Big Switch In Market Sentiment

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FLT

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

-Resources Stocks: What's The Problem?
-Big Switch In Market Sentiment
-Insurers Versus Climate Change
-Conviction Calls: Ord Minnett, Shaw, Citi, Morgans
-Rudi's Public Appearances
-Rudi On BoardRoomRadio
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

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

Big Switch In Market Sentiment

By Rudi Filapek-Vandyck, Editor FNArena

You don't need a pair of rose tinted glasses to see market sentiment has perked up in October.

Since peaking in the closing week of April, at 5924, Australian shares have found the going too tough to handle and even after rediscovering positive momentum in the second week of October, the ASX200 is still more than 1% below the April high, but it is closing in rapidly.

The switch in sentiment is clearly visible on the bar chart below, taken from FNArena's Overnight Report which is published daily. Actually, it is from The Monday Report as the report changes name on the opening day of each week. The chart is one of few improvements we have been adding to the website in recent weeks.

Now that the always unpredictable September month is behind us, surely local funds managers, assisted by investors of all colours and sizes, must feel emboldened to put more money back to work inside the domestic share market?

Their confidence would have received a big boost from the latest data analysis by analysts at JP Morgan (subsequently replicated by Ord Minnett). According to the research, Australian equities are member of a select group of stock markets globally that has experienced a positive final quarter performance in each of the past seven years.

Not only has Australia shown a rare 100% hit rate, the average return has been 4.1%. This compares with the MSCI World Index on average returning 3.4% and an average return for the September quarter of only 0.8%. Best performing sectors for the quarter are usually healthcare and financials, reports JP Morgan, with both outperforming the broader market by quite a margin, on average.

Maybe there's a relationship with the Aussie dollar usually weakening as year-end approaches? Only one sector has fairly consistently generated a negative return for the December quarter; energy, thanks to Brent crude prices usually falling as Christmas draws near.

The chart below shows fresh funds flowing into superannuation funds in Australia have been merely parked into cash and deposits in recent months. Deutsche Bank analysts rightfully conclude these funds will be allocated to asset classes, including domestic equities. The question is whether this process has started in October?

Amidst all attention seemingly focused on the share market's sideways movement since May, with the ASX200 until recently failing to break through 5800 on the upside, investors might have missed the fact total return for the calendar year to date is approaching 7%, believe it or not.

Add in the fact most banks are yet to report and pay out final dividends, plus JP Morgan's unmistakably positive research, and a positive movement leading into the new calendar year can possibly translate into yet another year of double-digit return, or close to, and that's certainly a contrast to general market commentary in Australia.

One final comment to add is all of this is taking place against mounting concerns in the US about valuations and a potential correction, also because it has been eons since US equities have experienced a decent pull-back. Such concerns, however, have been lingering for a long while and from an isolated fundamental point of view, it's hard to see why US investors would choose to start selling down their market over the next couple of weeks.

Hence any correction over there will have to be of technical nature. Or is Trump's rampaging frustration (and White House disorder) finally coming home to roost?

Theoretically I'd agree the biggest threat for Australian equities probably lies with a correction in US equities, but I wouldn't be betting on it happening anytime soon. My personal thoughts are probably reflecting the majority view in global financial markets. Ironically, that's when the foundations are being laid for the next market correction; when nobody sees it coming.

Small cap stocks are back in favour and one only has to observe strong momentum for the likes of a2 Milk, Bellamy's, Mineral Resources, Beach Energy, Altium, WiseTech Global and Blackmores to grasp the validity of that statement.

Deutsche Bank strategists warn investors not to get sucked in as the domestic economy remains tough, the Aussie dollar has probably done its dough and small cap valuations look a lot less attractive than six months ago. Careful stock picking is their advice to investors looking to jump on board for the next three months.

Insurers Versus Climate Change

It wasn't that long ago when insurers' focus was on climate change and its possible effects on the sector and its chances for survival.

Then came the big change in sentiment and insurers, wouldn't you know, could well become beneficiaries, not victims, in a world more frequently ravaged by hail storms, floods, tornadoes, drought and bush fires. The thinking behind this switch in sector view was that every time the sector experiences huge losses due to a spike in claims, insurance premiums increase the following year, returning insurers back to profits, plus some.

Well, not so, apparently. Deutsche Bank analysts released the chart below last week and it clearly shows the above is yet another myth waiting to be exposed at the next turning point.

What Deutsche Bank's historical data analysis shows is that premiums do spike higher following disaster years, but the effect is fleeting and temporary on each occasion. On most recent occasions, spikes in premiums remain rather modest and they hardly seem to compensate for the suffering that preceded.

Having said this, analysis by Morgan Stanley suggests insurers in Australia shouldn't be too afraid of the upcoming cyclone season in Australia. Dry weather El Nino conditions and extreme wet weather in strong La Nina years are the worst scenarios for insurers, shows Morgan Stanley research. Luckily for the industry, this year should see rather weak to neutral La Nina conditions; this should translate into a rather average year for claims.

Morgan Stanley's prediction is backed up by the Bureau of Meteorology which, at this point, anticipates not more than a "typical" cyclone season, meaning between ten to 13 cyclones between December and March, of which no more than four, on average, reach Australia's coast.

While nothing is set in stone as yet, Morgan Stanley points out the difference between a neutral year for damage claims because of cyclones, storms and floods compared with a heavy La Nina year can be as high as 60% for insurers.

