New Focus For A Changing World

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

In this week's Weekly Insights (published in two separate parts):

-New Focus For A Changing World
-Conviction List: Morgan Stanley, Ord Minnett, Morgans, Shaw
-CBA And The Premium Gone (Vol 5)
-TechnologyOne: A Stumble, Not A Fall
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

[Note the non-highlighted items appear in part two on the website on Thursday]

New Focus For A Changing World

By Rudi Filapek-Vandyck, Editor FNArena

There are times when the share market simply does not want to play according to the script. It seems like the shares we thought about buying yesterday are happily rallying while the ones we own remain stuck in the mud.

Such testing times are part and parcel of the overall investment experience, but they surely can drag out the worst pessimism and self-doubt from even the most experienced among us.

My own assessment still remains such times force an investor to refocus on the strategy and on what type of investor he or she is. This always receives a mixed response. I can see brains around me, or in the audience, instantaneously grinding to a halt.

"Huh? What's he saying? What does that mean? Don't we all want the same thing?"

Yes, it is true, all investors, big and small, experienced or otherwise, want to make money from their investments in the share market. But saying so is akin to stating all Olympians aspire to win a gold medal. They do, but unlike many investors, Olympians do not try to compete in every discipline available.

One does not see the 110 meters hurdles runner turning up next in a water polo game, or at Greco Roman wrestling. Roger Federer will not be joining a Rugby Sevens team. Success, both at the Olympics and in the share market, begins with knowing what you are good at, and what suits you personally, and then putting in the hard yakka.

Even then, there are times when the overall context simply does not suit your style and abilities. If you are experienced enough, and you do your time, you will come to appreciate the true meaning of "making hay while the sun shines" and "battening down the hatches".

The key difference between the share market and the Olympics is at the Olympics every discipline has its own designated territory, while in the share market everything takes place in one single public arena.

Know what you want and what you are after. Don't be distracted by others who happen to also buy and sell shares, but possibly for completely different reasons.

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However, there is no justification for complacency or for ignoring the signs that are available to all of us. It is OK to admire the Great Grand Bull Market that has ruled over US equities since March 2009, and many still see a continuation into 2018, but it should also be obvious by now the rub-off on Australian equities is sparse and minimal.

Yes, disappointing indeed. While US indices are celebrating one record new high after another in 2017, Australia is quietly experiencing a lost decade; ex-dividends, main indices are lower than where they were ten years ago, as measured from January 1st not from the all-time high later that year. Most share prices of blue chip stocks (BHP, Woodside, NAB, Telstra,..) are reflecting this today.

An obvious observation to make here is that, clearly, circumstances and dominant dynamics are not the same for Australian companies (shares) as they are for their peers in the USA. So what are the key differences investors might want to pay attention to and, where possible, incorporate into their portfolios and strategies?

-The Australian share market is far more yield-oriented than most offshore markets. Alas, if prospects of higher interest rates and rising bond yields prove correct, this also means any headwinds will be harder felt;

-Global asset markets in recent years have been dominated by macro-trades and movements, such as central banks' stimulus and tightening, and Australia, representing only 2% of global equities has often been shown the dirty end of the stick by global funds flows. This also applies to Chinese markets opening up to international capital. Recent data-analysis confirms international funds have largely avoided Australia since early 2017;

-Canberra is far from the only political capital in disarray around the globe; think London, Madrid and Washington, but at least the Trump administration is keeping hopes alive for a pro-business agenda. Not so in Canberra where hopes and aspirations have turned into corporate despair and disenchantment. Energy prices are skyrocketing, with no medium term solution in sight. Banks, gold miners, power utilities and LNG exporters are at risk of direct government intervention. Meanwhile, uncertainty over the country's carbon target and policies rules. The previous agenda for more jobs through innovation has sunk into never-never land;

-Gone are the days of the Australian dollar trading above parity against the greenback, but the AUD has mostly remained stronger-for-longer in the post-GFC era, stubbornly ignoring all forecasts for a 6-handle in front of it, let alone a 5. Instead AUD/USD remains close to 80c, with short term journeys on either side of it. Whereas corporates in the USA have had their reprieve through a weaker USD, in Australia such periods of genuine currency relief have been few and far between;

-Similarly, the RBA might have shown itself a steady hand in the post-GFC era, the Australian economy and its finance sector have by far not enjoyed the degree of monetary stimulus employed in North America, Europe, the UK, Japan or China. Financial markets are now leaning towards RBA tightening by mid next year, but I still have my doubts. And so does Westpac's Bill Evans. Either way: the absence of Quantitative Easing has been sorely missed in the domestic market;

-As a previously close-knit, sparsely populated island economy, Australia has felt the disruption from the internet and new technologies much harder than most economies elsewhere. Domestic heavyweight blue chip companies are the oligopolies now forced to defend their market share and clientele. This has weighed upon performance and outlook. Still is;

-The sum total of all of the above is that Australian profits, in aggregate, are in 2017 at the level where they were back in late 2006. Most investors, as well as their advisors, are casually blinded by the world's longest streak in uninterrupted GDP growth, but the share market is all about corporate profits, and growth therein, not in a country's sum-total GDP. Regarding the latter: if it wasn't for resources exports and elevated levels of immigration, there would have been no growth for the Australian economy in recent years;

-The Australian economy, like other developed economies, is made up of 50%-plus in consumer spending. Apart from negative wage growth (adjusted for inflation) and rising electricity costs, the prospect of property prices no longer rising and banks re-pricing their mortgages is weighing upon consumer sentiment and budgets. Forget about Amazon arriving in Australia soon-ish, consumers tightening their belts and changing spending patterns is likely to have a much larger impact on corporate Australia in the year(s) ahead;

-In line with all of the above, I note many share prices for blue chip stocks in Australia are essentially now moving through a broad, sideways channel. Often this channel started back in late 2012/early 2013 so this can serve at least as a partial explanation for the Australian share market's laggard status over the past five years. Such a channel is clearly visible on long term price charts for stocks like CommBank ((CBA)), Suncorp ((SUN)) and Wesfarmers ((WES)), while it is my view stocks like Woolworths ((WOW)), Metcash ((MTS)) and Telstra ((TLS)) are most likely in the process of developing their own sideways channel;

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The most severe impact on corporate profits and the outlook for growth in Australia has come from increased competition through disruption from new technologies and innovations. From FlexiGroup ((FXL)) to Telstra ((TLS)), to Seek ((SEK)), to Myer ((MYR)), to iSentia ((ISD)), to Greencross ((GXL)), to Wesfarmers; in all instances the answer investors might be looking for is the same.

Others, like oil and gas producers, have been hit indirectly with crude oil prices also now caught in a sideways channel, whereas banks and sections of the healthcare sector are now on the receiving end of government policies. Equally, there is a credible case to be made that significant changes will disrupt the wealth management industry in years to come.

For investors the crucial questions to ask are whether today's disruption is ultimately annihilating defensive moats, and whether the leading companies in a given sector are strong and flexible enough to adapt and stay on top. It appears in some hard hit sectors even the strongest can do no better than carving out a long term sideways channel (Wesfarmers, the major banks) while in other sectors even moving sideways is simply not on the cards (retailers, telecommunication).

With this knowledge at hand, investors can deploy multiple different adaptations. They can adopt shorter term trading strategies. They can focus solely on non-affected sectors and companies. They can decide to only invest in affected companies when near the bottom of their established trading ranges. They can opt for passive investment products that eliminate the risk for owning individual stocks. They can decide to invest overseas where a genuinely raging bull market makes achieving positive returns a lot easier.

They also can decide to at least direct some attention, and research, towards today's emerging disruptors in the Australian share market. Smaller companies do carry a higher risk profile, if only because of the potential for elevated share price volatility, but recent years have shown many of ASX-listed "New World" prodigies are not as volatile as many fear and shareholder returns have been much higher than with blue chip stocks under siege.

As such, I highly recommend investors put the following names on their radar (in no particular order):

-Appen ((APX)); global leader in the development of high-quality, human annotated data for machine learning and artificial intelligence
-Altium ((ALU)); high quality developer of PC-based electronics design software for engineers
-Integrated Research ((IRI)); high quality consultant for business-critical computing
-Kogan ((KGN)); Australia's largest online department store
-NextDC ((NXT)); independent operator of data centres in main capital cities
-WiseTech Global ((WTC)); leading global platform for integrated supply chain logistics management 
-Xero ((XRO)); New Zealand based provider of the fastest growing, most advanced cloud oriented accountancy software 

Plus the following beneficiaries from (or non-affected by) today's technological innovations:

-Aristocrat Leisure ((ALL)); strongest sector performer globally now moving into fast growing online gaming
-Amcor ((AMC)) & Orora ((ORA)); strong, solid and defensive growth across international markets
-Corporate Travel ((CTD)); leading B2B travel services provider, worldwide
-CSL ((CSL)); Australia's leading biotech unaffected by governments tightening purses, with ongoing strong growth prospects
-Domino's Pizza ((DMP)); leader in its field, early tech adopter and innovator, currently bottoming out after de-rating since last year
-TechnologyOne ((TNE)); leading IT consultant in Australia helping companies migrating onto the cloud
-Treasury Wine Estates ((TWE)); 25% luxury product with access into Asian middle class

Of course, none of these lists are finite and I am sure once investors refocus their own research and analysis, they will find plenty more examples that can be included, but the above mentioned stocks have established a track record which suggests these success stories won't turn into a fly-by-nighter anytime soon.

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Followers of my research will recognise many of the names mentioned in the two lists above as stocks that are included in my list of All-Weather Performers on the FNArena website (sorry, paying subscribers only) as well as in the FNArena/Vested Equities All-Weather Model Portfolio (see further below).

The Portfolio has essentially gone nowhere over the past three months, and I am sure, given the overall lack of enthusiasm inside the Australian share market overall, this won't come as a surprise to anyone.  Medium to longer term, I remain focused on the threats and opportunities as described above.

The Portfolio does not employ shorter term trading strategies.

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, noon-2pm, Trading Day Live
-Friday, 11.15am Skype-link to discuss broker calls

Rudi On Tour

– I will be presenting in Adelaide on November 14th to members of Australian Investors Association and other investors, 7pm inside the Fullarton Community Centre, 411 Fullarton Rd, Fullarton. Title of presentation: Investing In A Slow Growing World – An Update

(This story was written on Monday 9th October, 2017. This first part was published on the day in the form of an email to paying subscribers at FNArena, and again on the following Wednesday as a story on the website. Part two shall be published on Thursday).

(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

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