Rudi’s View: A Rally With No Earnings Support

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By Rudi Filapek-Vandyck, Editor

Global equities have been climbing the wall of worry for ten long months in 2024 with elevated valuation multiples in particular triggering calls for an imminent correction, if not the inevitable bursting of the so-called ‘everything bubble’.

Instead, all-time records have been broken and bettered, again and yet again. The S&P500 index in the US has set a new record 51 times so far this year, turning 2024 into the best year for US equities since 1997 (so far), generating the 12th best return since 1928 (first ten months).

The latest leg upwards upon confirmation of a decisive outcome in the US election has pushed equity valuations to the next level, as valuation measurements already looked quite stretched when it started. Consider, for example, the yield on US ten year bonds is now higher than the average dividend yield for US equities… for the first time in 22 years.

That tipping point was reached this month as the yield for US shares sank to a ten-year low. The Equity Risk Premium, which pits equities against bond yields, has now fully vanished, leading some commentators to highlight investors are now paying up to take on (equity) risk instead of getting paid for it.

The sentiment was reflected in this month’s Global Investment Manager’s Index from S&P Global Market Intelligence which showed risk appetite at its highest level since April 2021, led by North American investors, as “the mood sours toward defensives”.

Digging into the finer details, it turns out, with the sole exception of April 2021, risk appetite has never been as high as this month in the four-year history of this survey.

Offsetting general unease with where markets are in November, valuation-wise, is the observation that whenever equity indices are up by 20% or more by this time in the calendar year, there are usually still more gains to be had into year-end. It appears the opposite holds true as well in case equities are by now down in excess of -20%.

Added observation: back in 2021 the added gain was 1.37% only, while in 2019 the US market advanced another 4.45%.

Experience tells us the local market does not by default match the US markets, but whatever happens over there remains all-important for what happens on the ASX.

One of the other observations that is receiving quite a lot of attention recently is the wide gap in valuation between US equities and the rest of the world.

The following observation is from a Morgan Stanley report:

“The equity rally this calendar year has been one of the more unusual we have seen. What started in January as a fast embrace of aggressive market pricing of monetary easing (the RBA at one point was priced for three cuts this year) and high hopes for cyclical recovery in earnings trends has devolved into a rather precipitous fall in market earnings, whilst the price paid for them has continued to expand.

“The short answer is yes, as with valuations where they are there is little buffer to absorb endogenous disappointment or any exogenous shock. Indeed, for meaningful upside from here, earnings trends need to start to improve.”

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Trump’s surprisingly strong election win has had a profound early impact on financial markets and not in a positive manner only, as clearly shown on price charts for copper, aluminium and crude oil futures.

Given the man’s rally cry of “I love tariffs”, financial markets are obviously expecting a head-on collison with China once the new administration settles into the White House.

Other pre-conditioned expectations are greater government budget deficits, higher economic growth, higher corporate profits and higher inflation. The debates about all these forecasts have already started, and we will have to find out over the coming year or so whether those are truly the main characteristics for Trump’s second term.

More government borrowing and a renewed pick-up in inflation have already pushed US Treasury yields higher, which is also one reason as to why the rally in equities, certainly in Australia, hasn’t stretched much further. The other factor might be that valuations are looking stretched on known knowns.

One of the set-backs from the rise in global bond yields is a notable retreat in the price of gold bullion. I cannot stop pointing out the irony from the prospect for higher inflation pushing up bond yields and thus pushing back gold, supposedly a protector against price erosion through inflation.

Here one other key factor is also market positioning as many would have added some gold exposure ahead of the US election, as a hedge against potential mayhem and shenanigans that might have happened if Trump had not decisively won the contest.

As is often the case, the trading community is screaming blood and murder about the price of bullion descending from US$2800/oz to below US$2600/oz in such a short time span. Admittedly, it does look rather spooky, until one realises the decline to date is still less than -8%.

That’s the equivalent of a small cap company updating the market it hasn’t quite achieved its revenue or margin target throughout the past three months, easily!

Commodity strategists at ANZ Bank have been quick in responding accordingly, stating this is not a time for investors to abandon the precious metal; “We believe that increasing macroeconomic and geopolitical uncertainties under Trump’s presidency will favour investment in gold.”

The team at ANZ Bank has been negatively surprised by the magnitude of the price pull back to date, but also believes price weakness will prove short-lived. ANZ Bank’s motivation: “Trump’s plans to continue tax cuts beyond 2025 and to increase spending will likely deteriorate the US fiscal situation, and this could pave the way for macroeconomic policy adjustments that would support gold.”

