Rudi’s View: Investor Worries, Gold, Westpac, and Conviction Buys

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 | Apr 03 2024

In this week's Weekly Insights:

-Everybody Worried?
-Gold As Insurance
-Westpac, Technology Laggard
-Conviction Calls and Best Buys
-Rudi Unplugged - Send In Your Questions

By Rudi Filapek-Vandyck, Editor

Everybody Worried?

Bubble. Hype. Overpriced and overbought. These are all popular terms used by market commentators and investment experts in relationship to share markets in the US and locally in recent times.

Not a day goes by without various comparisons with the Nasdaq in 2000, Japan in the late 1980s, 1987, the Nifty Fifty era or the 1930s being made. It's not difficult to understand why investors are getting nervous, including subscribers here at FNArena.

And yet, I am not overly worried. When it comes to those aforementioned historical comparisons: my view is they are way, way, way too simplistic, with too much hyperbole attached.

Okay, after two strong quarters, as we've just experienced, it's not unusual for markets to pause and consolidate, they might even pull back, who knows? On short-term technical indicators, markets are overbought, so there's reason to expect some weakness at some point.

But I wouldn't hold my breath for a Grand Correction. I simply don't see a valid reason for this to occur, other than wishful thinking by those who want the market to undergo a big correction out of self-interest.

Things can change, of course, and the worst change to occur is rapid decelerating economic momentum alongside a further pick-up in inflation. That is a combination financial markets will not take lightly.

But thus far there's no evidence this is the scenario for the rest of the year.

I do agree with the assessments made elsewhere that the easy gains have now been made from the October lows, but this does by no means prevent share markets from posting further gains.

Markets will likely encounter more volatility from here onwards, as the path forward will become less uniform, with more side-steps and alternative scenarios to be considered by those whose job it is to make forecasts about economies and financial markets.

Underlying sentiment is still positive and likely to remain supportive as long as economies hold up, companies keep up with forecasts, inflation trends lower and the prospect of central bank rate cuts remains on the horizon.

I don't think the reducing number of potential rate cuts this year or next is the point to focus on for investors.

Markets are confident rate cuts will come. That remains the key foundation under this year's share market strength, together with technological innovation (AI, GLP-1s, cybersecurity, etc) and a surprising resilience in consumer spending and economies generally.

Goes without saying, there are no watertight certainties in financial markets, or in life generally, hence a more cautious investor can always transfer some of his equity exposure to cash.

If my comfort and confidence prove accurate, the global up-trend for equities will likely become more inclusive, meaning more money will start flowing into laggards to close the valuation gap with the share market winners to date.

Of course, nothing goes on forever, and things will change, at some point, maybe even without a warning signal first.

I am just not convinced right now is the right time to start worrying about all the bad things that can possibly happen. Let's leave that for another time.

Gold As Insurance

Last week I explained what drives gold, and how, but I did not mention the All-Weather Model Portfolio always carries some gold exposure, currently the equivalent of one stock at around 5%, through the Global X physical GOLD ETF (in AUD).

The reasoning as to why starts with the observation that, when measured over elongated holding periods, the return generated from owning gold falls in line with total return generated from local shares. But gold seldom moves in line with the local index, which implies its outperformance comes during times when equities are facing headwinds.

To some, gold offers diversification. In my world, the comparison with insurance suits best. When opting for insurance, no matter which specific kind, the buyer always hopes it never needs to be called upon, but if/when disaster strikes, it's great to know there's at least partial compensation at hand.

This is how I view gold. It's not a speculative tool for me. I may not even treat it as a genuine investment next to long-term portfolio holdings in CSL ((CSL)), Goodman Group ((GMG)), REA Group ((REA)), TechnologyOne ((TNE)), et cetera. But as a natural insurance policy, gold has a function, if one treats it as such.

The All-Weather Model Portfolio is constantly including some exposure to gold, through an ETF to keep things simple. The exposure itself is at times reduced or extended in line with the risks perceived to the world and financial markets generally.

As I often stated in the past: how much gold you own is directly related to how comfortable you are with the world and the outlook.

Back in 2020, when market mayhem hit through covid, the exposure to gold was (temporarily) increased to 11% of the portfolio. Back in 2022, when global bond markets triggered a devaluation of highly priced risk assets, the exposure was no more than circa 2%, later on increased to the current 5%.

Where I disagree with the army of true gold bugs (and financial system doom forecasters) is that I do not blindly treat gold as the natural safeguard against inflation and fiat currency pricing power erosion that must always be owned in copious amounts.

History is very clear about this: there are times when gold does not perform, and might even cause a lot of disappointment through negative returns (remember the 1990s?), plus it's a big bonus to understand how and when gold stands ready to close the gap with the share market's performance.

See also last week's update:

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