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Australia’s Problem: The Great Polarisation

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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 | Nov 18 2015

This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL

In this week's Weekly Insights:

– Paris Mon Amour
– China By Numbers
– Australia's Problem: The Great Polarisation
– All-Weather Model Portfolio
– Rudi On Tour
– Rudi On TV

Paris Mon Amour

By Rudi Filapek-Vandyck, Editor FNArena

The year was 1994, maybe the first half of 1995; in either case it happened a little over twenty years ago.

I was a young, driven, gung-ho journalist working for the second largest newspaper in the Netherlands and I had managed to track down an Algerian cell of freedom fighters in exile inside the migrant slums of Brussels.

Back in those days there was a certain degree of romanticism attached to these "terrorists" because at home undemocratic tyrants were making sure life in opposition was akin to hell, or worse, and Algeria certainly was no exception. In the early nineties the military had decided to organise open elections but when the majority of the population voted in religious representatives, democracy was denied and a bloody civil war erupted instead.

So there I was, in the corridor of a busy train station, with no idea whom exactly I was going to meet or what he looked like.

Just as in Hollywood movies, eyes were watching me for a full 45 minutes. By the time I was about to give up, one man whisked me into a nearby coffee shop, where we talked.

There were plenty of undemocratic regimes in Northern Africa, mostly former French colonies. As French governments sometimes sought to appease these governments by deporting a few recalcitrant citizens, it was much safer to seek refuge in nearby Belgium.

It's not difficult to draw a link to what is happening in France today. The key difference is today's combat-ready militants are no longer seeking to overthrow dictators on another continent, their frustration and isolation has by now been redirected against Western society itself that has failed them.

Reversing this is not going to be easy, not by any stretch. Not the least because society as a whole is polarising. The problem goes beyond failed integration policies and the marginalising of minorities, modern technologies and innovation are now becoming divisive forces in Western societies. If home-grown, true blue natives find it hard to hold on to their career, and to resist having to scale down on their qualifications, what chance does the son or daughter have of an immigrant living on welfare under the smoke of the big city?

With supermarkets and now even McDonald's installing payment processing robots, the problem of how to get society's underbelly unto a job becomes an ever tougher challenge. Following this weekend's organised massacre in Paris, the world's scorn is once again focused on religious fanatics, IS or otherwise, but religion is simply the tool that provides hope and an alternative to those who have fallen by the wayside.

The real core of the problem lies with robots and innovation transforming labour markets at a time when most economies find it nigh impossible to grow at the same pace as in the past. Nobody's genuinely ready for this. Political fragmentation. The return of extremist ideologies, both on the left and on the right. Religious fundamentalism. Anti-Western terrorism. They all stem from the same source.

In my book, "Change. Investing in a low growth world", soon to become available to paying FNArena subscribers, I make the connection and I explain this process, the battle between man and machine and its impact on society and its institutions, is only now reaching a tipping point. Nobody really knows what is coming or how exactly this process will unfold, but its ramifications will be noticeable and profound.

Alas, I do not have solutions, no guide as to how best to prepare for this as a fellow citizen and as an investor, other than I worry that resentment against the system, and its occasional ugly head, have now become par for the course.

The world is changing every day, and it will continue doing so, in acceleration, in the years ahead. Not all change is improvement, but we don't have the luxury of picking and choosing, we will just have to adjust, and to deal with it.

FNArena's thoughts are with the many victims of the crimes that have changed the face of Paris, and possibly of so much more, these past few days.

China By Numbers

This used to be a hot topic, but we all got over it. Who cares whether China's GDP stats accurately reflect what is going on inside the world's second largest single-country economy? China is no longer providing the economic boost it did for a few years. One look at today's price for copper, or BHP Billiton shares, or the Australian dollar tells us as much.

Regardless, I recently picked up two different approaches and I think they're both worthy of repeating here.

First up are the economic forecasters at The Conference Board who recently joined just about everybody else with yet another downgrade to global GDP growth for the years (multiple) ahead. No surprises here. The Conference Board also decided to get rid of the official GDP stats from Beijing and instead develop its own growth estimate.