ANZ Bank has a price target of US$2900/oz sometime in 2025.

Part of the philosophy behind the All-Weather Model Portfolio is that some exposure to gold is simply part of the standard asset mix. The Portfolio also prefers exposure to gold rather than to gold miners through the share market, as the latter adds company-specific risks that are preferably avoided.

Trump 2.0: More Uncertainty vs US Resilience

Recent update by Oxford Economics:

“Global growth is highly likely to hold steady next year, but beneath the surface the new US administration and China’s struggles are set to usher in a new, more mercantilist era for the global economy. Trade disruption, volatility in prices, and a new policy mix will determine the winners and losers in 2025.

“Instead, the US administration’s fiscal and trade policies and the reaction they elicit from China and the EU are likely to drive diverging sectoral fortunes and uncertainty around our baseline.”

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Part One of Weekly Insights this week: https://fnarena.com/index.php/2024/11/13/rudis-view-preparing-for-the-trump-years/

Best Buys & Conviction Calls

Ord Minnett’s list of Conviction Calls no longer includes Pinnacle Investment Management ((PNI)) while GQG Partners has been added. The list previously included Red 5 and now includes the gold producer’s merger entity, Vault Minerals.

-Alliance Aviation Services ((AQZ))
-ARB Corp ((ARB))
-Cosol ((COS))
-EQT Holdings ((EQT))
-Electro Optic Systems Holdings ((EOS))
-GQG Partners ((GQG))
-Lindsay Australia ((LAU))
-Qoria ((QOR))
-Regis Healthcare ((REG))
-SiteMinder ((SDR))
-SRG Global ((SRG))
-Stanmore Resources ((SMR))
-Vault Minerals ((VAU))
-Waypoint REIT ((WPR))

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Jarden’s recent update on smaller cap ASX-listed companies (“emerging companies”) has led to the release of 20 Best Ideas, lined up in order of anticipated total return (potential):

-IPH Ltd ((IPH))
-Temple & Webster ((TPW))
-Universal Store Holdings ((UNI))
-Nick Scali ((NCK))
-SiteMinder ((SDR))
-EVT Ltd ((EVT))
-AUB Group ((AUB))

The above are all picked by the broker’s Emerging Companies research team. The following stock picks have been selected by respective sector analysts:

-Inghams Group ((ING))
-Monadelphous ((MND))
-Champion Iron ((CIA))
-Domain Holdings Australia ((DHG))
-Genesis Energy ((GNE))

And then there’s another list of stocks that have equally been selected with High Conviction:

-Pointsbet Holdings ((PBH))
-Telix Pharmaceuticals ((TLX))
-Integral Diagnostics ((IDX))
-National Storage ((NSR))
-Ingenia Communities Group ((INA))
-Karoon Gas ((KAR))
-Pepper Money ((PPM))
-Michael Hill International ((MHJ))

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Wilsons’ Australian Equity Focus Portfolio:

-CAR Group ((CAR))
-Aristocrat Leisure ((ALL))
-WEB Travel Group ((WEB))
-Lottery Corp ((TLC))
-Collins Foods ((CKF))
-Breville Group ((BRG))
-Santos ((STO))
-ANZ Bank ((ANZ))
-National Australia Bank ((NAB))
-Macquarie Group ((MQG))
-Westpac Bank ((WBC))
-Hub24 ((HUB))
-Steadfast Group ((SDF))
-CSL ((CSL))
-ResMed ((RMD))
-Telix Pharmaceuticals ((TLX))
-Worley ((WOR))
-Xero ((XRO))
-TechnologyOne ((TNE))
-BHP Group ((BHP))
-James Hardie ((JHX))
-Evolution Mining ((EVN))
-South32 ((S32))
-Metals Acquisition ((MAC))
-Sandfire Resources ((SFR))
-HealthCo Healthcare & Wellness REIT ((HCW))
-Goodman Group ((GMG))
-WiseTech Global ((WTC))

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Stock pickers at Crestone have released their Best Sector Ideas; an attempt to identify the best in breed business models for major industry group sectors for long-term oriented investors. Anticipated performance over the next three years is part of the key considerations.

The selection consists of 17 companies:

-Aistocrat Leisure ((ALL))
-Ampol ((ALD))
-APA Group ((APA))
-Beach Energy ((BPT))
-Brambles ((BXB))
-CSL ((CSL))
-Goodman Group ((GMG))
-IGO Ltd ((IGO))
-James Hardie Industries ((JHX))
-Lottery Corp ((TLC))
-Macquarie Group ((MQG))
-Metcash ((MTS))
-Monadelphous Group ((MND))
-REA Group ((REA))
-ResMed ((RMD))
-Suncorp Group ((SUN))
-Xero ((XRO))

Crestone’s selection of sustainable dividend growers consists of 22 names. Historically, the stockpickers remind investors, companies that grw dividends consistently can offer superior long-term performance for those who own them.

