Rudi’s View: Bear&Bull Market To Continue (?) In 2024

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In this week's Weekly Insights:

-All-Weather Model Portfolio
-Bear&Bull Market To Continue (?) In 2024
-Conviction Calls & Best Ideas
-Holidays Are Beckoning

By Rudi Filapek-Vandyck, Editor

All-Weather Model Portfolio

Last week's Weekly Insights included some estimates on the performance of the FNArena/Vested Equities All-Weather Model Portfolio.

Alas, those estimates were incorrect, for which my sincere apologies.

Below are the updated statistics as per WealthO2, the platform on which the All-Weather Portfolio is administered. WealthO2 was recently renamed Dash.

The third column from the top depicts the total return (TR), before fees, after first identifying capital return and income.

Bear&Bull Market To Continue (?) In 2024

Traditionally a lot of time and effort is spent on whether share markets are in a bear or bull phase, and the public debate often relies on flawed and ultra-subjective signals and interpretations, such as the price action itself at face value.

One observation that might be more valuable to investors is that underneath the surface, share markets have polarised, often in extreme fashion, and the pendulum of share price momentum swings between positive and negative cycles from one year into another.

Last year (2022) generating return from Australia was all about oil & gas and metallurgical coal, but owning shares in Woodside Energy ((WDS)), Whitehaven Coal ((WHC)) and Co in 2023 has been quite the opposite experience.

Most shares in lithium producers and developers have given back all the previous gains, and then some.

The rollercoaster ride in technology stocks has not been less volatile; strong rallies throughout 2021, a deep fall into the abyss in 2022, then a remarkable comeback in 2023.

Most major indices, including those in the US, believe it or not, are still below or around the index levels of December 2021 (two years ago).

Instead of debating whether share markets are in a bear or in a bull market, maybe we should accept different parts of markets have experienced opposite conditions post covid. This then raises the obvious question: can we identify segments that might be moving from bear to bull in 2024?

My personal attention goes out to bond proxies and healthcare companies. Both market segments have (largely) failed to fully participate during the positive times post 2020, while still feeling the downward pressure during the not-so-positive times.

Loyal shareholders in Charter Hall ((CHC)), Centuria Capital Group ((CNI)) and Mirvac Group ((MGR)), to name but three examples, but also in CSL ((CSL)), Sonic Healthcare ((SHL)) and Ansell ((ANN)) have had little to smile about for three long years.

The current share market rally into year-end is injecting new life in these share prices. I note the recent H1 release by Fisher & Paykel Healthcare ((FPH)) has been well-received. Sigma Healthcare ((SIG)) is coming back to life as well. Shares in CSL and ResMed ((RMD)) are now up nearly 15% and 15.5% respectively from recent lows.

It goes without saying, if global bond yields continue to fall, and the level by late 2024 should be lower than where yields are today, all else remaining equal (lower growth, lower inflation), the previously negative impact should reverse for those segments that have been held back because of high inflation and rising bond yields.

Healthcare stocks and REITs would be my number one and two nominations for a positive reversal in underlying momentum. The two segments have been the outperformers locally in November.

On Monday, I discovered portfolio strategists at JPMorgan share the same mindset, having upgraded Technology and Healthcare to Overweight and turning REITs into their largest portfolio Overweight.

Consumer Discretionary, the positive surprise package of 2023, has been downgraded to Underweight. Banks and Staples, even though they are among the market laggards, both remain in Underweight allocations.

Swings and roundabouts. The years past have shown market momentum can reach extreme levels on the positive side, but it can also be extremely frustrating on the opposing side, even without any negative newsflow from the companies involved.

The big question that is on most investors' minds today is whether small and midcap companies might also be ready for a positive momentum reversal? Early indications are money is starting to flow back into the smaller cap stocks, which will be a big relief for those investors whose mandate is limited to these market segments.

The past two years have been exceptionally challenging for small cap investors, both in Australia and elsewhere. The flipside is this segment now offers potential for outsized gains. It is not difficult to see why overall enthusiasm and optimism are noticeably on the rise.

Stockpickers at DNR Capital are among the enthusiasts, advising investors should favour quality businesses that are well managed, with strong balance sheets, and with lots of growth potential longer term, as an offset to short term concerns.

DNR favours intellectual property services provider IPH Ltd ((IPH)), fast fashion retailer Lovisa Holdings ((LOV)), and Credit Corp ((CCP)).

While it is easy to fall for the comeback narrative for these market segments, and cheaper valuations provide further support for the thesis, stock selection remains all-important nevertheless.

Recent sell-offs in share prices of Healius (HLS)), EML Payments ((EML)) and AMP Ltd ((AMP)) -on the back of company-specific negative newsflow- are the warning signals for investors not all companies are high quality, well-managed, with strong balance sheets, and ready to meet or beat expectations.

