Rudi’s View: Met Coal, Banks, GenAi & Buying-The-Dip

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Updates on strategies, model portfolios, key picks, best buys and conviction calls.

By Rudi Filapek-Vandyck, Editor

It appears the team of commodity analysts at Morgan Stanley didn’t need to see Anglo American’s Grosvenor mine on fire to express a positive view on the outlook for metallurgical coal.

A visit to China had already convinced the analysts the market was grossly under-appreciating how much of supply-constraints are occurring inside the country.

Now Anglo American’s misfortune is adding further pressure, Morgan Stanley has made met coal its number one commodity pick.

Investors ready to ride the rally are guided towards the following key stock calls:

-Yancoal Australia ((YAL))
-Whitehaven Coal ((WHC))

Plus Teck Resources in the US and Shougang Fushan in China.

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Strategists at Citi remain of the view the US economy will experience a recession in the second half of this year.

It is this base case premise that has Citi forecasting three Fed rate cuts before year-end, with the first one to be delivered in September.

Starting off from that forecast, Citi strategists believe it is inevitable there will be a -5%-10% sell-off in US share markets in the months ahead, as investor optimism meets economic reality.

Current expectations remain high, but slowing growth ahead will make it increasingly more difficult for companies to continue beating forecasts, including for those megacap growth companies, Citi argues.

The good news is: Citi remains positive on the outlook for US markets, with the strategists advocating investors buy into pullbacks and prepare to buy into the upcoming correction.

In terms of sector exposures, the strategists suggest companies with compelling longer-term outlooks, perhaps enhanced by generative Ai potential, provide a means of navigating economic weakness, while benefitting from an eventually less hawkish Fed.

In addition, cyclicals typically get valuation support as Fed easing unfolds, providing an attractive barbell to Growth, Citi finds. Defensives should benefit from a clearer line of sight to earnings growth.

Citi’s upgraded projection now sees the S&P500 finishing year-end around 5600 (currently above 5500) with scope to rise further to 5800 in 2025. The anticipation is that earnings growth, and thus also investor interest, will broaden as the year progresses, with the index no longer relying on a small basket of megacaps and Ai-growth companies.

Peers at Goldman Sachs also see the S&P500 at 5600 by year-end and they too believe elevated multiples mean today’s outperformers in US markets could be subjected to outsized punishment in case of an earnings ‘miss’ in the quarters ahead.

It is Goldman Sachs’ view that all ‘beats’ will still be rewarded, irrespective of whether companies trade on low or High PE multiples, but any disappointment from a company on high multiples is likely to be punished harshly, while a low PE stock might be viewed more favourably.

The next quarterly reporting season in the US starts in less than two weeks, but those concerns are more focused on earnings reports later in the year.

Morgan Stanley‘s global investment committee’s recommendation is for investors to not extrapolate the first six months, which have been surprisingly fantastic though carried by a small base of outperformers, and focus on Quality Value that is as yet still reasonably priced.

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Barrenjoey Chief Equity Strategist Damien Boey has decided it’s time to pivot the investment portfolio in favour of a more defensive positioning.

Have thus been removed from Barrenjoey’s Bucket List of conviction ‘long’ ideas: Sandfire Resources ((SFR)), South32 ((S32)), Lynas Rare Earths ((LYC)), Incitec Pivot ((IPL)), and Rio Tinto ((RIO)).

In their place the list has seen the inclusion of Aussie Broadband ((ABB)), Insurance Australia Group ((IAG)), AUB Group ((AUB)), ResMed ((RMD)) and CSL ((CSL)).

Barrenjoey’s Bucket List of conviction calls includes the following selection:

-Woolworths Group ((WOW))
-Viva Energy Group ((VEA))
-TechnologyOne ((TNE))
-Medibank Private ((MPL))
-Steadfast Group ((SDF))
-Aussie Broadband
-QBE Insurance ((QBE))
-Santos ((STO))
-Northern Star ((NST))
-Ampol ((ALD))
-Insurance Australia Group
-Ventia Services Group ((VNT))
-AUB Group
-Aristocrat Leisure ((ALL))
-Brambles ((BXB))
-Origin Energy ((ORG))
-Cochlear ((COH))
-Car Group ((CAR))
-Metcash ((MTS))
-Aurizon Holdings ((AZJ))
-Cleanaway Waste Management ((CWY))
-ResMed
-Orora ((ORA))
-Telstra ((TLS))
-CSL

Boey’s reasoning for a more defensive portfolio positioning is because global risk appetite is currently much higher than the economic outlook deserves it to be. Even with the prospect of central bank rate cuts underpinning positive sentiment, Boey thinks it’s more likely risk appetite will, at some point, pull back.