-Amcor ((AMC))
-Ampol ((ALD))
-APA Group ((APA))
-Atlas Arteria ((ALX))
-Beach Energy ((BPT))
-BHP Group ((BHP))
-Car Group ((CAR))
-Coles Group ((COL))
-Dalrymple Bay Infrastructure ((DBI))
-Iress Ltd ((IRE))
-Lottery Corp ((TLC))
-Macquarie Group ((MQG))
-Metcash ((MTS))
-Mirvac Group ((MGR))
-Pro Medicus ((PME))
-QBE Insurance ((QBE))
-RAM Essential Services ((REP))
-ResMed ((RMD))
-Suncorp Group ((SUN))
-Tabcorp Holdings ((TAH))
-Telstra ((TLS))
-Westpac Banking ((WBC))

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Ord Minnett’s most preferred choices on the ASX:

-AGL Energy ((AGL))
-Alliance Aviation ((AQZ))
-ARB Corp ((ARB))
-Brambles ((BXB))
-CSL ((CSL))
-EQT Holdings ((EQT))
-Insurance Australia Group ((IAG))
-Judo Capital ((JDO))
-James Hardie ((JHX))
-Medibank Private ((MPL))
-Newmont Corp ((NEM))
-nib Holdings ((NHF))
-Pinnacle Investment Management ((PNI))
-Qantas Airways ((QAN))
-Regis Healthcare ((REG))
-Rio Tinto ((RIO))
-ResMed ((RMD))
-SRG Global ((SRG))
-Santos ((STO))
-Strike Energy ((STX))
-Telstra ((TLS))
-Vault Minerals ((VAU))
-Vicinity Centres ((VCX))
-Westpac Bank ((WBC))
-Waypoint REIT ((WPR))
-Xero ((XRO))

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Wilsons Highest Conviction investment ideas:

-Santos ((STO))
-Car Group ((CAR))
-James Hardie
-Hub24 ((HUB))
-Aristocrat Leisure ((ALL))

Among Research Ideas, the following six names are seen as Long Term Growth ideas:

-Flight Centre ((FLT))
-Ridley Corp ((RIC))
-Universal Stores ((UNI))
-ARB Corp ((ARB))
-Neuren Pharmaceuticals ((NEU))
-Siteminder ((SDR))

For those with a more speculative mindset, Wilsons puts forward PYC Therapeutics ((PYC)). In the Resources sector, the choice is Beach Energy ((BPT)).

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Goldman Sachs’s APAC Conviction List includes Life360 ((360)) and Xero ((XRO)).

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The full list of UBS’s Most Preferred Best Stock Ideas:

In Resources:

-BlueScope Steel ((BSL))
-Newmont Corp ((NEM))
-Orica ((ORI))
-Origin Energy ((ORG))
-Rio Tinto ((RIO))
-Santos ((STO))

In Financials:

-AUB Group ((AUB))
-Dexus ((DXS))
-Medibank Private ((MPL))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))

Industrials:

-Brambles ((BXB))
-Car Group ((CAR))
-Coles Group ((COL))
-NextDC ((NXT))
-REA Group ((REA))
-Telstra ((TLS))
-Telix Pharmaceuticals ((TLX))
-Treasury Wine Estates ((TWE))
-Worley ((WOR))
-Xero ((XRO))

The list of Least Preferred exposures:

-APA Group ((APA))
-Aurizon Holdings ((AZJ))
-ASX ((ASX))
-Bank of Queensland ((BOQ))
-CommBank ((CBA))
-Cochlear ((COH))
-Domain Holdings Australia ((DHG))
-JB Hi-Fi ((JBH))
-Reece ((REH))
-Scentre Group ((SCG))

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Morgan Stanley’s Macro+ Focus List in Australia is currently made up of:

-AGL Energy ((AGL))
-GPT Group ((GPT))
-James Hardie ((JHX))
-Santos ((STO))
-WiseTech Global ((WTC))

Plus:

-Aristocrat Leisure ((ALL))
-Car Group ((CAR))
-Macquarie Group ((MQG))
-Paladin Energy ((PDN))
-Suncorp Group ((SUN))

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Morgan Stanley’s Australia Macro+ Model Portfolio is currently made up of the following:

-ANZ Bank ((ANZ))
-CommBank ((CBA))
-National Australia Bank ((NAB))
Westpac ((WBC))

