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Rudi’s View: Portfolio Rotation!

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 | Nov 11 2020

This story features NEXTDC LIMITED, and other companies. For more info SHARE ANALYSIS: NXT

The answer to investor questions this week is: portfolio rotation triggered by positive vaccine news. The FNArena Editor provides some additional colour and insights

By Rudi Filapek-Vandyck, Editor FNArena

Violent share price movements on the local bourse this week, mimicking a similar jump in share price volatility in the US and elsewhere, has led to questions from subscribers and investors.

An example: “Just want to get your thoughts on the tech sell off yesterday. Everyone is talking about sector rotation because of COVID vaccine. I am a long term investor and hold Rudi's "quality stocks" such as CSL, MQG, RMD, ALU, APX, PME and NXT. I have done really well on all stocks. Can you please let me know whether this is but short-term volatility?

I intend to provide more background and colour on this week’s vaccine-news and related market movements in next week’s Weekly Insights, so keep an eye out for the email on Monday (if you are a paid subscriber).

In the meantime, a brief update on matters:

Most investors have been trained to look at the share market from a fundamental perspective, normally explained through the forecast profits 1-3 years ahead and the question what exactly has already been priced in of that into today’s share price?

However, nothing is ever as straightforward as that, certainly not in a public forum where fear and greed combine with short-termism, leverage, differences in aspirations and expectations, and a fluid situation in politics, geopolitics and economic conditions and outlooks.

Sometimes, the immediate happenings in the share market are simply the result of large institutional asset managers recalibrating their portfolios.

This week such re-weighting of portfolios was triggered by news that a vaccine to successfully fend off the covid-19 virus might soon come in production.

Such portfolio reassessments do not always have an enormous impact, but during times when markets are extremely polarised, and most investors are on board the uptrend of the winners, it is but logical to expect dramatic consequences.

For investors it is important to understand in most cases the departure of funds from prior winners in the share market is not necessarily a negative view on the quality or the outlook of these companies.

It’s just that if economies can recover faster next year on the back of a successful vaccine, and the world no longer has to face more lockdowns as is currently still the case in Europe, for example, than those stocks trading on extremely low valuations offer a reasonable prospect for outsized gains.

The last time share markets were hit by an extremely volatile portfolio rotation was in late 2016 when investors decided inflation is coming back, a view temporarily carried by bond markets at that time, and portfolios started selling defensives and yield stocks, as well as small cap growth, in favour of piling in on resources and banks.

Many an investor got caught out at that time, including the FNArena-Vested Equities All-Weather Model Portfolio which experienced multiple days when not one single stock in the portfolio would rise while indices kept surging higher.

Long story short: it lasted less than five months, and twelve months out every single stock in the portfolio had recovered and was trading at a higher price level, oft significantly higher.

I don’t think the current portfolio rotation has the same built-in potency, also because the road to recovery, with or without one or multiple vaccines, is less straightforward as the narrative that gripped the collective mindset in 2016.

That 2016 narrative, by the way, proved incorrect later on, as I was always convinced it would be, but such is the force in a public forum: the majority can be wrong, but they do decide where share prices are heading in the short term.

This is not to dismiss the fact that positive news about vaccines will change the dynamics for equities in that it will make share price momentum trends a whole lot less polarised as we have seen thus far in 2020.

In simple terms: the huge gap between the winners and losers will narrow, broadening the base that has been carrying this year’s bull market.

It does not, I don’t think, break the uptrend that has characterised share prices for the likes of NetxDC ((NXT)), Xero ((XRO)), Woolworths ((WOW)), ResMed ((RMD)), et cetera.

Companies that enjoying the benefits from tectonic changes taking place, will still be enjoying these benefits in years to come.

Admittedly, maybe some of the exuberance should come out that had been priced in, but the share market can be quite efficient when it has to, and maybe that has already occurred by now?

Those who have access to FNArena’s Australian Broker Call Report will have noticed some brokers have already started updating on sectors for the post-covid environment.

First observation: most re-adjusted price targets and valuations are still above today’s share prices. See the Report for more details.

What is not in today’s Report, is an impromptu update on local supermarkets by Citi, which in essence mirrors the comment I made above in a more generalised sense: all three of Woolworths ((WOW)), Coles ((COL)) and Metcash ((MTS)) are now enjoying firm, multi-year trends of increasing volumes and rising grocery inflation.

Irrespective of vaccine-news and portfolio rotation, Citi has kept a Buy recommendation for all three.

And that, I think, is the real message for investors whose portfolio might have taken a hit this week. Know thy stocks, and know why you held them in the first place.

More to follow in next week’s Weekly Insights.

(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. 

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