Rudi’s View: My Concern And Conviction Calls

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As market sentiment remains positive, maybe this year's biggest threats are excessive optimism and rising bond yields?

Inside the first Rudi's View update in the new calendar year:

-It's Still A Bull Market, However…
-Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

It's Still A Bull Market, However…

Welcome to 2021. What a year it's been already, and we're still less than two weeks into the new calendar year.

Probably the most important topic to start off with in the new year that is 2021 is that I have come to the conclusion that last year's exuberance and exceptional gains from taking risk won't likely remain without consequences this year.

To put it in simple terms: I think investors should prepare for a lot more volatility than what has occurred post April last year, and potentially for quite some nasty times to the downside.

This new bull market is by no means "over", but the easy gains seem to have been made. Below is the message that was sent out to investors in the FNArena/Vested Equities All-Weather Model Portfolio this morning:

Dear Investor,

Today we will be sending through a number of changes to the FNArena/Vested Equities All-Weather Model Portfolio.

The current changes to the model, are a risk management strategy designed to reduce the impact of any potential equity market sell off. It is highly unlikely that 2021 will simply continue the relatively straight-line recovery global equity markets have experienced since the brief bear market in March-April last year.

Driven by widespread optimism and confidence in the economic recovery, alongside US government stimulus plans and ongoing support from central banks around the globe, nothing seems to be able to upstage the ongoing uptrend.

Meanwhile, US bond yields are creeping upwards as general market optimism is feeding into anticipation of a return of consumer price inflation and possibly even a relaxation in central bank stimulus later in the year.

The risk here is that broad optimism is pricing in too much too early, while the risk for tangible disappointments is real and plausible. Most importantly, were bond yields to continue their upward trajectory this will lead to a re-pricing of all other assets, a major risk that needs to be heeded at a time of unbridled market optimism and historically elevated valuations for equities.

Within this context, the investment committee believe it is but prudent investors start taking precautions for a pause in the current uptrend, under a modest scenario outcome, or for a severe market correction in case irrational exuberance and "what could possibly go wrong?" meet the reality of slower growth and falling forecasts, if not a general reset of valuations.

As per always, the exact timing of such events, as well as the exact response by market participants is extremely difficult to predict. As a prudent investor, FNArena thinks it's better to act early than wait until it might be too late. More cash on the sidelines provides for optionality when the tide turns.

The above is why we are making multiple changes to the All-Weather Portfolio today.

With Kind Regards.

For proper context: I am by no means suggesting sell everything and hide under the bed, but for prudent investors it seems best to start reducing risk when markets are happy to ignore just about everything, including rising bond yields. The latter is what worries me this early in the new year.

When I sat down behind my desktop pc this morning, I had the intention to write a lot more about my concerns and new strategy for the year ahead, but an overzealous Ord Minnett (see today's Australian Broker Call Report) scuppered that plan. Life here at FNArena is never 100% predictable. I shall follow up with more details in the days ahead.

Conviction Calls

For investors with a suitable appetite for micro caps and above average risk, Ord Minnett made a big call on Monday morning, predicting Aurelia Metals ((AMI)) shares could well double over the year ahead. This emerging mid-tier gold and base metals producer with three assets in New South Wales could prove the next big opportunity in the sector if Ord Minnett's "Buy with Conviction" proves correct.

See Monday's Australian Broker Call Report for more details.

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Analysts at Morningstar have updated their selection of Best Stock Ideas in Australia and New Zealand. Morningstar's methodology for identifying opportunities among equities is heavily skewed towards "fair valuation" (above/below), so no surprise a2 Milk ((A2M)) has now been added to the list, as well as InvoCare ((IVC)).

Morningstar believes a2 Milk can grow at 13% per annum over the next ten years and on this basis the share price today is seen as inexpensive. InvoCare is equally battling near-term headwinds, and is seen as attractive because industry dynamics are anticipated to revert back to normal this year as society adjusts and copes with the covid-19 pandemic.

Other companies listed as Best Stock Ideas are Avita Therapeutics ((AVH)), Brambles ((BXB)), Challenger ((CGF)), Cimic Group ((CIM)), Computershare ((CPU)), G8 Education ((GEM)), Link Administration ((LNK)), Spark Infrastructure Group ((SKI)), Southern Cross Media Group ((SXL)), Viva Energy Group ((VEA)), Westpac ((WBC)), Whitehaven Coal ((WHC)), and Woodside Petroleum ((WPL)).

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Analysts at Bell Potter equally published their selected best stock picks for 2021. Here the selection runs across industries and sectors:

-For banks & general insurers: Macquarie Group ((MQG)), ANZ Bank ((ANZ)), and Auswide Bank ((ABA))
-Diversified Financials & Fintech: Life360 ((360)), Pendal Group ((PDL)), Afterpay ((APT)), Laybuy ((LBY)), Challenger ((CGF)), Praemium ((PPS))
-LICs and LITs: MFF Capital Investments ((MFF)), L1 Long Short Fund ((LSF)), and WAM Alternative Assets ((WMA))
-Agriculture and fast moving consumer goods: Inghams Group ((ING)), Costa Group ((CGC)), and Elders ((ELD))
-Technology: Uniti Group ((UWL)), Adacel Technologies ((ADA)), and TechnologyOne ((TNE))
-Discretionary Retail: City Chic Collective ((CCX)), and Domino's Pizza ((DMP))
-Engineering & Construction: GR Engineering Services ((GNG))
-Industrials: Johns Lyng Group ((JLG)), PSC Insurance ((PSI)), RMA Global ((RMY)), Carbon Revolution ((CBR)), Mader Group ((MAD)), Emeco Holdings ((EHL)), Flight Centre ((FLT)), and Rhipe ((RHP))
-Healthcare & Biotech: Avita Therapeutics, Paradigm Biopharmaceuticals ((PAR)), Kazia Therapeutics ((KZA)), Mesoblast ((MSB)),Immutep (IMM)), Starpharma ((SPL)), Aroa Biosurgery ((ARX)), and CleanSpace ((CSX))
-Emerging Companies: PointsBet ((PBH)), and Resimac ((RMC))
-Resources & Energy: Nickel Mines ((NIC)), Aeris Resources ((AIS)), Regis Resources ((RRL)), Beach Energy ((BPT)), Cooper Energy ((COE)), Coronado Global Resources ((CRN)), Byron Energy ((BYE)), Chalice Mining ((CHN)), and Gold Road Resources ((GOR))

(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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