Potential triggers include the Bank of Japan diverging away from its global peers, and devaluations of JPY and/or the Chinese Yuan.

In Australia, the Barrenjoey strategist worries about the RBA raising rates further in response to stubbornly high inflation. With excess savings depleting rapidly among Australians, consumer spending remains at risk of slowing further, with negative flow on effects for the labour market.

Barrenjoey is thus underweight banks and domestic rate-sensitive cyclicals and believes Insurance, Staples, Telcos, Healthcare and Utilities are defensive in this environment.

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Strategists at Wilsons concur the next RBA meeting will be a ‘live’ one, making the June quarter CPI release scheduled for July 31 all-important.

Wilsons is not yet on board with an RBA hike in August, but has the timing for the next rate cut postoned to the second half of next year.

As such a long lag in comparison with central banks elsewhere represents a headwind at the margin for the local share market (stronger AUD), Wilsons is Underweighted the Australian share market.

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If anyone thought FNArena’s Special Report on GenAi, investing in the next industrial revolution (78 pages) is too much to read on a lazy afternoon, RBC Capital has just released 108 pages in much finer print, titled A cross-sector view of GenAI. An exploration of key GenAI themes and implications.

A few snippets from the report:

“We see GenAI as the next disruptive mega-trend: Similar to the PC, Internet, mobile phones, cloud computing or social media, we believe GenAI will follow as the next disruptive mega-trend.

“Over the recent years, we’ve seen the market move through various cycles, many of which have brought opportunities for accelerated growth as well as consolidation of companies that could not adapt to changes.

“Reflecting on the past few years, the pandemic came in as an unforeseen event that accelerated digital transformation but also created new gaps in a world that was both more distant and connected at the same time.

“While we think these trends have changed the ecosystem, our view is that GenAI will be an even larger and more disruptive mega-trend than people realize, and as we’ve noted before, GenAI itself will be disruptive, but people that leverage GenAI will be even more disruptive.”

[…]

“There are still limitations that need to be solved for GenAI to scale as security and data privacy, model hallucinations, limited access to GPUs and the high cost of training a model remain top concerns.

“We believe that access to talent and GPUs likely favors larger vendors, though we will watch out for disruptive private companies that can maneuver faster. Within internet, there will also be regulatory attention that comes eventually, though at this point we think the DOJ runs the risk of potentially having to sit on the sidelines to watch what platform-fueled anticompetitive behavior starts to prove out before it can begin to regulate.

“Within industrials and power, we’d note that datacenters supporting AI will likely need to have advanced configurations to support the massive computing requirements and the requisite operating practices supporting these at scale.”

Among the most notable direct beneficiaries, the report has included ASX-listed Infratil ((IFT)), Macquarie Technology ((MAQ)), and NextDC ((NXT)) alongside international companies Accenture, Adobe, Microsoft, Moody’s, Thomson Reuters, and others.

FNArena has published a 78 pages Special Report on GenAi, the fourth industrial revolution with lots of in-depth insights, forward projections, and useful links to companies for investors in the Australian stock exchange.

This Special Report remains exclusive for paying subscribers. Paying subscribers can download their copy via the Special Reports section on the website.

RBC also publishes a Global Energy Best Ideas List and here Woodside Energy ((WDS)) has joined as a replacement for Santos.

***

From Goldman Sachs’s recent update on commodities:

“we remain most positive copper & aluminium and met coal on forecast market deficits, and remain bearish thermal coal and battery materials (lithium, nickel) on forecast market surpluses, and we continue to expect the benchmark 62% iron ore price to average US$100-105/t over the remainder of the year.”

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Jarden‘s update on the local travel industry shows the broker’s two sector favourites are Flight Centre ((FLT)) and Webjet ((WEB)) over Corporate Travel Management ((CTD)) and Helloworld Travel (HLO)).

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JP Morgan‘s update on Emerging Companies (“small caps”) shows Superloop ((SLC)) is the Top Pick and Dicker Data ((DDR)) is the broker’s Bottom Pick.

The first is lauded for its strong operational momentum on still an undemanding valuation, while the market is seen as too optimistic for Dicker Data’s outlook which includes slowing top line growth.

