Rudi Interviewed: Have Cash, Can Be Patient

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It has become the 'unofficial' tradition in recent years: an interview with Livewire Markets ahead of yet another corporate reporting season in Australia. Below is a sub-edited transcript from last week's interview, released this week by Livewire (also available on YouTube).

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Interviewer: Hello, and welcome to Livewire markets. I'm Allie Selby, and over the last few weeks markets have continued to do what they do best; climbing a wall of worry, despite calls of calamity that is to come. But if there's one man who will definitely say how it is, it is FNArena's Rudi Filapek-Vandyck, thank you so much for joining us today for this reporting season premiere.

Rudi: My pleasure. Let's keep the tradition ongoing.

Interviewer: Rudi, What do you think investors can expect?

Rudi: I think it will be more polarised than usual and I think it will be a case of paying attention to detail. The dynamics in the US are now different from Australia. In the US, there is a growing perception, correct or incorrect, that earnings might be bottoming. In Australia, we're still staring towards further falls, although those are general averages.

If we look into the details, we see that those responsible for those falls locally are predominantly miners, energy companies and the banks. Take them out, plus retail and the REITs as well, and it appears there are segments in the market that are actually looking forward to an acceleration in growth.

These will be the two poles in this market that we are about to witness in August. And beyond, as I very much doubt all questions will be answered this August.

Interviewer: Are there any early themes that have emerged during the confession season?

Rudi: To my surprise, confession season has been quite mild, even though it has returned; we hadn't seen it for a while. Still, confession season has been rather mild and this might put pressure on the outlooks provided in August.

The one thing that should catch investors' attention from overseas experiences is it would appear companies whose share price has performed well this year, even if they beat expectations, that share price might still tank. And vice versa; companies whose share price has lagged this year, in some cases they even miss forecasts, but the share price still goes up.

So we might have opposite dynamics this season. We've seen a few examples locally, but we will have to wait and see. It's still two weeks before we really are into the thick of it, locally. But if that's the new trade, investors might have to adjust their strategies.

Interviewer: That's definitely interesting. I feel like we've seen a lot of market commentators say that expectations are still too high. Do you agree?

Rudi: They are falling, and they are falling quite rapidly in Australia. But again, I think we should look at the details. Analysts tend to be behind the curve, usually they are, so we'll see lots of adjustments and it will be a case of segment by segment, company by company. Many companies will see their forecasts drop. In general, expectations are that, on average, forecasts will drop.

For Australia, the average forecast is for negative growth next year. Dividends in aggregate will shrink this year and the expectation is this is only step one; dividends will drop further next year. Again, if we look into the details, forecasts for bank dividends this year are still okay; actually they look quite good.

It's the miners and the energy companies, the cyclicals that are reducing their dividends. We have already seen BHP Group ((BHP)) and Rio Tinto ((RIO)) doing exactly that. Those are the prospects we are looking forward to in Australia.

Interviewer: So are you avoiding those companies in this reporting season?

Rudi: Well, I'm not a big investor in cyclicals in the first place. But I do think the major mistake investors can make here is to look backwards in terms of dividends, because in particular those sectors will be cutting the dividend.

Interviewer: Are there any stocks that you're watching in particular that you think will have, maybe, a really juicy reporting season?

Rudi: More than just a few. The top of the market is obviously very much dependent on banks and resources, but if you peel away the Top100, or let's say the Top20, there are companies that stand out and will do well, even though the outlook is quite benign for the Australian economy.

Unfortunately, those companies are not necessarily on everyone's radar because these companies do not necessarily trade on a single digit PE. You can easily mention Aristocrat Leisure ((ALL)), which does not report in August. But it includes CSL ((CSL)) as well, and Goodman Group ((GMG)), and Woolworths ((WOW)).

Interviewer: Any small caps?

I noticed expectations are growing ahead of earnings results for Audinate Group ((AD8)), SiteMinder ((SDR)), Fineos Corp ((FCL)), and Data#3 ((DTL)); these are often mentioned. There are also the contractors and engineers. There's definitely a trend ahead of August where analysts are increasing their forecasts for this sector.

One sector I'd like to highlight is the healthcare sector; in the past two decades at arm's length the best performing in Australia, and it really is at arm's length. Since covid, that sector has been lagging. Think Fisher & Paykel Healthcare ((FPH)), ResMed ((RMD)), Ramsay Health Care ((RHC)), CSL, Sonic Healthcare ((SHL)) – all are lagging the market.

The interesting thing is analysts covering this sector are pretty much waiting for the pivot point when that sector becomes attractive again. Maybe August could provide that pivot point. Otherwise, it might be February next year.

Interviewer: Let's talk about that. I feel like all the signals are pointing in different directions at the moment, for the market in general. What signals are you watching to know when to pivot?

Rudi: The difficult circumstances that lay ahead of us, they do not impact the market as a whole. There's always the difference that when, for example, Fortescue Metals ((FMG)) has a tough time ahead of itself, then maybe for a ResMed or a CSL their time has arrived.

That's the polarisation we have in this market. For some of the laggards, maybe their time will come when it's still too early for the retailers and the REITs, and for some of the cyclicals.

I think that's more important than seeing the market in general. If the share market outlook looks quite benign from here, that's predominantly because BHP and other iron ore producers, and the banks, represent such a big chunk of it.

If you cast your net wider, expectations are very strong for insurers this reporting season. That's not simply QBE Insurance ((QBE)) and Insurance Australia Group ((IAG)) only, but also the private health insurers and, in addition, the brokers, Steadfast Group ((SDF)) and AUB Group ((AUB)).

A company that is not often mentioned in this context, is Fineos Corp; it operates in the slipstream of these very strong dynamics for insurance companies, which is now translating in better dynamics operationally.

Interviewer: On the other side of the ledger are interest rate beneficiaries; we've seen a lot of tech companies rally strongly this year. Do you see that continuing?

Rudi: It's all in the hands of the bond market, really. That sector has really seen a revival simply because the bond market provided relief, and the share market just went along with it.

The other element is resilience in the face of tough economic conditions. I couldn't help but noticing for REA Group ((REA)), and for WiseTech Global ((WTC)), and for Carsales ((CAR)), plus a number of others… forecasts, valuations and price targets are going up. Those stocks have already performed really, really well.

I think the message here for investors is: it's not just a low PE that gives you value in this market. It can be on higher PEs.

Another thing that will likely come to the fore this August as well is artificial intelligence, AI. It's the one big theme that has driven the tech sector globally. When we're getting excited locally it's all about NextDC ((NXT)) and Macquarie Telecom, now Macquarie Technology Group ((MAQ))…

Interviewer: …and Megaport ((MP1))…

Rudi: … Yes, and maybe a little bit of Appen ((APX)). I am wondering whether, maybe, Dicker Data ((DDR)) could also be a beneficiary. Maybe Telstra ((TLS)) is a beneficiary. Hopefully we'll find out in August.

Interviewer: Are there any sectors where sentiment is so poor that you feel like most of the bad news is already priced in?

Rudi: That's a difficult one. Two sectors that could be on investors' lists are the retailers and the real estate investment trusts (REITs). I still think in both cases there's more bad news to come. I think if you're moving in those sectors you are early.

Again, that's a general view. There are always exceptions. I mentioned Goodman Group earlier. That's also officially a REIT, but it is performing well; not the same as the majority of the sector.

I think the best strategy now is to take a long term view, at least three to five years, and take potentially more bad news on the chin. On the expectation, of course, as long as you don't pick the ultimate bad apples, that those share prices will come good in three to five years' time.

Those two sectors, all else being equal, also pay good dividends so you actually get paid to wait it out for a while. Needless to say, I think investors should still take on board there is potentially more bad news coming for retailers and for REITs.

Interviewer: Where else are you seeing bad news at the moment? Which areas of the market should investors be steering clear off right now?

Rudi: I am not certain about this whole China stimulus revival. I see a struggling Chinese economy instead. That sector also tends to struggle with higher costs. We just had a season of quarterly production updates and many miners surprised to the downside because they cannot control their costs. I think that's again going to show up in August, and beyond.

Interviewer: Last time you spoke with Livewire was in February and you told us that you're holding 18% cash. That's a lot of cash. Are you still holding 18% cash? How's that cash holding going to change?

Rudi: If you think that's a lot, at one stage last year, in 2022, I had more than 40% in cash. I think I need to create a bit of context.

One of the promises we made when we started managing the portfolio is that we would protect investors' capital to the downside. In very simplistic terms: if your capital goes down by -40% and it then goes up by 50% or 60% the following year, you're still down overall.

If the portfolio only goes down by -3, 4, 5, 6 or -7%, you don't need much to get back in the black. That's one of the reasons why we sometimes move into cash.

Another reason is I am interested in quality companies. When bond yields cause mayhem, their share prices go down. Sometimes by a lot.

To answer your question: the portfolio still has 18% in cash. We're very patient as to how to allocate it. I think the risks have now moved from the macro level to the micro. So now it's about companies underperforming or performing in August. I suspect we'll get a lot of volatility this month, and after August follows September, so I think we can be patient.

That money is looking to be allocated gradually, not in a hurry. For example, I have been a long term fan of CSL. When you see the share price selling off, that's where part of the cash goes to. I am watching many more companies. If their share prices go down, it's time to top up.

Interviewer: Apart from volatility, what are you looking out for to actually put that 18% cash to work?

Rudi: Some companies I would like to own but I no longer do because I have been surprised by how their share prices have performed. Like, for example, Pro Medicus ((PME)) and WiseTech Global. With 18% in cash I'm thinking: please sell those shares, halve the share price, and I'll be buying!

Interviewer: Thank you so much for your time. I really enjoyed that chat.

(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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