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Find The Bull

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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 | Jul 20 2016

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

 In This Week's Weekly Insights:

– Find The Bull
– Australia's Most Highly Rated Stocks
– Irish Correction
– Italy: Next Shoe To Drop?
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV

Find The Bull

By Rudi Filapek-Vandyck, Editor FNArena

"Everything happens for a reason. Sometimes it's because you have been foolish and made the wrong choice."

Making a positive return from the Australian share market has been a tough ask for many over the past two years. If you happen to be among those investors licking their wounds, don't beat yourself up over it.

More than half of professional funds managers know exactly how you feel.

According to market watchers at Standard & Poor's, more than half of all actively managed funds fails to beat the ASX200 each year, and things do not get any better on a three-year horizon. S&P's five-year horizon data crunching reveals a whopping 70.96% underperforming the index.

I'll spare you the (horrible) insights regarding funds that specialise in fixed interest securities or in overseas equities. Needless to say, in a year when most equity indices went largely sideways, through multiple periods of extreme volatility, most funds managers would encourage you to forget about the past and focus on the future instead.

Hopefully things can only get better from here. The ASX200, including dividend payouts, generated 0.6% in total return for the year ending June 30th. The benchmark for most professional managers, the ASX300 Accumulation Index, generated 0.9%. Total return for the S&P500 in the US was 1.49%.

Considering most funds managers charge a fee simply for accepting your money, it would be very hard for most of them to report a positive return for the year.

According to Mercer, which is another data cruncher on the funds management industry, the median Australian shares fund manager returned 2.2% for the year, before tax and management fees. Macquarie Alpha Opportunities Fund tops the performance chart with a total return of no less than 32.2%, beating Bennelong with a return of 28%. Its antipode carries the name Sigma Select Equity Fund. It returned -11.4%.

Reports Mercer: most strategies centred around resources and large caps generated returns of around -5%.

'Must Haves' Disappoint

Resources and banks. When it comes to investing in the Australian share market, large cap exposures BHP Billiton ((BHP)), Rio Tinto ((RIO)), Woodside Petroleum ((WPL)) and the Big Four Banks are pretty much seen as "must haves" by many in the industry. And many a retail investor has copied the conviction.

The problem with that view is that resources stocks have been in a downtrend since 2011, admittedly finding and bouncing off a bottom in February this year, and banks are now underperforming for the third calendar year in a row.

One wouldn't immediately pick it, but even after the strong rally off the early February lows, BHP Billiton shares are still down -24% from early July last year, Rio Tinto is down -5.5%, Woodside is down -22% and the banks' losses (ex-dividends) vary between -5.8% and -22% with Westpac ((WBC)) the sector outperformer and ANZ Bank ((ANZ)) holding the wooden spoon.

The quick come-back for the miners and oil and gas stocks from beaten down, oversold, bargain basement prices in early February has been nothing but spectacular, but now the real test lies ahead for that part of the market: is there a longer term, fundamental upturn on the horizon or not?

The analyst community is as divided on the matter as I have ever witnessed over the past sixteen years. This is probably best illustrated by the fact Morgan Stanley used last week's June quarter production update by Whitehaven Coal ((WHC)) to lift the price target to $2.25, some 33% above the share price. But Macquarie stoically held on to a 60c price target, -64.5% below the share price on Monday.

The variety in views (and targets) is equally wide for other resources stocks, as can be seen via Stock Analysis on the FNArena website, including for heavyweights BHP Billiton, Rio Tinto, Woodside Petroleum, and the like.

The situation is different for the major banks. Virtually nobody will debate the fact banks' share prices look cheap, in particular in a relative sense vis-a-vis the broader market and when compared with most other yield providers in the market, but investors remain reluctant to push share prices up in any significant fashion.

CommBank ((CBA)) shares, are currently still 2.9% below consensus target, maintaining its sector premium. National Australia Bank ((NAB)) is the sector laggard trading 10% below consensus target, but then NAB is widely considered the next to reduce its dividend, potentially later this year or in 2017.

Morgan Stanley: What If?

Bank analysts at Morgan Stanley had a crazy idea last week. What if investors would put all their worries aside and simply re-rated Australia's banks in the same fashion as they have done with the likes of Transurban, Sydney Airport, et cetera?

Well, on Morgan Stanley's calculations this would translate into upside potential for sector-wide share price appreciation to the tune of 30%. For the ASX200, given the Big Four account for some 27%, this would translate into an 8% boost upwards.

Why isn't this happening?

The answer might be found in an in-depth sector analysis released by Citi analysts last week. In it, the analysts argue the banks are facing a new era, in which ongoing pressure on their core profits remains the key challenge. Hence the need to recalibrate strategies, in particular with a focus on keeping costs reined in. Expect more cost-out announcements, and more asset divestments too.