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Evans and Partners‘ two preferred specialist A-REITs are Arena REIT ((ARF)) and Waypoint REIT ((WPR)).

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Stockbroker Morgans update on Best Ideas comes with the view that stocks will continue to diverge in performance as interest rates normalise and investor focus will zoom in on earnings quality, market positioning and balance sheet strength.

Morgans’ Best Ideas now includes Elders ((ELD)), having included ALS Ltd ((ALQ)), TechnologyOne, Clearview Wealth ((CVW)), GUD Holdings ((GUD)) and Stanmore Resources ((SMR)) during last month’s review. The last company that was removed from the list is Objective Corp ((OCL)) which was removed in early June.

Morgans’ stock pickers are not a big fan of the expensive flight-to-defensive sectors and instead prefers quality cyclicals and mid- & small caps. Preferred sectors include staples, healthcare, financials, travel, agriculture, resources, and energy.

Banks and telcos remain notable Underweights.

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UBS’s list of Most Preferred stocks no longer includes Harvey Norman ((HVN)), Reliance Worldwide ((RWC)), or Seek ((SEK)). Their replacements are Brambles ((BXB)), James Hardie ((JHX)), NextDC, Super Retail ((SUL)), and Universal Store ((UNI)).

The broker’s list of Least Preferred stocks has seen the removal of Bega Cheese ((BGA)), Super Retail (!!), and Vicinity Centres ((VCX)). Instead Aurizon Holdings, Pilbara Minerals ((PLS)) and Reece ((REH)) have been added.

The full list of Least Preferred stocks now includes:

-Aurizon Holdings
-ASX ((ASX))
-Bank of Queensland ((BOQ))
-CommBank ((CBA))
-Cochlear
-Domain Holdings ((DHG))
-Pilbara Minerals
-Reece
-Scentre Group ((SCG))

UBS’s full list of Most Preferred stocks:

-AGL Energy ((AGL))
-BlueScope Steel ((BSL))
-Orica ((ORI))
-Origin Energy ((ORG))
-Rio Tinto
-Santos

-AUB Group
-Computershare ((CPU))
-nib Holdings ((NHF))
-QBE Insurance
-Suncorp Group ((SUN))

-Brambles
-Coles Group ((COL))
-CSL
-James Hardie
-NextDC
-Super Retail
-Telstra ((TLS))
-Treasury Wine ((TWE))
-Universal Store
-Worley ((WOR))
-Xero ((XRO))

Model Portfolios, Best Ideas & Conviction Calls

Ord Minnett analysts’ Conviction List consists of the following:

-Alliance Aviation Services ((AQZ))
-ARB Corp ((ARB))
-Cosol ((COS))
-EQT Holdings ((EQT))
-Lindsay Australia ((LAU))
-Pinnacle Investment Management ((PNI))
-Red 5 ((RED))
-Regis Healthcare ((REG))
-Select Harvests ((SHV))
-SRG Globval ((SRG))
-Waypoint REIT
-Webjet
-Whitehaven Coal

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Goldman Sachs’s High Conviction calls for the Asia-Pacific region includes only four ASX-listed companies:

-Lynas Rare Earths
-Woolworths Group
-Qantas Airways ((QAN))
-Xero

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Jarden’s select list of preferred small cap stocks in Australia (“Emerging Companies key picks”):

-Dicker Data
-Lovisa Holdings ((LOV))
-Siteminder ((SDR))
-Nick Scali ((NCK))
-Universal Store Holdings
-Temple & Webster ((TPW)).
-Telix Pharmaceuticals ((TLX))
-Regis Healthcare
-Pepper Money ((PPM))
-Inghams Group ((ING))
-National Storage ((NSR))
-Ingenia Communities Group ((INA))
-Karoon Energy ((KAR))
-Domain Australia Holdings ((DHG))
-NRW Holdings ((NWH))

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Morningstar’s Best Equity Ideas for ASX-listed stocks currently contains 14 inclusions. Morningstar’s approach is traditionally centred around ‘cheap value’:

-TPG Telecom ((TPG))
-Domino’s Pizza ((DMP))
-Bapcor ((BAP))
-a2 Milk Co ((A2M))
-Santos
-AUB Group
-ASX Ltd ((ASX))
-Aurizon Holdings
-Ventia Services
-Lendlease Group ((LLC))
-Pexa Group ((PXA))

As well as Fineos Corp ((FCL)), ResMed and Newmont Corp among international ideas.

