Rudi's View | Dec 02 2015
This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA
By Rudi Filapek-Vandyck, Editor FNArena
2015 will be remembered for a number of things.
The ascendancy of Malcolm Turnbull to PM. A devastating earthquake in Nepal. The Irish voting in favour of same sex marriages.
Leaders of the world's most corrupt institution -FIFA- forced to resign and (finally) under real international scrutiny. The year that Volkswagen damaged the German seal of engineering invincibility. Boats and trains full of immigrants and borders closing around Europe.
There were suicide bombers and other acts of violence and terrorism, Paris marked the low point. There was a massive mud slide in Brazil. The warmest year on record, apparently.
Have I forgotten something?
The Belgians are ranked the number one football team in the world (soccer for you 'Strayans).
No seriously, that is a rare event, like Japan winning against South Africa in rugby.
And there's still potential for more to come with the Climate Change Summit in Paris concluding in two weeks' time, just before the Federal Open Market Committee might announce its first US rate hike in nine years.
I have written a book. More about that later.
Australian Equities And Banks
In terms of share market investing, 2015 in Australia is shaping up as the second year in succession wherein dividends are keeping average investment returns, as defined by major indices, in positive territory over the twelve calendar months.
Behind that observation hide many opposing and contrasting events and movements. Remember the euphoria in the first months of the year? CommBank ((CBA)) shares were going to race past the $100. In the end, they didn't get there and it was instead local vitamins producer Blackmores ((BKL)) who confidently took the hurdle and then, almost without a pause, decided to go for $200.
Nobody predicted either of these events in late 2014. I know because I keep a close watch on these things. Investing. It's so much easier in hindsight.
Two weeks ago, see "Australia's Problem: The Great Polarisation", I outlined how binary the Australian share market had become in 2015. It's almost like investors were given the choice: pick a stock. It might drop by 30-60% before December or it might double in a few months' time.
Contrary to recent years, the good old fashioned mum-and-dad stocks did not deliver ongoing gains this year. In fact, the performance of local blue chip stocks has been nothing but dismal this year. Only two stocks out of the Top 12 are thus far positive without dividends. Only seven stocks from the Top 20 are in the same boat, with AMP ((AMP)) recently joining Macquarie ((MQG)), CSL ((CSL)), Brambles ((BXB)), QBE Insurance ((QBE)), Scentre Group ((SCG)) and Westfield ((WDC)).
Here's another observation worth paying attention to: both CommBank and Westpac ((WBC)) are on the verge of moving into positive territory sans dividends. National ((NAB)) and ANZ Bank ((ANZ)) are nowhere near such a feat. Neither is Bendigo and Adelaide Bank ((BEN)), but Bank of Queensland ((BOQ)) is up double-digits this year.
2015 has also been the year when investors separated the chaff from the wheat inside the banking sector. Gone are the days when all major banks essentially moved in unison. Investors should keep this in mind when they are considering adding more exposure. Buying "cheap-er" now automatically implies you are buying "riskier".
Analysts at CLSA, Citi and Morgan Stanley are still talking extra capital and/or dividend payout cuts and it goes without saying the two stronger ones simply represent less risk of any of that happening to their shareholders.
2015 also became the fourth year in a row for commodities to carry the wooden spoon in terms of financial assets performances. A fifth successive year looks virtually impossible, with US government bonds likely having to deal with further adjustment to a rising Fed Funds rate (implying negative return, at face value). Still, none of this implies the sector is looking towards a comeback year in 2016.
The story still remains one of plenty of supplies and no acceleration in demand in sight, which means the adjustment has to happen on the supply side, through lower prices or otherwise. Chinese steel in particular seems to carry plenty of potential for ongoing bad news, with flow-on effects for iron ore, molybdenum, manganese, met coal, nickel and everything else that is a direct derivative.
The year BHP Billiton ((BHP)) shares sank below $20 and it was not a screaming buy. Back in 2008 it was and the valuation gap narrowed quickly, but not this time around.
Current views on BHP are probably best summarised by the two brokers that decided to change their view on Monday. Stockbroker Morgans removed the stock from its list of highly recommended Buy recommendations, otherwise known as "Conviction Buys".
Make no mistake, Morgans still believes owning BHP Billiton shares will have its rewards when the tide turns at a time that is not today. But as the Federal Reserve continues prepping markets for higher interest rates, which leads to expectations for a stronger USD and with most commodities markets in the state they are in, Morgans simply has given up on its conviction for a big reset in the BHP Billiton share price short term.
Morgans still prefers BHP as its number one pick in the sector, for the "long term". I have no beef with the quality assessment of BHP and its balance sheet, except that I do not think that commodities or resources stocks by default deserve a place in investment portfolios, diversified or not.
Once upon a different time, post the Nasdaq meltdown of 2000, I bought some technology stocks as I at that time was misguided by the idea that a well-diversified portfolio means you always have some exposure, to everything. It's a silly idea. For years I have advocated every portfolio should have some gold exposure. Not anymore. I also don't think a portfolio should always include some resources stocks.
When the proverbial hits the fan, such outdated and misguided concepts simply cost a lot of money.