Citi is actually of the view that those banks who look more vulnerable today -ANZ Bank and NAB- will prove the better choices as an investment over time, because these are the banks where management will be first to act. Note ANZ has already lowered its dividend payout ratio, it is restructuring right now and asset sales have already been announced. More is being speculated about. National Australia Bank finally got rid of its overseas exposures, but now the challenge lies in straightening out the local operations.

Is it feasible that with so many questions remaining, not to mention the international uncertainties too, Morgan Stanley's wild dream might eventually be realised?

Equally important, Morgan Stanley's wealth management division, which is separate from equities research, also released a report last week and its title leaves little room for guessing: Bloated on Banks.

The opening sentence on the cover page: "We believe in general, retail investors hold too much of their portfolios in the major banks (ANZ, Commonwealth Bank, NAB and Westpac)."

Followed by: "We see the Australian banks facing three key risks: the need for more capital, ongoing margin pressure, and the risk of rising bad debts.

"These growing headwinds to profits suggest investors should now at least reconsider the size of their holdings in the major banks to reduce risk in their portfolios.

"An underappreciated risk for investors is relative risk. We believe the typical retail investor is inadvertently increasing portfolio risk by holding too much in the major banks."

I wholeheartedly agree. The golden era for the banking sector in Australia has now truly come to an end. Gone are the days of fantastic returns year-in, year-out. So why are investment portfolios still over-exposed to the sector? Nostalgia, the need for income and not wanting to pay capital gains tax probably cover most answers.

I'd still be having an in-depth conversation with my financial planner to explore my options and alternatives.

It's A Break-Out!

All of the above might well prove well off the mark in the weeks, if not months ahead. Most economists and fundamental analysts might have a hard time trying to justify this month's rally in global equities, other than that markets might be jumping shadows or pre-empting more central bank stimulus post-Brexit, there is no such hesitation among chartists and technical analysts.

US equities have broken out to the upside, setting new all-time highs. If history is anything to go by, the door should now be open for further gains. Historical analysis suggests 10% or even 15% more upside. The ASX200 in Australia is now equally above its prior technical ceiling at 5400.

Fund managers are still holding large wads of cash. The banks look cheap. So do resources stocks, if we take a rose-tinted instead of a sceptical view. Imagine walking in their shoes. Where would you put all the extra money? In yield stocks and industrials that already are up by 20% or more this year, or in the laggards that are still down significantly since last year?

Having said this, if there's one thing that remains remarkable about the share market swings this year, both to the upside and the downside, it is that investors do not want to separate from the popular safe havens in the share market. Just in case, of course.

IPOs: It's A Bull Market!

It's an observation I have made many times over, while most market commentary is focused on whether Wesfarmers ((WES)) is a buy below $40, or what is likely going to happen to the banks, smaller cap industrials are accumulating ongoing gains for shareholders, and they have been for a while now.

Sure, when it comes to genuine eye-catching returns, the rage is all about gold producers and smaller resources stocks. Whitehaven Coal shares are up more than 120% just in the past three months.

But smaller cap industrials such as ARB Corp ((ARB)), Healthscope ((HSP)), Navitas ((NVT)), Retail Food Group ((RFG)) and Smartgroup ((SIQ)), to name but a few, are well up for the year, after a good performance last year and the year before for most of these stocks, and they are arguably better suited for most SMSF investors, in particular those with longer term buy&hold strategies.

By now, this fact is no longer escaping the attention of newsletters, investment services and advisors of all kinds. On my observation, investor focus is making a big shift towards the smaller end of town. There where NextDC ((NXT)) is up 45% for the year thus far, instead of NAB shares still being down -11% since January 1st.

Small cap euphoria has now extended to fresh IPOs where newcomers such as WiseTech Global ((WTC)), WAM Leaders ((WLE)) and Reliance Worldwide ((RWC)) have turned into the new go-to destinations. OnMarket Bookbuilds, admittedly talking their own book but who cares as long as the stats are correct, reports the numbers of IPOs continues to increase in Australia and new financials and technology companies are feeding the frenzy.

The average return since listing for all 34 IPOs in the first two quarters this year has swung to 23.3% compared with 27 IPOs yielding on average 6.5% during the same period last year. Average return on day one of listing is 18.50%.

Graphite tenements owner Graphex Mining ((GPX)) returned 82.5% to investors on its first day of listing; the stock has gathered momentum since and had a return of 160% as on June 30. Still, it was soundly beaten by vegetable seed producer Abundant Produce ((ABT)) which has proven the best performing IPO in 2016 thus far; up 370% since listing.

It seems to me the lethargic performance of large caps in Australia over the past three years has directed investors' attention to the smaller end of the market. And this shift has now created genuine run-away, bull market conditions for young and exciting newcomers in the share market.

Of course, there is the occasional ChimpChange ((CCA)) or Redbubble ((RBL)) who fails to take off and moves in the wrong direction, but jumping on new IPOs seems to have become the latest exciting investment adventure in Australia.