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Morgan Stanley’s Australia Macro+ Focus List contains the following 10 stocks:

-Aristocrat Leisure
-Car Group ((CAR))
-CSL 
-Macquarie Group ((MQG))
-Origin Energy
-Paladin Energy ((PDN))
-QBE Insurance
-Suncorp Group
-Treasury Wine Estates
-Woodside Energy

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Morgan Stanley’s Macro+ Model Portfolio consists of the following 32 constituents:

-ANZ Bank ((ANZ))
-CommBank ((CBA))
-National Australia Bank ((NAB))
-Westpac Bank ((WBC))
-Macquarie Group ((MQG))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))
-Goodman Group ((GMG))
-Scentre Group ((SCG))
-Stockland ((SGP))
-Aristocrat Leisure
-Car Group
-Domino’s Pizza ((DMP))
-The Lottery Corp
-Wesfarmers
-James Hardie ((JHX))
-Orica ((ORI))
-Coles Group ((COL))
-Treasury Wine Estates
-CSL
-ResMed
-AGL Energy ((AGL))
-Origin Energy
-Telstra ((TLS))
-Transurban Group
-BHP Group
-Newmont Corp
-Rio Tinto
-South32
-Paladin Energy
-Santos
-Woodside Energy

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Wilsons‘ list of Highest Conviction Investment Ideas: TechnologyOne, Worley ((WOR)), Woodside Energy, Aristocrat Leisure, and Collins Foods ((CKF)).

More ideas come with “long term growth” profiles:

-Ridley Corp ((RIC))
-Universal Stores ((UNI))
-ARB Corp ((ARB))
-Neuren Pharmaceuticals ((NEU))
-Pinnacle Investment Management ((PNI))

Among Resources stocks, there are two favoured ideas:

-Beach Energy ((BPT))
-Liontown Resources ((LTR))

And there’s a Speculative basket too:

-Immutep ((IMM))

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Wilsons’ Focus Portfolio‘s largest overweight remains towards growth companies, including a large overweight to the healthcare sector. The largest underweight allocation remains for local banks. The Portfolio also holds a slight overweight allocation to resources, but this is due to “active positioning” in green metals and energy (underweight iron ore).

In terms of individual stocks, as mentioned earlier, IDP Education has been removed with TechnologyOne added and exposure to Webjet enlarged. The Focus Portfolio encompasses the following:

Consumer Discretionary
Aristocrat Leisure, Lottery Corp, Collins Foods, Breville Group, Webjet

Energy
-Woodside Energy

Financials
-ANZ Bank, National Australia Bank, Westpac, Macquarie Group, Insurance Australia Group ((IAG)), Netwealth Group, Steadfast Group ((SDF))

Healthcare
-CSL, ResMed, Telix Pharmaceuticals ((TLX))

Industrials
-Worley ((WOR))

Information Technology
-TechnologyOne, Xero

Materials
-BHP Group ((BHP)), Amcor ((AMC)), Evolution Mining ((EVN)), Mineral Resources ((MIN)), Arcadium Lithium ((LTM)), Sandfire Resources ((SFR)), South32 ((S32))

Real Estate
-Goodman Group, HealthCo Healthcare & Wellness REIT ((HCW))

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Macquarie Wealth’s recommended Growth Portfolio:

-Goodman Group
-Seek ((SEK))
-Aristocrat leisure
-Northern Star ((NST))
-CSL
-Computershare ((CPU))
-NextDC ((NXT))
-Flight Centre ((FLT))
-Mineral Resources
-Cleanaway Waste Management ((CWY))
-Steadfast Group
-Arcadium Lithium
-ResMed
-Pexa Group
-Treasury Wine Estates
-Viva Energy ((VEA))
-Xero ((XRO))

Macquarie Wealth’s recommended Income Portfolio:

-Suncorp Group
-Telstra
-National Australia Bank
-Westpac Bank
-ANZ Bank
-BHP Group
-CommBank
-Premier Investments ((PMV))
-Coles Group ((COL))
-Viva Energy ((VEA))
-Atlas Arteria ((ALX))
-Aurizon Holdings ((AZJ))
-APA Group ((APA))
-GPT Group ((GPT))
-Deterra Royalties ((DRR))
-Metcash ((MTS))
-GUD Holdings ((GUD))
-Charter Hall Retail REIT ((CQR))
-Amcor

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Shaw and Partners Research Monitor for the June quarter shows the broker’s ASX100 Large Caps Model Portfolio consists of the following ten members:

