now, there's nothing spectacular in store for FY18 and FY19.

As a direct result, the share market's average PE ratio is poised to remain at relatively high level, unless weaker share prices bring the average down. On Macquarie's projections, today's FY17 average market PE of 15.8x is only falling below 15x by December 2019, and that's assuming current forecasts do not fall in between.

Macquarie's forecasts post FY17 are for 2% increases in EPS only for both FY18 and FY19.

Deutsche Bank has much better forecasts for FY19, expecting to see 9% EPS growth that year, but that is still a long way off.

Herein lies both the explanation for Australia's underperformance over the past six months, as well as the key challenge for the local share market in the year ahead. Things haven't exactly become easier with global bonds on the move on coordinated guidance from central bankers around the globe.

The sudden reversal in price direction during the closing days of June has triggered a stern warning from experienced market observer Dennis Gartman that the solid bull market that has supported many an equity index since February last year, might now be in trouble.

Referring to the chart below, which tells us the story behind key equities on the European continent, Gartman declared on Friday that attention must be paid!

In a world that has only accumulated more and more debt, and in which rising asset prices have compensated for the lack of investment and economic growth, while financial markets have become accustomed to central bank liquidity, it is always going to be a tricky process to wind back the monetary stimulus without disturbing the positive trends relying on it.

So yes, Gartman is right, attention must be paid.

FNArena All-Weather Model Portfolio

The FNArena/Vested Equities All-Weather Model Portfolio has shown itself to be a true contrarian/alternative market performer. Since the first week of February, stocks like CSL ((CSL)), Amcor ((AMC)), NextDC ((NXT)) and Aristocrat Leisure ((ALL)) have re-discovered their mojo, achieving notable outperformance against the broader market, in particular with banks and resources stocks struggling.

The difference in performance showed itself in particular throughout the June quarter which proved a negative for the market overall, while the All-Weather Portfolio held on to a gain of 3.1%. This proved sufficient to once again beat main market indices on the closing bell on June 30th for the first six months of the year.

Of course, honesty obliges us to add the Portfolio could not keep up during the reflation trade in the second half of last year. I intend to write a more extensive update/review in Weekly Insights next week. For more info on the All-Weather Portfolio: see further below.

Also, paid subscribers should note share prices have been updated for the All-Weather section on the FNArena website.

Adelaide, Here We Come!

It has been a while since I visited Adelaide to present my thoughts and insights to local investors, despite multiple emails from subscribers and other locals as to why I kept on neglecting South Australia, and visiting Melbourne, the Gold Coast and Perth instead.

No more! The time has come. I will be presenting on invitation from the Australian Investors Association (AIA). Time of action will be 7pm on November 14th inside the Fullarton Community Centre, 411 Fullarton Rd, Fullarton.

Title of my presentation: Investing In A Slow Growing World – An Update. Genuinely looking forward to it.

New Website: Earnings Forecasts In Foreign Currencies

Most visitors would be well aware the FNArena website offers insights into profit and dividend estimates for circa 400 ASX-listed stocks.

As a matter of fact, it's probably the key reason as to why many are regular users of various tools and overviews on the website.

Not every company reports its financial numbers in Australian dollars. Multinationals such as CSL, BHP, ResMed and Woodside Petroleum use the US dollar as their prime reporting currency, others originate from New Zealand (a2 Milk, Fletcher Building, Xero) or report in British Pounds (CYBG).

To offer quality insights and maximum flexibility, FNArena does not simply translate such foreign currency forecasts into Australian dollars. First and foremost we show what the original data and forecasts look like, so investors can assess the raw, underlying trend in operational performance, and then we offer two different options for Australian investors to investigate. One is the translation of foreign currency data into AUD through the average currency values over the past twelve months. The second one uses the FX cross value from the same day.

The difference in FX input through options two and three may seem trivial, but there are times when different AUD values can make a noticeable impact. FNArena subscribers, we feel, have access to all the right tools to make optimal assessments and timely updates, without having to rely on arbitrary, static FX translations.

In practical terms, this means Stock Analysis shows three different tables for companies reporting in foreign currencies, each with their own tab. There are no PE ratio and dividend yield calculations available in the original currency table (due to different FX for forecasts and share price), but such calculations can be found under each of the two following tabs.

The differences in PEs and implied yields in the following two tabs are because of different AUD values over the past twelve months and where the currency trades right now. Investors still have to make their own judgment as to where they think the currency will be trading in the year(s) ahead, but at least they have two options to draw initial conclusions from.

For more info about earnings estimates on the FNArena website, see also https://www.fnarena.com/index.php/2017/06/23/new-website-earnings-forecasts/

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
-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 3rd July, 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 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