JP Morgan's updated view is summarised with the following statement from their latest sector report: "Even as base metals are trading at levels not realized since the Global Financial Crisis, our commodities team does not believe any sort of ‘mean reversion’ in pricing will occur near term, as still lower prices are needed to rebalance oversupplied markets and firm the fundamental outlook."
As you probably would have picked up by now, JP Morgan recently slashed their price target to $18, which is where the shares are trading at as I am writing these sentences.
In a world wherein many are talking about "bubbles" (mostly in reference to housing prices) I am surprised I haven't seen the term yet being used in relationship to the pre-GFC years for energy and industrial commodities. In hindsight, what a bubble it was! Think about everyone making money, amidst all those predictions it was going to last forever and ever, so much more to come, one billion Chinese and then another billion in India, hence all those billions of dollars went into ports, trains, mobile accommodations and additional production capacity… and now the sector is facing the reality that the bubble is over; welcome to the hangover!
By the way, Morgans also removed Challenger Financial ((CGF)) from its Conviction List. Still on it are Sydney Airports ((SYD)), Amcor ((AMC)), ResMed ((RMD)), Ramsay Health Care ((RHC)), ANZ Bank ((ANZ)) and Qantas ((QAN)) among Top 100 members. Smaller cap picks remain GBST ((GBT)), 360 Capital Industrial Fund ((TIX)), Corporate Travel ((CTD)), Vitaco ((VIT)), AP Eagers ((APE)) and Villa World ((VLW)).
Equities Base Narrowing
Investors in Australia tend to look with envy and jealousy at markets in the US where a "real" bull market is now in its seventh successive year, but look into the details and there's enough happening over there to not get too excited about prospects for 2016.
For starters, earnings growth is stalling, even going backwards, and we can all imagine what will happen if the greenback really goes for a run on the back of a too aggressive Federal Reserve (which, one assumes, almost guarantees Yellen & Co will remain softly spoken and dovish). Now recent research has laid bare the narrow base that is keeping US equity indices in positive territory this year: Facebook, Amazon, Netflix, Google, Priceline, eBay, Starbucks, Microsoft and Salesforce.
Amazing huh? Turns out the US equity market is just as polarised as is the Australian market. There are no Warren Buffett-favourites on that list, but plenty of "new economy" stocks. In a sense, what happened on the Australian share market this year was mirrored in the US with the exception that on the ASX "new economy" means small & midcap stocks.
This reverse profile also means professional investors and wealth managers in the US would have found it near impossible to beat the index over the year. They probably all bought "cheap-er" stocks, only to see the "expensive" ones continue to run, while most cheap-er ones simply kept underperforming.
In Australia most stock pickers, and that includes those funds managers who do not tinker with index weights, have had an absolute blinder of a year. Payback for the fact mum-and-dad portfolios were so difficult to beat in previous years?
The big question then becomes: what 2016? Are we going to continue pouring funds in outperforming, premium-valued, fast-growing new economy champions or are we seeking to close the gap that has formed with the old economy stalwarts?
I suspect there's going to be a bit of both, so as per always it'll come down to timing.
The key message to remember from this year, however, is the harsh lesson many an investor has paid good money for in 2015: stocks valued at a market PE premium are not by default destined for a fall, just like stocks priced at a market discounted PE ratio do not automatically make for a good investment.
Think about it the following way: Slater & Gordon ((SGH)) shares looked "cheap" (e.i. attractive) when they halved from their peak above $8 early in the year. Then they halved again. Then, believe it or not, they halved again.
In contrast, shares of infant formula marketer Bellamy's ((BAL)) rose from circa $1.60 to above $5 between January 1 and July this year. In September they rose to $8. Today they reached $11.50.
You like "cheap" or "expensive" in your portfolio?
The question goes straight to the core of today's share market environment, in my view.
Allow me to illustrate what I am talking about with a few practical samples:
– Macquarie Group shares are up 39%+ for the year to date, dividends not included. Macquarie shares are not particularly "cheap", and they seldom have looked like it on their journey from $60 to above $80 this year, yet consensus price target still sits some 9% above the current share price.
– CSL shares have now returned above $100. Good for a year-to-date return of some 21%+, ex-dividends. Market premium is written all over the stock and it constantly has been. Yet, some broker targets reach as high as $110.
– Ramsay Health Care shares are up 23%+ thus far in 2015, dividends not included. What's the most heard sentence you'll ever hear about this stock? Too expensive. Missed the boat. Investors could have outperformed their "cheap" BHP shares by more than 50% if they'd ignored all those "too expensive" warnings, and that's just over the past eleven months.
I can cite a few dozen more examples, but I am sure you get the picture. As you would have expected, the stocks mentioned above feature both in FNArena's All-Weather Model Portfolio this year as in the book I have written and which will be made available to FNArena subscribers from tomorrow onwards (1 December).
Change. Investing in a low growth world hopefully explains as to why CSL and Ramsay should be in your portfolio for times like these, and Slater & Gordon, BHP and ANZ Bank not necessarily.
