Rudi’s View: This Crisis Ain’t Over

This story features AMCOR PLC, and other companies. For more info SHARE ANALYSIS: AMC

On Saturday, FNArena Editor Rudi Filapek-Vandyck sent out the following message to subscribers:

Dear Subscriber,

It looks like Friday might have been the bottom in this share market rout, at least in the short term, and on Monday Australian shares might try to emulate at least part of the strong rally that occurred on US equity markets last night.

My message to you is nevertheless to contain your enthusiasm. This is not the end of the crisis. It's simply further evidence that, as I wrote in the week past, volatility works both ways. In this case, we are witnessing volatility showing itself to the upside.

To understand what is happening this month is understanding why share markets are bouncing higher. The fall-out from the spreading pandemic was putting global credit under immense pressure. Central banks around the world identified what was happening and they have used their liquidity taps to prevent another Lehman Bros moment for the global financial system.

This has triggered the relief rally around the world on Friday.

Let's not make the mistake to assume everything will now revert back to pre-February normal. There is still a pandemic that needs to be taken care of. And the impact on businesses and economies is yet to reveal itself.

Simply put: Friday's relief rally doesn't tell us anything about where share prices will be in 3, 6, 9, 12 months from today. My advice to you is therefore the same as over the past few weeks: keep looking for High Quality companies with the least risk of issuing a profit warning.

But also: keep as much in cash as what allows you to sleep at night.

I know that many among you have been paying attention to my research into All-Weather Performers. This morning I have updated the lists on the dedicated section on the website. Amcor ((AMC)) has moved to the section with Question Marks (under attack from a short seller), while I have removed the Question Mark for both Wesfarmers ((WES)) and Woolworths ((WOW)).

The section Emerging New Business Models has lost half of the stocks as I want you to now focus on the most solid, least risky business models with the least question marks surrounding.

I remain convinced that my research has identified some of the strongest and most dependable business models listed on the ASX. History only adds to my conviction these companies will take good care of your precious money. As you will observe when you conduct your own research, many of these share prices have not weakened as much as many others during the recent rout.

There is an incredibly important message in this observation. For investors, as opposed to short term traders and speculators, the best value opportunities are most likely not among the shares that have fallen the most. This remains a time to de-risk. In many ways, the crowd out there has already done this for us. It has shown which stocks are riskier and more vulnerable than others.

I won't make this message too long. There will be more to read and to consider in Monday's Weekly Insights. But I will highlight two more points:

CSL ((CSL)) is a fan-ta-bu-lous company, and it is listed right here on the ASX. It is also one of the few that even at the depth of selling pressure on Friday was still UP for the calendar year. It was one of the first to rally on Friday, and it ended up 11.88% on the day. If this stock still isn't in your portfolio, then I am sorry, I no longer understand what you are trying to achieve.

Secondly, I have not been a fan of Australian banks, and I still am not. I do know many among you own banks because you want yield/income. What is not well understood, I think, is that zero interest rates and all kinds of central bank controls and market interventions lay ahead, plus bad debts are almost certainly to rise from here.

Businesses will go bankrupt, both listed and unlisted.

The combination of these exogenous forces make it probable that Australian banks will need to further announce dividend cuts in the year(s) ahead. The most important message that comes out of Bear Markets is that a lower share price does not remove any of the operational risks. Quite to the contrary. Be mindful of this.

If you must own a bank in Australia, pick CommBank ((CBA)). Its share price has fallen significantly less than its peers. There is that message again. Don't ignore it. Macquarie Group ((MQG)) is an even better choice.

In terms of yield/income stocks, I very much prefer less risky propositions such as APA Group ((APA)), Dexus Property ((DXS)), Transurban ((TCL)), Atlas Arteria ((ALX)) and Viva Energy REIT ((VVR)), to name a few alternatives.

Let there be no misunderstanding: all companies and business models are now at risk of lower earnings this year and next. There are no exceptions. But some companies are more at risk than others, that's what should be everybody's focus from here onwards.

Like: do you really want to be in oil and gas when Russia and Saudi Arabia have declared war on US frackers? Hint: oil and gas equities were the worst performer prior to the massive sell-off. Again: don't ignore the message.

For those who want more ideas than my lists under All-Weather Performers, I suggest you re-read the stories I wrote in recent weeks. Each of "Lose The Losers, Back The Winners" and "Bear Market Lessons And Observations" contains additional lists and suggestions.

I assume you are all aware there is a dedicated section on the website, Rudi's Views, where my stories from the past are grouped together.

As per always, stay sane. Don't lose your nerve. Do not feel pressured. Do lots of reading and thinking. That's exactly what I am about to do for the remainder of this weekend.

To be continued on Monday, see Weekly Insights, and beyond.

All the best,

Your Editor

(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.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms