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Cautious, Cashed Up, Looking For Direction

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 | Apr 11 2019

This story features CSL LIMITED. For more info SHARE ANALYSIS: CSL

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

Cautious, Cashed Up, Looking For Direction
-Not The End, Says Prudential

-Conviction Calls
-Retail REITS And The (Invisible) Risk
Have Your Say – The CSL Challenge
Rudi On TV
Rudi On Tour

[Non-highlighted parts will appear in Part Two on Friday]

By Rudi Filapek-Vandyck, Editor FNArena

Cautious, Cashed Up, Looking For Direction

I am probably not revealing any big secrets when I state the local share market is getting the heebies jeebies every time the 2018 high comes within spitting distance.

This despite reassurances from technical analysts, or at least some of them, the market's bias remains to the upside. Thus far there has been no appetite to push the ASX200 too far down because, you know, Trump and Xi might actually announce something concrete and that would put equities on a higher level pretty quickly.

Investor dilemma was put on notice by the team of global strategists at Citi. On their assessment, any calls for recessions and bear markets and the like are way, way, way too early and totally overblown at this stage, but, on the other hand, further upside for global equities between now and year-end is estimated at the grand total of… (wait for it)… 2%.

Specific stock selection and allocating additional funds into pullbacks therefore look like the strategies that might generate highest returns over the next eight months.

Citi strategists are banking on a weaker US dollar to assist with further gains in US equities and Emerging Markets equities, with healthcare, communication services and materials most preferred sectors. The latter is an umbrella label for miners and energy producers, often also including contractors and engineers to both sectors, as well as certain old legacy inclusions such as Amcor and Incitec Pivot.

Just as an aside: I hope everyone agrees the more modern FNArena-specific sector denominations running on the FNArena website are a much more helpful tool than the plain old "materials".

Equally noteworthy, maybe, is that Citi strategists do not like consumer discretionary, utilities and consumer staples, and neither do they like equities in Japan or in Australia (both markets are treated as "underweight" regions).

Strategists at Morgan Stanley fully agree with the weaker US dollar thesis, and with the preference for equities in Emerging Markets, but not so with Citi's assessment for US equities. Morgan Stanley thinks market expectations for US corporate profits remain too lofty and the upcoming quarterly reporting season is going to prove just that (Citi disagrees).

For this reason, Morgan Stanley likes to own more shares outside of the US, as well as an equal weighting into bonds (equal portfolio allocations for equities and bonds) plus an overweight allocation to cash. Readers of my Weekly Insights might remember Morgan Stanley's local market analysts in Australia recently lowered their year-end target for the ASX200 to 5800.

If we consider the team at Citi to represent today's market bulls and their counterparts at Morgan Stanley as representing the bears, then it doesn't look like too much of a stretch to toy with the concept of a share market that makes a lot of moves either way, with potentially lots of rotations underneath the surface, without actually going anywhere in real terms.

As a matter of fact, such has been the situation since mid-February, though the ASX200 index thus far in 2019 peaked at 6263.90 on March 7th. Last year's post-GFC high was registered on August 13th at 6339.20. On Tuesday, the index closed at 6217.

The one element that has investors and analysts and strategists scratching their heads these days is consistent large funds outflows from equities whereas the March quarter of 2019 generated one of the highest returns for equities globally in nearly a decade (since September quarter 2009).

Analysis of data recorded by services like Lipper and EPFR global suggests equity funds posted net outflows of -US$39.1bn during a period when equity indices gained 14%. This sounds bizarre, if not absurd. For good measure: it's not impossible for share markets to rise while investors are withdrawing funds at the same time.

Analysts at BA-Merrill Lynch have pointed out it also happened in early 2016, but back then the circa 5% gain was a lot smaller and so were the withdrawals. So who has been buying when investors were trading in stocks for cash?

Corporate America is one buyer to name in this regard. Think: corporate buybacks. Another source of buying could be professional investors with uncomfortable short positions. Covered options can also make a contribution.