2016 To Provide Answers
As per always, investors always want predictions and answers for the year ahead, but the wheels of many pertinent questions, so important for investment outcomes in 2016 and possibly beyond, move rather slowly. We still do not know whether the Fed actually will raise interest rates and how exactly that is going to impact on currencies and financial assets. A lot will be determined by priced-in expectations in US Treasuries. These are still not 100% priced for a rate hike in December.
Yield as an investment theme is not leaving the share market anytime soon, but it will change shape. Investors should put more emphasis on growth. High yielders with no growth are poised to underperform. High debt might become a problem too. ALS Ltd's ((ALQ)) surprise capital raising last week is in direct response to these changing dynamics.
Another slow-moving, and crucial, process is Australia's adjustment to the post-resources capex boom-bust. Next year should incorporate the big hit. Which seems like a case of bad timing with Sydney's property market cooling. It's okay to bank on resilience and on better-than-feared outcomes, as nobody really knows how the scenario is going to unfold, including the RBA. Just make sure you don't lose your shirt if volatility kicks in or things turn out otherwise.
One theme that will increasingly appear on 2016's agenda, I predict, will be whether to cut or not to cut dividends. Always a tough one in Australia, in particular in the current environment.
Will any of the banks cut their payout ratios? Probably not in 2016. But BHP Billiton is almost certainly preparing for an "adjustment", and so is Woolworths ((WOW)). Many of the resources stocks will find themselves in a similar position.
Which is why a recent analysis by Goldman Sachs should have everyone's attention. Goldman Sachs' historical analysis into companies who cut their dividends under difficult circumstances and those who hold on to it with everything they have at their disposal suggests shareholders in the first group are better off as the market resets expectations and then moves on, while underperformance and de-ratings remain on the agenda for those holding on to what cannot be sustained.
I think there's a message in here. Better to get bad news out of the way and allow the market to confidently map the future instead of forcing investors to constantly deal with the uncertainty about when and how much exactly are they going to cut.
Lastly, for those feeling a bit depressed as 2015 has probably failed to live up to expectations, index fund manager Vanguard has published a few calculations which I believe should bring a smile to Australian investors' face.
– On November 1, 2007, the S&P/ASX200 closed at a record, 6828.7 points, its pre-GFC closing high. On March 6, 2009, this index closed at 3145.5, its lowest close in the depths of the GFC.
– By contrast on November 1, 2007, the S&P/ASX200 Accumulation Index (including dividends paid out and reinvested) closed at a record 43,094.3, its pre-GFC high. On March 6, 2009, this index fell to 21,298.1, its lowest point in the depths of the GFC.
– On November 20, 2015, the S&P/ASX200 Index (prices only) closed at 5256.1 points. This is still well below its pre-GFC closing high yet 67% above its GFC closing low.
– On November 20, 2015, the S&P/ASX200 Accumulation Index (share price plus dividends) stood at 47,868.3. This is 11% above its pre-GFC high and almost 62% above its GFC low.
Goodbye 2015, Auf Wiedersehen In 2016
This is my final Weekly Insights for 2015. It has been an intense and eventful year in which we rolled-out the All-Weather Model Portfolio and I finished my book, amongst so many other things. Time to wind down and recharge the mental batteries. In two weeks I will travel to Africa. Before that I have a video interview here and there and one last presentation at the Federal Golf Course in Canberra (details below).
Next year will be special, but I am keeping the details to myself, for now. I know some among you have been impatient, but tomorrow Change. Investing in a low growth world will be available to all paying subscribers (6 & 12 months) at FNArena.
I am excited about the end result, but also happy it's finished now. I hope you'll enjoy it even more.
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
(This story was written on Monday, 30 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: email@example.com or via Editor Direct on the website).
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.
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 firstname.lastname@example.org
For paying subscribers only: we have an excel sheet overview with share price as at the end of November available. Just send an email to the address
CHANGE. INVESTING IN A LOW GROWTH WORLD
From 1 December 2015 onwards a paid subscription to FNArena (6 or 12 months) comes with a free electronic copy of Change. Investing in a low growth world (120p). Make sure you get your copy in time for the year-end break!
For more info SHARE ANALYSIS: ALQ - ALS LIMITED
For more info SHARE ANALYSIS: AMC - AMCOR PLC
For more info SHARE ANALYSIS: AMP - AMP LIMITED
For more info SHARE ANALYSIS: ANZ - AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
For more info SHARE ANALYSIS: APE - EAGERS AUTOMOTIVE LIMITED
For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED
For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED
For more info SHARE ANALYSIS: BKL - BLACKMORES LIMITED
For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED
For more info SHARE ANALYSIS: BXB - BRAMBLES LIMITED
For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED
For more info SHARE ANALYSIS: CSL - CSL LIMITED
For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED
For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED
For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED
For more info SHARE ANALYSIS: QAN - QANTAS AIRWAYS LIMITED
For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED
For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC
For more info SHARE ANALYSIS: SCG - SCENTRE GROUP
For more info SHARE ANALYSIS: SGH - SLATER & GORDON LIMITED
For more info SHARE ANALYSIS: SYD - SYDNEY AIRPORT
For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED