Rudi Interviewed: Bear Market Be Gone

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            [1] => ((TNE))
            [2] => ((WTC))
            [3] => ((XRO))
            [4] => ((CAT))
            [5] => ((SDR))
            [6] => ((HSN))
            [7] => ((RE))
            [8] => ((CBA))
            [9] => ((NEM))
            [10] => ((FMG))
            [11] => ((RIO))
            [12] => ((BHP))
            [13] => ((CCL))
            [14] => ((EOL))
            [15] => ((BRG))
            [16] => ((GMG))
            [17] => ((ALL))
            [18] => ((LNW))
            [19] => ((HUB))
            [20] => ((NWL))
            [21] => ((SKS))
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    [1] => Array
        (
            [0] => PME
            [1] => TNE
            [2] => WTC
            [3] => XRO
            [4] => CAT
            [5] => SDR
            [6] => HSN
            [7] => RE
            [8] => CBA
            [9] => NEM
            [10] => FMG
            [11] => RIO
            [12] => BHP
            [13] => CCL
            [14] => EOL
            [15] => BRG
            [16] => GMG
            [17] => ALL
            [18] => LNW
            [19] => HUB
            [20] => NWL
            [21] => SKS
        )

)

This story features PRO MEDICUS LIMITED, and other companies.
For more info SHARE ANALYSIS: PME
The company is included in ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

The FNArena Editor shares his views on investing, AI, Australian shares and about what to expect from the August results season.

As has become almost a de facto tradition, I was interviewed by Livewire Markets’ co-founder James Marlay ahead of the August results season. 

The interview took place on August 4 and was released two days later on August 6.

Below is a curated transcript of the interview.

The full video (circa 22 minutes) is available via the Livewire Markets website (registration required):

https://www.livewiremarkets.com/wires/why-rudi-filapek-vandyck-thinks-60-of-the-asx-could-finally-have-its-moment

as well as via Youtube: https://www.youtube.com/watch?v=fZ8hPF8TQMs

****

Hi, folks. It’s James Marlay here, co-founder at LiveWire Markets. It’s early August. Reporting season is about to kick off, which means it’s that time of year where I get to sit down with the legend of market analysis, who knows all things about broker consensus, broker forecasts, and general stock market wizard.

I’m joined by Rudi Filapek-Vandyck from FNArena. Rudi, great to see you. Thanks for coming in. I love our pre-reporting season catch-up.

Rudi Filapek-Vandyck: After such an introduction, how how can I not have a smile on my face?

Interviewer:

Now, folks, for those of you that want to keep your pulse on reporting season, check out Rudi’s profile on Livewire. I put a link in the wire and in YouTube’s. He’ll be publishing his reporting season monitor every Friday afternoon, which will help you understand stocks that beat and missed expectations and any revisions from the brokers. It’s a great resource, definitely worth following.

With that out of the way, let’s talk markets. Rudi, we’ve been talking about general sentiment being a bit bleak from investors feeling like it’s been a bit of a tough grind in the Australian market. I recently listened to a podcast with a very strong performing fund manager, and even he said he was finding it hard to get excited about the Aussie market.

What’s your interpretation? Why does it feel like that? 

Rudi:

The obvious observation to make is the Australian share market has heavily underperformed U.S. markets and markets in Asia,. You can tell the the wide dispersion in how fund managers have performed.

It was really a case of if you don’t have the right stocks, it’s really tough. But let’s throw some good news in. We had three years of net negative earnings per share growth in Australia, and so whatever we did post covid has gradually disappeared from the market. I think ultimately you pay the price for that.

The good news is we’re now looking, according to consensus, at 12% EPS growth on average for the ASX200.  Where are the champagne bottles?

There are a few problems with that. Problem number one: nobody believes that by the end of the month that 12% will still stand. In other words: it’s too high.

Multiple reasons for that. I think August, if that proves correct, and I think that probably is correct, we should see a lot of downgrades.

Where is the strength at the moment? Well, the 12% is carried by resources and by banks. There’s actually not that much left after resources and banks. Those have been the drivers, and we probably saw that in share prices as well.

Those have been the drivers over the past year, in particular also over the past six months. If you believe the likes of UBS, Macquarie, Morgan Stanley that number is about to halve this month.

That’s quite a lot. Imagine you’re a golf player and you’re gonna add half of your shots to your round. You’re gonna have a shitty round!

Having said so, the market has only been carried by 40% of the of the stocks. So there’s 60% out there that has lagged, done largely nothing. A lot of people have been sitting there. There is potential for that 60% to catch up.

As a matter of fact, for next year, the forecast is about 6% to 7% growth, which would be, if forecasts for this year are correct, similar to this year. The only thing is, the group of companies, the sectors that are carrying this year’s profit, are not the same as next year.

So there is a flip coming, if market expectations are correct, and that’s probably because we all expect that, at some stage, the RBA is done, economic growth will pick up, because the RBA starts loosening again.

That is not immediately happening, so that might be a story for the second half of this financial year, which is basically in 2027.

But just to give you an idea about how that flip is materialised, next year, if forecasts are correct, the best growing sector in Australia will be the REITs, followed by domestically oriented companies in Australia.

This year it should be offshore. So there is a different dynamic happening, and I think to answer your question correctly, I think the frustration comes from the fact that there has only been 40% doing all the work, and 60% has not contributed.

If you were deeply embedded inside the 60%, this market would have, for a long while, felt like a bear market, though it wouldn’t look like that at the top end of of the market. And that, I think, has frustrated many, including fund managers.

Interviewer:

Rudi, you always talk about results against expectations as being what matters most. It’s not the number per se, but where that number lands relative to analyst and investor expectations. Where do you think expectations are so low that even a modest result could result in a in a positive surprise?

Rudi:

That’s an interesting one. Expectations, I would say, at the moment are the lowest for REITs and for discretionary retailers. But, as I said before, there will be a lot of people looking forward and thinking: from the moment the RBA starts lowering interest rates, those sectors should be the two beneficiaries.

The problem: is August too early or not?

There’s probably still potential for negative news to come out. The other important thing to take into account is that August is not simply going to be about results and expectations.

This market has basically become an AI market. It also has become a market in an age of disruption. So that 60%, and there were some parts on the positive side as well, but that 60%, a lot of them have been derated for disruption.

Disruption can come through AI; the software stocks, the online travel agents, for example. But disruption can also come through other factors like electric vehicles. It can come through satellites. That’s why, for example, telecommunication stocks have been derated.

One of the problems investors now have is that even if companies report strong results, they may have a positive response initially, but they may not have durability.

Because as long as the question marks haven’t been answered of how much disruption is around the corner, those share prices might remain cheap for longer.

That’s a problem for investors they have to confront. Now you are almost forced, even if you want to or not, you’re almost forced to have a view on AI and on disruption, because sooner or later it’s going to impact on your portfolio.

My view is if you happen to own stocks now, for which apparently the question hasn’t been asked yet, sooner or later it will. So you are forced to have a view now.

How are your companies positioned with disruption that’s around the corner?

Interviewer:

I think it’s a really interesting point and it’s a question that we’ve received a few times from our readers, with all the excitement around AI, people are thinking I need to be part of that, but the threat of disruption to stocks, say technology, and something like Pro Medicus ((PME)) came under some question marks.

The part that’s missing there is which are the most durable stocks? Which ones are AI resilient, resistant, proof? Have you got a list of names that you think would fit into that category?

Rudi:

The obvious candidates I can throw in would be TechnologyOne ((TNE)) and Pro Medicus. The market is giving us the evidence for that. Both initially sold off with all the rest, and both have recovered quite a lot.

From memory, Pro Medicus is now trading around $160 or $170. It has been at $110, maybe even lower. At one stage in February, TechnologyOne was almost at $20. Last time I checked, it was above 31.

So this also shows the task that lies ahead for the likes of WiseTech Global ((WTC)), Xero ((XRO)), Catapult Sports ((CAT)), SiteMinder ((SDR)), you name it, Hansen Technologies ((HSN)), etc.

They have to convince investors, and this is what I alluded to earlier. This is not just about like, oh, look at us, we have 20% growth in the EPS. The market goes like, that’s nice, but tell us now how much has come from AI, how much is AI helping you, and how much is not there in terms of AI disrupting your business model?

So there’s an extra layer now on results. It’s no longer simply about your dividends and what you actually achieve in profits. This is also about convincing the market that your derating has been too forceful and it is, hopefully, undeserved.