The one error an overly enthusiastic investor can make at this point is to draw confidence from the resilience in economies and in global share markets to date, and ignore that, arguably, the risks for disappointment are higher in the six to nine months ahead.

As Wilsons strategists put it this week: "We believe the odds are still tilted towards a US soft landing, although the risk of recession appears higher in 2024 than in 2023." Don't be surprised if Australian households go on a spending pause in early 2024 while the prospect of yet another RBA rate hike remains a genuine threat.

The average Price-Earnings (PE) ratio for the local market is an above average 15.5x while underlying earnings forecasts remain vulnerable to more downgrades.

Thus far, cyclicals are reporting better-than-expected performances, also because economic momentum has so far remained stronger-for-longer. However, everyone with an eye on past experiences instinctively feels this can switch extremely quickly when economies turn south.

In recent weeks, positive revisions for the likes of James Hardie ((JHX)), CSR ((CSR)), Boral ((BLD)), Inghams Group ((ING)), Steadfast Group ((SDF)) and Seven Group Holdings ((SVW)) have been met by negative revisions for companies including Brickworks ((BKW)), City Chic Collective ((CCX)), Integral Diagnostics ((IDX)), Healius, Pexa Group ((PXA)), Sonic Healthcare, Nufarm ((NUF)), Harvey Norman ((HVN)), and the local lithium sector in general.

Net-net these downgrades and upgrades are currently offsetting each other with the average EPS growth forecast for ASX200 companies positioned for a negative -6.1% in FY24, projected to be followed up by positive growth in FY25 and FY26 of 5.5% and 3.9% respectively. As per always, there are a lot of divergences hiding behind those averages.

The good news, yet again, is the local AGM season has not delivered the tsunami of negative market updates that some forecasters might have feared. All in all, report analysts at Macquarie who have been paying close attention, this year's AGM season has delivered more upgrades than downgrades to company guidances.

On a relative comparison with last year's AGMs, this year has been a net positive experience, with less profit warnings and less severe sell-offs in response. Macquarie believes this bodes well for the February results season, when conservative guidances might be ready for an upgrade?

FNArena's tracking of out-of-season financial reports can be accessed here: https://www.fnarena.com/index.php/reporting_season/

An opposing view to Macquarie's optimism might be the observation more companies on the ASX have been flagging a skew towards the second half of FY24. The obvious observation to add here is that economic conditions in 2024 might be a lot weaker than they are today, which automatically places a big question mark behind those second-half-will-be-better guidances.

Among the companies that are counting on a better second half are ALS Ltd ((ALQ)), Amcor ((AMC)), Credit Corp, Elders ((ELD)), Incitec Pivot ((IPL)), News Corp ((NCP)), Telstra ((TLS)), Orica ((ORI)), Sonic Healthcare, and Stockland ((SGP)).

One added observation is companies continue to struggle with higher input costs, in particular through higher labour costs.

Healthcare companies Integral Diagnostics and Healius both had to issue profit warnings recently with labour costs one of the factors impacting. I'd be inclined to think this remains also a major threat for Ramsay Health Care ((RHC)).

Macquarie also nominates Estia Health ((EHE)) and G8 Education ((GEM)) as at higher risk for the same reason. Others have pointed out the local supermarket operators as suffering from higher staff costs as well.

One observation from the August reporting season was that a higher interest burden is only just starting to impact on companies carrying too much debt. This feature is likely to become more important in the year(s) ahead.

In terms of stockbrokers' Buy-Hold-Sell ratings, one of the proprietary data sets from FNArena, the percentage of Buy (and equivalent) ratings has seldom been as high as in 2023.

While this can be partially attributed to the inclusion of Bell Potter and Shaw and Partners, the real reason, I believe, is the extreme polarisation in the share market post 2020.

One key offset to the renewed share market optimism is that fixed income and alternative investment options are back, and they are looking at their most attractive in at least a decade.

Common logic tells me this means a lot of funds on the sideline, maybe even a lot of funds currently invested in the share market, might flow into lower risk, high yielding alternatives.

It seems but a smart move for any retiree who prefers longevity and predictability of income over the dangers of being exposed to the day-to-day volatility of individual companies on the stock exchange.

Fewer available funds for local shares won't stop share prices from moving higher if that is the trend for the year ahead, but it might imply some typical low volume market characteristics (as we've all noticed in the two years past) might stick around for longer.

We'll have to wait and see, of course, whether and what exactly the impact might be, but I'd be inclined to not fill up my boots with 'value' small caps, as has been suggested by some, as there might simply not be enough money flowing around until there is a direct and obvious catalyst for the share price.

In other words: your typical investor in beaten-down, lower quality, smaller cap 'value' might in future be forced to bring along a lot more patience, and conviction, in order to stay the course and witness the end result of that strategy.

At this stage, this is but speculation, of course. Time will tell.