This can explain as to why this year's recovery in US equities has occurred on relatively light volumes. Reportedly, even on days of key data releases -like the labour market data on Friday- total daily volumes still remain some -15% below average. Last Friday, as it were, revealed the second lowest NYSE daily trading volume for 2019 thus far.

Admittedly, indices in the US are near all-time highs and yet another quarterly reporting season is about to commence, so a cautious investment community at this point is not that uncommon. Not with Morgan Stanley strategists around who believe the bias is now weighted towards downside surprises.

And yet, I cannot help but think the Overweight position in cash at Morgan Stanley might be part of the explanation too. Maybe the quick V-shaped recovery in the March quarter took many institutions by surprise. Their dilemma has now become: what to do with cash that remains on the sidelines?

The answer will reveal itself once the trend changes to the downside. If the majority feels Citi is more correct than Morgan Stanley, then the dips will be short and shallow. If more money sides with Morgan Stanley, the opposite is more likely to materialise.

Not The End, Says Prudential

US-headquartered Prudential Financial is the world's tenth largest asset manager, including a long time representation in Australia, but overall media coverage is largely non-existent.

To change the latter, also in a push to strengthen its foothold among local institutions, Prudential sent a small delegation of representatives for its asset management division, Prudential Global Investment Management (PGIM), on a mini-tour through Australia, including president and CEO David Hunt.

The global outlook that is dominating all strategies and decisions across various asset classes and geographies at PGIM can be summarised with one sentence: bond yields and interest rates will remain historically low for a very, very, very long time.

During a meeting with local media on Tuesday, Hunt explained how PGIM's fixed income division had been buying government bonds with their ears pinned back in 2018 as the firm was convinced the year marked an aberration in the long established trend, rather than marking the setting of a new trend that would push bond yields sustainably higher.

The Prudential view implies no outbreak in inflation for the foreseeable future, potentially more rate cuts from central banks around the world, and definitely not the end of Quantitative Easing (QE).

To paraphrase Mark Twain: all those reports about the end of QE are greatly exaggerated.

Have Your Say – The CSL Challenge


It's probably one of my key achievements since starting FNArena in 2002; to get investors interested in owning shares in CSL ((CSL)) and similar robust, high quality, sustainable growth stories, in defiance of general perception that stocks trading on a high PE multiple can never be owned but for a short term momentum play.

Over the years I have received many supportive emails and vocal encouragement from FNArena subscribers and investors elsewhere. At the end of last week's presentation to ASA members in Sydney, one elderly investor approached me with the words "CSL is such a wonderful company, why would you ever sell it?"

I think time has arrived we started sharing some of those stories with investors who are new to the CSL Challenge. From investors to investors. I am hereby asking those who own CSL shares to write down their motivation, memories, experiences, et cetera in order to share them with other investors.

Make it as detailed/generalised and as long/short as you like. Send it to, preferably with reference "CSL Challenge".

You don't have to do it completely pro bono. An innocent hand at the FNArena office will pick at random three contributions that will receive one bottle of wine each. To be eligible, make sure you also indicate whether you prefer red, white or rose. We'll pick one winner for each choice.

I'd say we close this invitation by April 15th, but let's not procrastinate too long. Get onto it right away! We take care of the wine selection.

Rudi On TV

My weekly appearance on Your Money is now on Mondays, midday-2pm.

Rudi On Tour In 2019

-ASA Melbourne, May 1
-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22
-AIA Adelaide, SA, June 11
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(Part One of this story was written on Tuesday 9th April 2019. It was published on the day in the form of an email to paying subscribers, and will be again on Thursday as a story on the website. Part Two will be completed on Wednesday, 10th April 2019 and published on the website on Friday).

(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 the direct messaging system on the website).



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 $420 (incl GST) for twelve months or $235 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible):

(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.) 

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