Interviewer:

REA Group ((RE)) is reporting this Friday. It’s going to be fascinating to see how the market responds and what they say.

Rudi:

REA Group has another layer on, which is the housing market, which is, again, one of those big question marks. I can add another sector to it; the banks.

One of the reasons why the Australian share market is where it is at the top end is because the banks keep performing in Australia. At face value, on traditional valuation metrics, banks are expensive. Everyone tells you banks are expensive.

Now, here’s the interesting proposition. In normal circumstances, the way things are going, maybe another rate hike from the RBA, the Australian economy is basically in a struggle, very much K- shaped.

You would think that the problems are coming for banks, and that’s where a lot of caution comes from among sector analysts.

But there are two counter-arguments against this. I think it was this week or maybe the week before — memory starts becoming unreliable at my age. UBS had some fascinating research. They basically discovered a new earnings driver for the banks.

They are lending to finance infrastructure projects and the build out of data centers, and it sort of has escaped most people that that is becoming a very strong growth driver for the banks.

So maybe there’s more growth coming than what we’re all accustomed to because we’re looking at mortgages and business lending.

The other equally fascinating element is, I recently saw a ranking, a global ranking of banks and how they are positioned to deal with regards to AI. Like: how much are they equipped to get benefits from AI and to become a very strong beneficiary?

Number one in the world is, of course, nobody is surprised, JP Morgan. Number four…  the Commonwealth Bank of Australia ((CBA)).

Markets are forward looking, maybe that premium in the CBA share price is made out of more than just thin air?

Interviewer:

Interesting. One of the talking points I was interested to get your take on was around dividend payout strategies and policies from boards. We’ve had the change to taxation, capital gains tax, and I’ve read some articles from some quite prominent investors saying this will incentivise boards to distribute more of their earnings as dividends, or put in place buybacks.

Have you read anything in the broker commentary that you cover to suggest that that could be a feature of reporting season?

Rudi:

Not that particular side, but the other big sector in Australia is resources, and expectations are very high for the resources sector. We have a very small sample, but the ones that have reported –Newmont Corp ((NEM)), Fortescue ((FMG)), Rio Tinto ((RIO)), we’ve seen enough from BHP Group ((BHP))–  there’s enough built in expectation that we’re going to see a very good dividend season.

These companies have had high commodity prices. They also sort of showed us what the threats are on the other end, and we’ve also seen that at the smaller cap end. It’s costs, it’s capex, and it’s overruns.

Those are the two polarising elements we will see on the resources. Of course, results count for resources companies, but what counts more is the prospect of what will happen to the particular commodities that drive.

But there too, you see, particularly over the past six months, there’s a strong alignment with the AI build out. Even in the resources sector, money is seeking exposure to data centers through resources. So, polarisation is not going to go away anytime soon, I don’t think.

Interviewer:

All right. Which stocks are going to be sort of front of mind for you? Which ones have been marked with a little asterisk next to them to watch very closely this reporting season? What are you watching? What are you expecting?

Rudi:

Maybe interesting to throw in here that on our data, 65% of all broker ratings are a Buy at this point in time. That’s still incredibly high.

Interviewer:

Is that high on average?

Rudi:

It’s incredibly high. The highest we’ve ever measured I think is 66%, and it’s now 65%. Not even in the GFC was it that high.

That shows you the polarisation in this market. As I indicated earlier, some brokers have whole sectors on Buy, and the whole sector doesn’t move. The polarisation is there.

Whole sectors are being derated, so the logical field to look at would be small caps that haven’t performed. My preference is to try to find those smaller cap companies that have something special, that potentially have more to offer than simply being cheaply priced and having one good year in front.

I personally have my focus on companies like Cuscal ((CCL)).  I think there’s potential to become something special at some stage. I would normally also nominate Energy One (((EOL)), but they are now under takeover.

One I think deserves more attention than it gets would be Breville Group ((BRG)). Normally, you wouldn’t pick Breville because consumers are under some pressure, but I think the current dynamics actually work to their favour. 

Interviewer:

Make your coffee at home. Is that what you’re saying? 

Rudi:

On the weekend with the extra surcharges, a cup of coffee is quite expensive these days. The other thing also is they are more innovation-oriented than most people give them credit for. And they’re constantly going to add new geographies into the mix.