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Paying subscibers have 24/7 access to my research into All-Weather Performers on the ASX:

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

More reading/recent editions:

-All-Weather Portfolio In 2023

https://www.fnarena.com/index.php/2023/11/29/rudis-view-all-weather-portfolio-in-2023/

–Quality In Stocks, What Is It Good For?

https://www.fnarena.com/index.php/2023/11/22/rudis-view-quality-in-stocks-what-is-it-good-for/

-Between Perception And Reality

https://www.fnarena.com/index.php/2023/11/15/rudis-view-between-perception-reality/

-Outlook 2024, Is History Our Guide?

https://www.fnarena.com/index.php/2023/11/08/rudis-view-outlook-2024-is-history-our-guide/

Conviction Calls & Best Ideas

What if the RBA stops hiking interest rates?

Analysts at Macquarie have done the historical research and concluded when the RBA pauses share market preference is reserved for your typical defensives, bond proxies, and large caps.

A suggested basket of stocks would consist of ResMed, CSL, Coles Group ((COL)), Endeavour Group ((EDV)), Northern Star, Newmont Corp ((NEM)), Orora ((ORA)), NextDC ((NXT)), Telstra, The Lottery Corp ((TLC)), and Transurban ((TLC)).

Reports Macquarie: "Health, Staples and Gold outperformed after an RBA pause when there was a US recession, with earnings growth usually the key driver of their outperformance."

But will history repeat in 2024?

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The November update on Morningstar's list of Best Stock Ideas in Australia has seen the inclusion of WiseTech Global ((WTC)).

The other thirteen on the list are:

-a2 Milk Co ((A2M))
-ASX Ltd ((ASX))
-Aurizon Holdings ((AZJ))
-Domino's Pizza ((DMP))
-Fineos Corp ((FCL))
-Kogan.com ((KGN))
-Lendlease Group ((LLC))
-Newcrest Mining
-ResMed
-Santos ((STO))
-TPG Telecom ((TPG))
-Ventia Services ((VNT))
-Westpac Banking ((WBC))

Newcrest Mining is still represented even though the company is no longer listed on the local bourse. We can but assume Morningstar staff has too many tasks to complete in too little time and the idea is to migrate to Newmont Corp which is listed on the ASX and now fully owns all Newcrest operations.

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Quant analysts, move aside! Analysts at Research as a Service (RaaS) have taken up the challenge, applying five screening filters on 15 ASX-listed retail stocks in trying to identify those that represent the best return potential for the year ahead.

The underlying philosophy is summarised as follows:

"Good returns can be made from buying well-run, highly-leveraged retailers before the cycle turns, particularly if earnings expectations and earnings multiples are low."

And the verdict is…

-Dusk Group ((DSK)), seller of home fragrance products, has come up with the highest score – the only one that scored highly on all five filters applied, currently trading on a low PE and with low expectations to beat.

-Furniture retailer Nick Scali ((NCK)) came out second, only failing on the low PE screening, while youth retailer Universal Store ((UNI)) failed to screen highly on the "low expectations" filter, and came in third.

The five screenings applied are easy comparables in like-for-like sales, a high gross margin, a strong business model, a low FY25 PE ratio, and low expectations for earnings growth.

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Morgan Stanley's Australia Macro+ Focus List has gone through a number of changes in November as all of Altium ((ALU)), Car Group ((CAR)), QBE Insurance ((QBE)), and Woodside Energy were added.

Aristocrat Leisure ((ALL)), CSL, Goodman Group ((GMG)), Macquarie Group ((MQG)), Telstra, and Treasury Wine Estates ((TWE)) remain included.

Have lost their inclusion: IDP Education ((IEL)), Northern Star Resources, Rio Tinto ((RIO)), and Suncorp Group ((SUN)).

Holidays Are Beckoning

Today's is the final Weekly Insights for 2023.

Your Editor will be enjoying Belgian beers, Australian wines and, hopefully, plenty of sunshine in the weeks ahead.

Thanks to all of you who read my weekly writings; maybe not every week, but regularly nevertheless, and to those who comment and provide feedback.

Thanks to those who cannot help themselves and direct their disappointment and criticism towards us. At the very least, you're keeping myself and the team at FNArena grounded.

Lucky us, we receive far more positive responses than those that are truly nasty. We should blame the tough conditions that have dominated financial markets in the past two years, maybe?

As yet another eventful calendar year draws to its close, it's time to reflect and to reload the battery. Won't be long before we all start zooming in on what the February reporting season might reveal.

I hope you enjoyed reading Weekly Insights as much as I did researching and writing them. It is truly and genuinely a never ending exercise.

I still feel privileged to be in the position I am.

I wish you all Happy Holidays and a safe entrance into the new calendar year.

Weekly Insights shall resume in late January, prior to the tsunami of corporate results in February.

Be happy, stay healthy and, above all, stay sane in the meantime.

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(This story was written on Monday, 4th December, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).

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