-Macquarie Group ((MQG))

-Suncorp Group ((SUN))

-Goodman Group ((GMG))
-GPT Group ((GPT))
-Scentre Group ((SCG))
-Stockland ((STG))

-Aristocrat Leisure ((ALL))
-CAR Group ((CAR))
-Domino’s Pizza ((DMP))
-The Lottery Corp ((TLC))
-Wesfarmers ((WES))
-WiseTech Global ((WTC))

-James Hardie ((JHX))

-Orica ((ORI))

-Coles Group ((COL))

-CSL ((CSL))
-ResMed ((RMD))

-AGL Energy ((AGL))
-Origin Energy ((ORG))
-Telstra ((TLS))
-Transurban ((TCL))

-BHP Group ((BHP))
-Newmont Corp ((NEM))
-Rio Tinto ((RIO))
-South32 ((S32))

-Paladin Energy ((PDN))
-Santos ((STO))
-Woodside Energy ((WDS))

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Crestone’s selected list of Best Ideas in Australia:

-Ampol ((ALD))
-APA Group ((APA))
-Aristocrat Leisure ((ALL))
-Beach Energy ((BPT))
-Brambles ((BXB))
-CSL ((CSL))
-Goodman Group ((GMG))
-IGO Ltd ((IGO))
-James Hardie ((JHX))
-Macquarie Group ((MQG))
-Metcash ((MTS))
-Monadelphous Group ((MND))
-REA Group ((REA))
-ResMed ((RMD))
-Suncorp Group ((SUN))
-The Lottery Corp ((TLC))
-Xero ((XRO))

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Stockbroker Morgans’ list of Best Ideas:

-Acrow ((ACF))
-ALS Ltd ((ALQ))
-Amotiv ((AOV))
-Beacon Lighting ((BLX))
-BHP Group ((BHP))
-Camplify Holdings ((CHL))
-Cedar Woods Properties ((CWP))
-ClearView Wealth ((CVW))
-CSL ((CSL))
-Dalrymple Bay Infrastructure ((DBI))
-Dexus Industria REIT ((DXI))
-Elders ((ELD))
-Flight Centre Travel ((FLT))
-GQG Partners ((GQG))
-HomeCo Daily Needs REIT ((HDN))
-Karoon Energy ((KAR))
-MA Financial ((MAF))
-Maas Group ((MGH))
-Mach7 Technologies ((M7T))
-NextDC ((NXT))
-PolyNovo ((PNV))
-QBE Insurance ((QBE))
-Qualitas ((QAL))
-Reliance Worldwide ((RWC))
-ResMed ((RMD))
-Rio Tinto ((RIO))
-South32 ((S32))
-Superloop ((SLC))
-The Lottery Corp ((TLC))
-Treasury Wine Estates ((TWE))
-Universal Store Holdings ((UNI))
-WH Soul Pattinson ((SOL))
-Woodside Energe ((WDS))

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Macquarie Wealth‘s recommended Growth Portfolio:

-Goodman Group ((GMG))
-Seek ((SEK))
-Aristocrat leisure ((ALL))
-Northern Star ((NST))
-CSL ((CSL))
-Computershare ((CPU))
-NextDC ((NXT))
-Flight Centre ((FLT))
-Mineral Resources ((MIN))
-Cleanaway Waste Management ((CWY))
-Steadfast Group ((SDF))
-James Hardie ((JHX))
-ResMed ((RMD))
-Pexa Group ((PXA))
-Treasury Wine Estates ((TWE))
-Viva Energy ((VEA))
-Xero ((XRO))

Macquarie Wealth’s recommended Income Portfolio:

-Suncorp Group ((SUN))
-Telstra ((TLS))
-National Australia Bank ((NAB))
-Westpac Bank ((WBC))
-ANZ Bank ((ANZ))
-BHP Group ((BHP))
-CommBank ((CBA))
-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))
-Amotiv ((AOV))
-Charter Hall Retail REIT ((CQR))
-Amcor ((AMC))

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

-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 ((JHX))
-Cochlear ((COH))
-REA Group ((REA))
-TechnologyOne ((TNE))
-ResMed ((RMD))
-Data#3 ((DTL))
-Pro Medicus ((PME))
-Jumbo Interactive ((JIN))
-PWR Holdings ((PWH))
-Netwealth Group ((NWL))
-Aristocrat Leisure ((ALL))
-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 ((COL))
-The Lottery Corp ((TLC))
-Lovisa Holdings ((LOV))
-CSL ((CSL))
-IDP Education ((IEL))
-Pinnacle Investment Management ((PNI))
-ARB Corp ((ARB))
-Breville Group ((BRG))
-Johns Lyng ((JLG))