Judging by the returns from most fresh IPOs in 2016, who can blame investors?

Of course, we all know this unbridled enthusiasm, with sheer unlimited gains for everyone, cannot and won't last forever. Who's to say it won't continue for longer?

Better enjoy it while it lasts then.

Special note: the FNArena Vested Equities All-Weather Model Portfolio generated a total shareholder return of 13.5% for the financial year ending June 30th.

Australia's Most Highly Rated Stocks

The FNArena Sentiment Indicator, availaible on the website for paying subscribers, helps with assessing which stocks are in favour, or completely out of it, according to broking analysts' ratings.

As a rule of thumb, a positive view requires at least 0.7 on the indicator and minimum three different views. On these criteria the Indicator currently ranks 27 stocks as the most highly rated in Australia.

As per always, the selection contains a mixture of stocks that are loved by just about everyone and others that have fallen out of favour with investors, while analysts remain of the view the latter doesn't seem justified.

The trick for investors is thus to determine to which category each of these inclusions belong and then assess the opposing risks. In the first category it is well possible the share price is too bloated and the company might not be able to surprise to the upside in August. In the second category the key question becomes: is the market right or ignorant?

Somewhat surprising, maybe, McMillan Shakespeare ((MMS)) is currently the only stocks with a perfect score, beating Qantas ((QAN)), Lend Lease ((LLC)), NextDC ((NXT)) and Aristocrat Leisure ((ALL)) by a bee's appendage. Westpac is not far away, notable because it is the sole bank in this list (!).

Note that according to R-Factor, also available on the FNArena website, Programmed Maintenance ((PRG)) is currently the cheapest stock in the ASX200. Programmed sits on 0.8, right in the middle of the pack.

The FNArena Sentiment Indicator also helps with finding dividends and yield in the share market. Highest yield on offer sits currently with Nine Entertainment ((NEC)) (10.81%), followed by Flexigroup ((FXL)) (7.56%) and National Australia Bank ((NAB)) (7.52%).

The latter again serves as an indication of how reluctant investors are in 2016 to push up share prices for Australian banks.

Irish Correction

It was the sentence that had to be corrected, yet it wasn't. In Weekly Insights from 27th June, the special Brexit edition mind you, I wrote "Assuming Ireland and Scotland stay with the Brits".

Still hurts to see that sentence. I was rightly corrected by some readers. Ireland is, of course, an independent country. It's Northern Ireland that should have been mentioned with the Scots.

My apologies to all Irish who took offence. Coming from a small country myself, I know exactly how you felt after reading that sentence. After all, the world still doesn't know Napoleon's Waterloo is located in Belgium. Would be unthinkable if the battle had happened near the Alamo or in modern day Alsace-Lorraine.

Italy: Next Shoe To Drop?

The global chain otherwise known as the international banking system is only as strong as its weakest link. We know this all too well post the collapse of Lehman Brothers and ongoing concern about the health of European banks. Look no further than the decline in the share price of Deutsche Bank.

However, the post-Brexit fallout has firmly put the spotlight on banks in Italy, and what are the authorities going to do about it?

Thanks to Twitter I came across the risk assessment matrix for the Italian banking problems, produced by the IMF. Enjoy.


 

Rudi On Tour

I will be presenting:

– 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: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

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 18th July 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: info@fnarena.com or via Editor Direct on the website).

****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

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): https://www.fnarena.com/index2.cfm?type=dsp_signup

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until June 30th. Paying subscribers can request a copy at info@fnarena.com

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CHARTS

ALL ANZ ARB BHP CBA CCA FXL LLC MMS NAB NEC NXT QAN RBL RFG RIO RWC SIQ WBC WES WHC WLE WPL WTC

For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED

For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

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

For more info SHARE ANALYSIS: CCA - CHANGE FINANCIAL LIMITED

For more info SHARE ANALYSIS: FXL - Flexigroup

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: MMS - MCMILLAN SHAKESPEARE LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: NEC - NINE ENTERTAINMENT CO. HOLDINGS LIMITED

For more info SHARE ANALYSIS: NXT - NEXTDC LIMITED

For more info SHARE ANALYSIS: QAN - QANTAS AIRWAYS LIMITED

For more info SHARE ANALYSIS: RBL - REDBUBBLE LIMITED

For more info SHARE ANALYSIS: RFG - RETAIL FOOD GROUP LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: RWC - RELIANCE WORLDWIDE CORP. LIMITED

For more info SHARE ANALYSIS: SIQ - SMARTGROUP CORPORATION LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED

For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED

For more info SHARE ANALYSIS: WLE - WAM LEADERS LIMITED

For more info SHARE ANALYSIS: WPL - WOODSIDE PETROLEUM LIMITED

For more info SHARE ANALYSIS: WTC - WISETECH GLOBAL LIMITED