In its own words, this has resulted in a "more realistic" growth estimate of 3.7% for this year. Have you overcome the initial shock? Well, here's the good news: projection for 2016 is the same pace of growth. At least it's not getting any worse, right?

Maybe. The Conference Board also believes short term the risk seems very much skewed towards further negative surprises. More good news: "Beyond the short-term volatility, however, it's likely that the bulk of China’s slowdown has already taken place since 2011, even if unapparent in official statistics. Growth could pick up in the medium term to average 4.5 percent in 2016–20, before dropping to 3.6 percent in 2021–25".

Those who want to get their teeth into the nitty gritty of the new methodology: https://www.conference-board.org/economic-outlook2016/ (in the right hand side column)

Natixis economist Patrick Artus has taken on the Herculean task of trying to prove whether China's disappointing GDP growth numbers this year are simply a result of the domestic economy shifting away from manufacturing and infrastructure towards more services and domestic consumption. Short answer: it is not. Artus's conclusion is Beijing's published stats are simply overstating true growth. Real growth is lower. Beijing is simply doing a lies, damned lies and statistics to save face.

The Natixis economists did not go as far as to try to put an estimate to the gap between real growth and what the official data like us to believe GDP growth is. Does it really matter?

Possibly, for Australian investors, the most important piece of information is what is happening with Chinese steel production, more so than what is suggested by the official GDP data. Here the outlook remains sombre, at least for the medium term. Industry consultant MEPS is forecasting a significant fall in the price of Chinese steel this year, which we already know (see prices for scrap and iron ore). Next year, 2016, should see further weakness, but to far lesser extent, predicts MEPS. A recovery is anticipated for 2017.

Look at it from the bright side: that's less than 14 months from today. Assuming MEPS is correct and talking about early 2017. MEPS is anticipating ongoing improvement in the years beyond 2017.

Australia's Problem: The Great Polarisation

You can be bullish or you can be bearish, but the Australian share market has a problem. The lack of decent growth without too many constraints is located at the very top of the market and it is impacting on the performances of the local indices.

Not that this is the first time I am highlighting the point. Consider the following:

– as at Monday, the ASX20 is down nearly -13% compared to one year ago with only six of its members (that's right, 6 only) having generated a positive return

– those six are, in order of performance, Macquarie Group (+30%), CSL ((CSL)) (+18%), QBE Insurance (+17%), Westfield ((WFD)) (+14%), Scentre Group ((SCG)) (+12.5%) and Brambles ((BXB)) (+5%)

– Crowd favourites like Telstra ((TLS)) (down 11%), ANZ Bank ((ANZ)) (down 20%), BHP Billiton ((BHP)) (down 33%) and CommBank ((CBA)) (down 8%) are not sharing the love this year

– Worst performer of the Top 20 is Origin Energy ((ORG)), down a whopping -59.66%

– Woolworths ((WOW)) is down -31%, Woodside Petroleum ((WPL)) is down -27%

The ASX50 is down a little less than -10% over the same period. 24 of the top50 (still less than half) have generated a positive return over the past twelve months, including companies such as Asciano ((AIO)), James Hardie ((JHX)), Ramsay Health Care ((RHC)) and Newcrest Mining ((NCM)).

Santos ((STO)) is the worst performer out of the bunch, narrowly beating Origin Energy with a capital loss of more than 60%. BHP Billiton offshoot South32 (S32) managed to perform even worse than the mothership; down -38%.

The best, non-acquisition driven performance comes from Sydney Airport ((SYD)), up 37%. Asciano is up 42%.

The ASX100 is down a smidgen more than -8% over the period with 54 constituents posting a positive return. Finally, we've crossed the 50% mark.

Domino's Pizza ((DMP)) is up more than 64% meaning the difference between owning Domino's and BHP Billiton since November last year is no less than 100%. Who could've imagined? Magellan Financial ((MFG)) is up 58%. Henderson Group ((HGG)) is up 51%.Treasury Wine Estates ((TWE)) is up 59%. But the one that beats them all is Qantas ((QAN)) up a whopping 99% over the past twelve months.

