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Confusion, Challenges And Conquerers

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 | Jun 22 2016

 In this week's Weekly Insights:

– Confusion, Challenges And Conquerers
– Everything Is Possible, In Africa
– Brexit: Symptom For Bigger Problems
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV

Confusion, Challenges And Conquerers

By Rudi Filapek-Vandyck, Editor FNArena

"Disruption and opportunities are not five, 10 or 20 years away. They are happening now."
[Transurban CEO Scott Charlton]

Investors have arguably become more comfortable with the prospects of financial technology innovators, aka "FinTech", causing too many problems short term for institutionalised oligopolists in Australia, the major banks.

It has now once again emerged that harbouring a lot of potential and turning great opportunities into successful business stories really are two different worlds.

One only has to witness the rapid fall in the OzForex ((OFX)) share price as evidence in support of that statement. Management at the helm is still convinced it is working on one of the most attractive growth stories in corporate Australia, and they may yet prove themselves correct, but investors have become more than a tad cautious.

It's not that the financial sector doesn't have plenty of other worries and challenges to deal with, including business models that are aligned with investing and the local equities market. One sector that is clearly under pressure is stockbroking. When was the last time anyone got bombarded by commercial ads and messages about this trading platform or that wealth management product?

Every financial newsletter that still exists today (and many haven't lasted the distance in years past) is thanking Dame Fortuna every evening before bedtime their database is mature and resourceful, and not something that needs to be built from scratch today. Plus the fact the chosen business model doesn't solely survive on advertising revenues. (Yet another reason to question on what planet management at free music stream business Guvera is living?)

Stockbrokers are turning themselves more into financial planners. There are plans to scrap the turnover-related remuneration model and instead adopt management fees related to total sums in portfolios. There's a global debate going on about the position of in-house research in the context of changing market dynamics and increased scrutiny from regulators. Who's getting access? Who's paying for it?

Not only is the Australian share market finding it increasingly difficult to excite investors, it's but the natural reflex after a few years of negligible returns, and most who are heavily invested in the market show little appetite to switch in and out on a regular basis. The traditional model increasingly no longer looks viable longer term.

The same disappointing performance of local equities, in particular the top end of the market, is causing ructions for the funds management industry too. Beating the index by going Underweight/Overweight banks and resources might look okay when total returns run in double digits, but where is the attraction if the index itself barely beats inflation? All of a sudden high fees are doubly exposed.

Global insurer and asset manager AXA held a few round tables earlier in the year. Some of the key predictions made relate specifically to challenges for the industry:

– managers will increasingly step away from traditional benchmarks and search for better measurements for performance
– increasingly the focus will shift from pure performance towards the inclusion of responsible investing
– reporting will increasingly be done on "real" returns

AXA notes increasingly institutional investors are treating ESG (Environmental, Social and corporate Governance) as part of their fiduciary duty which, more than anything else, should serve to drive it into the mainstream.

The Future Has Already Arrived

Meanwhile, the world is coming to terms with the fact this is a low growth, low inflation and thus also a low return environment. Recent speeches by Janet Yellen and other FOMC members suggest even the Federal Reserve has now succumbed to that conclusion.

So the race is on to find tomorrow's growth engines for we cannot possibly all be hiding in upstart technology companies and expensive defensive assets, which, history suggests, wouldn't necessarily be a good idea anyway.

Directing their crystal ball towards the seven years ahead, the aforementioned analysts at AXA came up with the following themes that should be on investors' radar:

– Growing services sectors and digitalisation require less capital
– China is developing financial and other services while an additional 200m citizens will join the middle class in the country by 2026
– New forms of energy are here to stay
– China's One Belt One Road initiative will drive trade and investment, and keep commodities demand alive
– Asia will continue to offer highest growth, and corporate cash flows

As such, it is AXA's view the next investment cycle will revolve around "real return from real investment"; New Energy, New China and New Investment.

The economic evolution towards a much heavier weighting for services is also taking place in Australia. Economists at ANZ bank, in a freshly published in-depth study "Servicing Australia's Future", argue this is the explanation behind Australia's resilient GDP growth, weak investment, falling inflation and strong employment numbers.

The future has already arrived.

In the years ahead, argues ANZ Bank, services will become an ever more dominant component in the Australian economy and services require relatively little capital, but still plenty of skilled labour. On ANZ's projections, services will grow its share to 77.3% by 2023 (from 72.4% last year) while capital goods will see its share in the Australian economy shrink to 22.7% from 27.6% in 2015.

The big growth engines underpinning this transformation will be health, education and professional services, predicts ANZ.

Winners From Digital Disruption

A lot has been said and written about the threats and challenges that are awaiting Australia's Top Twenty, and many other institutionalised business models, from the rapid emergence of a digital world. It's probably a fair comment to make that a lot more will be written and published around this theme in the years ahead.

Macquarie analysts earlier this month released a research report that zoomed in on the potential positives;

– improving asset utilization (Utilities);
– labour productivity gains (Mining and Agriculture);
– supply chain improvements & inventory management (Retail);
– improving product experiences/tailoring to the customer (Media, Insurance, and Healthcare).

The analysts quote Cisco estimating the Internet of Everything (IoE) will increase US corporate profits by 21% over the 8 years through 2022. An equivalent increase for Australia would translate into an additional $20bn of profits, points out Macquarie.