The Bureau of Meteorology has flagged some risk remaining of La Nina conditions developing by December, so Morgan Stanley is not taking anything for granted just yet.

Conviction Calls: Ord Minnett, Shaw, Citi, Morgans

One of the stocks that has remained on my radar this year is Flight Centre ((FLT)). Most analysts covering the stock cannot reconcile the sharp recovery in share price from the lows in March-April, and they certainly don't seem prepared to reconsider their negative view now the share price has rallied from circa $28 back then to $50 by late August.

Flight Centre shares have settled around $45 since.

Yet those in favour of buying the shares remain convinced management is on a winning streak, and the share price has much further to go. Ord Minnett slapped a price target of $53 on the stock back in August, accompanied with the sole Buy recommendation for the eight stockbrokers monitored daily by FNArena (see Stock Analysis on the website).

The stockbroker making the most noise about Flight Centre, and showing the most conviction behind its positive view on the company/stock, is Shaw and Partners. The latter reiterated its Buy rating, and $52 price target, while explicitly stating "our conviction in our BUY rating remains".

Both Ord Minnett and Shaw place their faith in management's focus on reducing costs as a key ingredient for improving overall returns for the company over the next 3-5 years. Shaw expects "cost growth will be significantly curtailed, enabling the leverage in the business to drive earnings growth over at least the next few years resulting in a substantial build in free cash".

The flip side of the argument is currently being supported by analysts at Morgan Stanley who seem on a mission to convince investors Australian household are under the pump, or they soon will be, and this will have a pronounced impact on spending patterns, and thus on companies whose well being is dependent on consumers spending.

Morgan Stanley believes Flight Centre is one of the companies most likely to be affected. No guessing why the latter has the lowest price target for the stock ($38) and an Underweight/Cautious industry view.

****

Have share prices for Australian bricks and mortar retailers been pared back too far in anticipation of the Amazon-impact? Public opinion remains as divided as ever. Meanwhile, share prices remain well below analysts' price targets, with exception of Harvey Norman ((HVN)).

Discretionary retailing analysts at Citi released their findings on Monday; Super Retail ((SUL)) and Premier Investments ((PMV)) are currently undervalued, JB Hi-Fi ((JBH)) and Harvey Norman not so. Citi sees further weakness ahead for the latter two from the moment Amazon makes its actual presence felt on Australian soil.

Offshore experience shows, say Citi analysts, retailers in the DIY (Auto and Hardware), discount department stores (also known as "DDS") and Food categories have to date experienced little impact from Amazon.

****

Precious metals specialists at Citi have grabbed the opportunity to put gold and gold exposure back on investors radar, because, says Citi, geopolitical tensions are back and this means investors need portfolio protection/hedges, in particular with equities and bonds broadly overvalued.

Citi analysts also have a canny admission to make: most investors seeking leverage to gold buy into gold equities. Historically, however, this strategy has not worked, and this time around, history is likely to repeat. Citi thus recommends physical gold over gold equities.

Exceptions are possible, and the analysts have come up with a short list of global gold producers whose share price is most likely to outperform the metal itself, the chosen few are Northern Star ((NST)), Randgold, Evolution Mining ((EVN)), Perseus Mining ((PRU)) and Pretium. Three gold producers are considered least likely candidates to outperform gold; Harmony Gold, Zhongjin Gold and Gold Fields.

As far as gold bullion is concerned, Citi expects the gold price to average US$1,312/ounce in 2H17, rising to US$1,350-1,400/ounce by 2019-2020. Citi analysts also anticipate the gold industry's all-in costs (AIC) will follow the price of gold higher, as years of unsustainable austerity measures unwind.

****

Stockbroker Morgans has been making multiple changes to its various Model Portfolios, as at the end of September. The Income Model Portfolio has taken up entitlements in Macquarie Atlas Roads' ((MQA)) accelerated rights issue, while IPH ltd ((IPH)) and Suncorp ((SUN)) remain on the watch list with the intention to accumulate more whenever opportunity announces itself.

The Balanced Model Portfolio has added Cleanaway Waste Management ((CWY)), plus added more shares to the existing position in IPH Ltd.  The Growth Model Portfolio added Domino's Pizza ((DMP)), while reducing exposure to Reliance Worldwide ((RWC)) and increasing ownership of BT Investment Management ((BTT)).

Note to paying subscribers: updates on Conviction Calls have been a regular feature in my Weekly Insights stories since early February this year, with only a rare exception. For past updates: see Rudi's Views on the FNArena website.

Rudi's Public Appearances

One of the additions we've made to the website is incorporating Rudi on TV and Rudi On Tour into the Rudi's Views section of the FNArena website.

Regular readers of Weekly Insights know both overviews of respectively my appearances on Sky Business and presentations throughout the country already are standard inclusions in the weekly email that lands in most readers' inbox every week.

From now onwards this information can be easily accessed by visiting Rudi's Views on the website, which also remains the easiest route to my weekly updates and analyses on the FNArena website, including an archive stretching back more than ten years.

Rudi On TV is updated before the start of each week. It goes without saying, last minute changes can happen any time. Communication about last minute changes will continue via Twitter.

Rudi On BoardRoomRadio

Last week's audio interview:

https://boardroom.media/broadcast/?eid=59dc644b43412343aeab2ed9

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, 1pm-2pm, Trading Day Live
-Thursday, between 7-8pm, interview on Switzer TV
-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 16th 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).

****

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