But there’s plenty to choose from in a market where 60% hasn’t performed yet. I would also argue, even without a lot of companies now having to prove to investors that they’re worth more than the threat of AI, there are lots of companies in Australia that are linked directly to the data center buildout or to AI, and I think there’s just a mental blockage in Australia.

The question is not whether those companies are in good nick or performing well. They are. The question is: when do Australian investors decide they can pay more for those companies?

Example number one, I would say is Goodman Group ((GMG)). The market might be hesitant because it’s awaiting contracts. I have very little doubt those contracts will come through, if not in August, then over the next six months.

Among the large caps, I still think Aristocrat Leisure ((ALL)), not everyone’s taste because it’s gambling, but it still remains one of the prime growth stories on the Australian stock exchange.

Gaming, including Light & Wonder ((LNW)), has derated because people go like, “Oh, you never know what AI is going to do to those guys”. Well, I’m not so sure.

Among the smaller caps, I would also throw in the likes of Hub24 ((HUB)) and Netwealth Group ((NWL)); both, again, derated. I think people are overestimating the potential what AI can do to a heavily regulated sector as where those two are in.

I think there’s more out there. If you look at the market update we had recently from SKS Technologies ((SKS)), there’s your data center theme again. The thematic is really healthy, and strong, and again, that share price responded positively.

I think that goes for that whole sector that is linked to data centers and…

Interviewer:

…the engineering firms…

Rudi:

Also. Most of them are not trading at the peak of where the share price has been over the past 12 months. So I think there’s plenty to investigate. And, of course, there’s a whole army of people out there that are hoping that the whole AI trade comes to naught and that it tumbles, and we’re going to see the punishment they’ve been waiting for since a few years.

But I would argue: be careful what you wish for.

Interviewer:

Look at the weight of money that’s being put behind it.

Rudi:

But also the way the build out of AI is now so embedded inside economies, and inside sectors, and inside businesses. I just gave the example that even the banks are in on it now, resources are in on it now.

You have to be careful what you wish for, because, I think, we should all hope that it doesn’t come to naught, because I’m not so sure where we’re going to hide if it does.

Interviewer:

Rudi, talking about hiding, at the start of last reporting season, you were probably holding north of 20% cash, and you expressed some trepidation about the market and how you’re going to invest. That cash level, where does it sit now? Should we read into it?

Rudi:

I have made some changes, because one of the changes that we haven’t discussed yet, but everyone can see that the financial markets itself are changing.

We have much more short-term money crowding out the longer-term money, so we get more volatility.

I’ve responded to that by diversifying more, taking smaller positions and not so much conviction calls. On balance, I think my cash is just under 20% again. So that hasn’t moved that much.

One statistic to throw in, just to show everyone how tough this market has been: up until the 30th of June, over the six months of this year, the average return without dividends for the average share price in the ASX200 was -4.5%.

Again, it shows you that if you didn’t have the “right” stocks, it wasn’t such a jolly good period.

Ultimately, of course, we haven’t seen a big big sell off or we haven’t seen a big crash or whatever, so some people might say: you’ve been too cautious with your cash.

Well, maybe that has been the case, but I remain on the lookout, and if August lives up to expectations, there might be some opportunities opening up.

Interviewer:

Well, Rudi, as I said, we’ll be getting your weekly updates on the reporting, the FNArena Reporting Season Monitor, and it’d be great to check in post reporting season to get your breakdown on what you saw.

Rudi:

Yes, I’ll be here.

Interviewer:

Folks. I hope you enjoyed that chat with Rudi Filapek-Vandyck, the editor at FNArena. Remember, subscribe to the YouTube channel. We’ve got lots of content coming throughout reporting season, and don’t forget to check out Rudi’s reporting season monitor.

I’ll put the links in the description on this video. Thanks for watching.

The full video (circa 22 minutes) is available via the Livewire Markets website (registration required):

https://www.livewiremarkets.com/wires/why-rudi-filapek-vandyck-thinks-60-of-the-asx-could-finally-have-its-moment

as well as via Youtube: https://www.youtube.com/watch?v=fZ8hPF8TQMs

(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.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi’s View stories. Go to My Alerts (top bar of the website) and tick the box in front of ‘Rudi’s View’. You will receive an email alert every time a new Rudi’s View story has been published on the website. 

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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