According to Macquarie, the four Megatrends to impact the most on corporate Australia are:

– Internet of Everything (IoE);
– Wearables;
– Big Data;
– Virtual Reality

In the words of the analysts: "Those under immediate threat (change), which are largely top line driven stories such as online (CAR, SEK, REA), outdoor media (OML, APO, QMS) and entertainment goods stores within Retail (JBH, HVN);

"Those where we expect see significant disruption but over a longer period of time. These sectors are usually exposed to government regulations, which tend to slow the pace of change – Healthcare (COH & RMD) and Utilities (AGL & ORG).

"Those expected to experience relatively low levels of total digital potential (Construction, Mining & Manufacturing). The nature of these industries suggests they will be 'cost line' beneficiaries."

Cloud computing, predicts Macquarie, will drive big data centres as processing, storage, network and security requirements grow. Amongst the winners will be those who provide data storage, such as NextDC ((NXT)), but also providers of software as a service (SaaS) such as Aconex ((ACX)) and the accountancy software sector; MYOB ((MYB)), Reckon ((RKN)) and Xero ((XRO)).

Macquarie's high conviction picks exposed to these themes are Aconex, Cochlear ((COH)), Ooh!Media ((OML)), Seek ((SEK)), Vista Group ((VGL)) and Xero.

Commodities Renaissance?

Morgan Stanley analysts went against the grain on Monday, predicting the era of the electric vehicle might herald something of a commodities renaissance. Their favourite exposures are lithium, graphite, cobalt and copper.

The same stockbroker also issued a report suggesting investors are yet to catch up with the negative impact from solar on utility operators Origin Energy ((ORG)) and AGL Energy ((AGL)) in Australia.

The main conclusion from the report: "We think all the drivers could be directionally more bullish for solar and battery take-up than the market currently thinks."

Adding a minor twist to the story, Citi analysts last week concluded AGL's bottom line will actually benefit from this in the three years ahead, before the headwinds start materialising.

Isn't there a Chinese proverb that states "May you live in interesting times"?

Oh wait, that's meant to be a curse! I cannot possibly end this story in such manner.

Below is the digital disruption map from the Macquarie report:

"…technology progress does grow the economy and create wealth, but there is no economic law that says everyone will benefit. In other words, in the race against the machine, some are likely to win while many others lose…"
[David Rotman – MIT Technology Review 2013]

Everything Is Possible, In Africa

It's been nearly six months since I returned from my last trip to Africa and I still have a few memorabilia in the top drawer of my desk which I wanted to share.

Let's just say it has been busy.

Below is a note of 50 kwatcha, national currency in Malawi and worth next to nothing, in reflection of the country's woes due to widespread corruption and impotence (welcome to Africa) and the five year long downtrend in commodity prices. Admittedly, the latter has reversed this year.

But what makes this note so peculiar is the fact it contains an image of a Land Rover Defender station car. Product placement on an official bank note? Only in Africa.

Brexit: Symptom For Bigger Problems

It's the world's number one problem to deal with at the moment and the jury is still out about how and what exactly plus all kinds of potential scenarios post the outcome of the UK referendum vote. Let's hope the outcome is to stay and we can all move on in peace (selfish, I know).

Global asset manager Alliance Bernstein made a point this week of highlighting investors should not focus on Brexit as a one-off, all-in or all-out event. The referendum in itself, warns AB, is an example of how the continuing challenges faced by the global economy can feed into pressure for political and institutional change.

As such, Brexit should be seen as "a symptom of how global growth remains challenged in the face of significant demographic changes and the accumulation of debt, and it's a reminder of the significant limitations of monetary policy in dealing with such issues."

AB firmly accuses Quantitative Easing policies for being the root cause because such policies enrich investors, but not the productive economy. The outcome thus leads to more social inequality, which translates into the growing anti-establishment move for political change globally.

Were Brexit to happen, AB suggests the UK economy would become more "vulnerable" with property prices likely to cool, hitting sentiment for heavily indebted consumers. Others are predicting a UK recession within 12-18 months and heavy-handed central bank support actions on both sides of the British channel.

Rudi On Tour

I will be presenting:

– To Melbourne chapter of the Australian Shareholders' Association (ASA) on 6 July

– To a Selected Group of FNArena Subscribers, "An Evening With Rudi", in Melbourne, 6 July (sold out)

– To Gold Coast chapter of Australian Shareholders' Association (ASA) on Tuesday 12th  July at Robina Community Centre, commencing at 9:30am

– To Brisbane chapter of Australian Shareholders' Association (ASA)  on Wednesday 13th July  at the Wesley House, 140 Ann St, Brisbane, commencing at 11:00am

– At the Australian Investors' Association's (AIA) National Conference in August on Queensland's Gold Coast.

– To Chatswood chapter of Australian Investors' Association (AIA) on September 7, 7pm, Chatswood RSL

– To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.

Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon:

See also further below.

Rudi On TV

– On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
– I will be appearing as guest on Sky Business, 12.30-2.30pm, on Thursday
– On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 20th June 2016. 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: or via Editor Direct on the website).



Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:

The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible):

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until May 31st. Paying subscribers can request a copy at 

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