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Key Stock Picks for the year-ahead nominated by analysts at Bell Potter:

-Among listed investment companies (LICs); Australian Foundation Investment Company ((AFI)), Metrics Master Income Trust ((MXT)), and MFF Capital Investments ((MFF))

-Agriculture & fast moving consumer goods; Bega Cheese ((BGA)), Rural Funds Group ((RFF)), and Elders ((ELD))

-Technology; TechnologyOne ((TNE)), Gentrack ((GTK)), and REA Group ((REA))

-Diversified Financials; Perpetual ((PPT)), Regal Partners ((RPL)), and McMillan Shakespeare ((MMS))

-Real Estate; Dexus Convenience Retail REIT ((DXS)), HealthCo Healthcare & Wellness REIT ((HCW)), and GDI Property Group ((GDI))

-Retailers; Premier Investments ((PMV)), Universal Store Holdings ((UNI)), and Propel Funeral Partners ((PFP))

-Aerospace & Defence; Electro Optic Systems ((EOS)) and Austal ((ASB))

-Industrials; Brickworks ((BKW)), IPD Group ((IPG)), and Cleanaway Waste Management ((CWY))

-Healthcare; Telix Pharmaceuticals ((TLX)), Cyclopharm ((CYC)), Aroa Bioscience ((ARX)), MedAdvisor ((MDR)), and Neuren Pharmaceuticals ((NEU))

-Gold sector; Capricorn Metals ((CMM)) and Santana Minerals ((SMI))

-Base metals; Aeris Resources ((AIS)), Nickel Industries ((NIC)), and Mineral Resources ((MIN))

-Strategic Minerals; Alpha HPA ((A4N)), IperionX ((IPX)), and Liontown Resources ((LTR))

-Energy sector; Boss Energy ((BOE)) and Paladin Energy ((PDN))

-Mining services; Seven Group Holdings ((SVW)), Mader Group ((MAD)), and SRG Global ((SRG))

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Morningstar’s selection of Best Buys on the ASX:

-IGO Ltd ((IGO))
-TPG Telecom ((TPG))
-Domino’s Pizza ((DMP))
-Bapcor ((BAP))
-Endeavour Group ((EDV))
-Santos ((STO))
-ASX Ltd ((ASX))
-Aurizon Holdings ((AZJ))
-Brambles ((BXB))
-Dexus ((DXS))
-SiteMinder ((SDR))
-APA Group ((APA))
-Fineos Corp ((FCL))
-ResMed ((RMD))

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Ord Minnett’s research analyst Athena Kospetas has communicated the following Key Preferred Ideas per sector:

Financials
-Westpac ((WBC))
-Judo Bank ((JDO))
-Insurance Australia Group ((IAG))
-Medibank Private ((MPL))
-nib Holdings ((NHF))
-Pinnacle Investment Management ((PNI))
-EQT Trustees ((EQT))

Resources
-Rio Tinto ((RIO))
-Newmont Corp ((NEM))
-Red 5 ((RED))

Energy & Utilities
-Santos ((STO))
-Strike Energy ((STX))
-AGL Energy ((AGL))

Healthcare
-ResMed ((RMD))
-CSL ((CSL))
-Regis Healthcare ((REH))

Consumer stocks
-Qantas Airways ((QAN))
-ARB Corp ((ARB))

Communication Services & Technology
-Xero ((XRO))
-Seek ((SEK))
-Telstra ((TLS))

Industrials
-James Hardie ((JHX))
-Brambles ((BXB))
-Alliance Aviation ((AQZ))
-SRG Global ((SRG))
-Qube Holdings ((QUB))

Real Estate
-Vicinity Centres ((VCX))
-Waypoint REIT ((WPR))

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Barrenjoey’s Top Picks:

-Insurance Australia Group ((IAG)) among financials, as well as GQG partners ((GQG)) and Westpac ((WBC))
-Xero ((XRO)), Pexa Group ((PXA)) and Dicker Data ((DDR)) in the technology sector
-Vicinity Centres ((VCX)) and Abacus Storage King ((ASK)) among REITs
-South32 ((S32)), Lynas Rare Earths ((LYC)) and Perseus Mining ((PRU)) among miners and Strike Energy ((STX)) in the oil&gas sector
-ResMed ((RMD))
-Metcash ((MTS))
-Aristocrat Leisure
-Reliance Worldwide ((RWC))
-Brambles ((BXB))
-Seven Group ((SVW))

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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