-Aristocrat Leisure
-Domino’s Pizza
-Evolution Mining ((EVN))
-James Hardie Industries ((JHX))
-Pilbara Minerals ((PLS))
-Qantas Airways
-ResMed
-Suncorp Group
-Treasury Wine Estates
-Xero

Preferred exposures among ’emerging companies’ (smaller caps) are:

-Abacus Storage King ((ASK))
-Bannerman Energy ((BMN))
-Black Cat Syndicate ((BC8))
-Global Lithium Resources ((GL1))
-Helloworld ((HLO))
-Metro Mining ((MMI))
-Retail Food Group ((RFG))
-Vista Group ((VGL))
-Tyro Payments ((TYR))
-Webjet

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Back in December, Bell Potter analysts released their stock picks for 2024, ranked by themes and market segments:

-For Listed Investment Companies (LICs); Australian Foundation Investment Company ((AFI)), Plato Income Maximiser ((PL8)), and MFF Capital Investments ((MFF))

-Agriculture & Fast Moving Consumer Goods; Bega Cheese ((BGA)), Rural Funds Group ((RFF)), and Elders ((ELD))

-Technology; Life360 ((360)), WiseTech Global, and Task Group ((TSK))

-Diversified Financials; Perpetual ((PPT)), Regal Partners ((RPL)), and PSC Insurance ((PSI))

-Real Estate; HMC Capital ((HMC)), Dexus Convenience Retail REIT ((DXC)), HealthCo Healthcare & Wellness REIT ((HCW))

-Retailers; Cettire ((CTT)), Propel Funeral Partners ((PFP)), and Accent Group ((AX1))

-Industrials; DroneShield ((DRO)), Austal ((ASB)), Corporate Travel Management ((CTD)), IDP Education, IPD Group ((IPG)), and The Environment Group ((EGL))

-Healthcare; Telix Pharmaceuticals, Cyclopharm ((CYC)), Clarity Pharmaceuticals ((CU6)), Clinuvel Pharmaceuticals ((CUV)), and Immutep ((IMM))

-Gold sector; Regis Resources ((RRL)), and Santana Minerals ((SMI))

-Base Metals; Aeris Resources ((AIS)), Nickel Industries ((NIC)), Mineral Resources, and IGO Ltd ((IGO))

-Strategic Minerals; Lynas Rare Earths ((LYC)), Talga Group ((TLG)), Liontown Resources ((LTR)), and Alpha HPA ((A4N))

-Energy; Boss Energy ((BOE)) and Strike Energy ((STX))

-Mining services providers; Chrysos Corp ((C79)), Matrix Composites & Engineering ((MCE)), and GenusPlus Group ((GNP))

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Also in December, Shaw and Partners released its 10 Best Ideas to benefit from the anticipated small caps’ revival in 2024.

The selected ten:

-AIC Mines ((A1M))
-Austin Engineering ((ANG))
-FireFly Metals ((FFM)), previously AuTeco (AUT)
-Chrysos ((C79))
-Gentrack Group ((GTK))
-Metro Mining ((MMI))
-MMA Offshore ((MRM))
-Peninsula Energy ((PEN))
-ReadyTech Holdings ((RDY))
-Silex Energy ((SLX))

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Macquarie’s ASX Quality Compounders

The highest quality ‘compounders’ as identified by Macquarie quant research inside the ASX300:

-James Hardie
-Cochlear ((COH))
-REA Group ((REA))
-TechnologyOne
-ResMed
-Data#3 ((DTL))
-Pro Medicus ((PME))
-Jumbo Interactive ((JIN))
-PWR Holdings ((PWH))
-Netwealth Group ((NWL))
-Aristocrat Leisure
-Spark New Zealand ((SPK))
-Codan ((CDA))
-Clinuvel Pharmacauticals ((CUV))
-Redox ((RDX))

Given Macquarie’s research strong leaning on the past five years, with high barriers to match, the following 11 companies fell just outside the above list:

-Fisher & Paykel Healthcare ((FPH))
-Medibank Private ((MPL))
-Coles Group
-The Lottery Corp
-Lovisa Holdings
-CSL
-IDP Education
-Pinnacle Investment Management
-ARB Corp ((ARB))
-Breville Group ((BRG))
-Johns Lyng ((JLG))

My research and All-Weather stock selections are 24/7 available for paying subscribers: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

(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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P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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