Santos and Origin Energy remain the two worst performers but the ASX100 also includes Slater & Gordon ((SGH)) and WorleyParsons ((WOR)), both good for capital losses of 54%.

The ASX200 has done better, but not much, being down a little less than -8% over the period. This merely proves the point that the further we move down the cap rankings, the smaller the performance differences become. This point is further emphasised by the fact that 106 members achieved a positive return thus far. Still a little better than the flip of a coin, but significantly better than the ASX20 and ASX50.

Note Blackmores ((BKL)) is up more than 400%. Evolution Mining ((EVN)) has gained 150%. Northern Star ((NST)) appreciated by 140%.

Can anyone remember the share market being this polarised with the gains so much skewed away from the top end?

The ASX300 is down circa -7.5% over the period. The All Ordinaries (500 members) is down -6.5%.

Bellamy's ((BAL)) is the number one performer with a gain of 480%. Sorry, I forgot St Barbara ((SBM)), up 1223% (no, that is not a typo).

Now, I suggest we all go back two weeks in the archive and re-read my Weekly Insights from 2nd November "No Fireworks On The Horizon". Morgan Stanley strategists suggesting investors focus on opportunities outside the banks and resources, representing 45% of the ASX200. Makes sense? How about UBS strategists suggesting investors ignore the Top Ten?

FNArena All-Weather Model Portfolio

From the moment China put the kybosh into global investor complacency about what is really going on with economic growth outside the USA, our financial partner has become ever so excited about the All-Weather Model Portfolio we are running on the Praemium Platform.

The reason for this is straightforward and simple: whereas most SMSF portfolios are experiencing carnage, and certainly I have heard some true horror stories about large holdings in Santos, BHP Billiton, Origin Energy and the banks, all in one portfolio (!), the FNArena/Pulse Markets All-Weather Model Portfolio has remained remarkably stable, consistent and… positive.

See chart below.

I am not going to jinx myself, or the Model Portfolio's performance to date, by declaring we are the greatest geniuses in the market, which truly we are not. But this portfolio partially exists to add real world experience to my analysis of the post-GFC investment climate and it is probably a fair statement to make the Model Portfolio is adding a lot of weight to the practical importance of my research.

The next event to look out for is the release of my book, which also includes updates and follow ups on previously released analysis by myself here at FNArena. "Change. Investing in a low growth world" will be released before the end of this month.

You bet I am excited.

Rudi On Tour

– I have accepted to present to members of Australian Shareholders' Association (ASA) in Canberra, on Tuesday, 8th December 2015, 6.30pm, Federal Golf Course

Rudi On TV

– on Thursday, Sky Business, Lunch Money, noon-1pm
– on Thursday, Sky Business, Switzer TV, between 7-8pm
– on Friday, Sky Business, Your Money, Your Call – Bonds (awaiting confirmation)

(This story was written on Monday, 16 November 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(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: info@fnarena.com or via Editor Direct on the website).

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THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

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MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Odd as it may seem, but today's share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of October available. Just send an email to the address above.

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CHARTS

ANZ BHP BKL BXB CBA CSL DMP EVN JHX MFG NCM NST ORG QAN RHC SBM SCG SGH STO SYD TLS TWE WOR WOW WPL

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: BKL - BLACKMORES LIMITED

For more info SHARE ANALYSIS: BXB - BRAMBLES LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED

For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED

For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC

For more info SHARE ANALYSIS: MFG - MAGELLAN FINANCIAL GROUP LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: NST - NORTHERN STAR RESOURCES LIMITED

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: QAN - QANTAS AIRWAYS LIMITED

For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED

For more info SHARE ANALYSIS: SBM - ST. BARBARA LIMITED

For more info SHARE ANALYSIS: SCG - SCENTRE GROUP

For more info SHARE ANALYSIS: SGH - SLATER & GORDON LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: SYD - SYDNEY AIRPORT

For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED

For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED

For more info SHARE ANALYSIS: WOR - WORLEY LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED

For more info SHARE ANALYSIS: WPL - WOODSIDE PETROLEUM LIMITED