article 3 months old

How Long The Multi Asset Bull Market?

rudi-views
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 27 2016

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

 In this week's Weekly Insights:

– How Long The Multi Asset Bull Market?
– Australia's Lowest Rated Stocks
– Highest Yields On Offer
– Australia's Highest Rated Stocks
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV

How Long The Multi Asset Bull Market?

By Rudi Filapek-Vandyck, Editor FNArena

"Easier global monetary conditions and pending downgrades to growth and inflation globally have seen us lower our bond forecasts further."
[Macquarie Research]

There is a natural dislocation between global economies and financial markets in that economies progress and change rather gradually and slowly while participants in financial markets live by the day or the hour, if not by the minute or even (nano)second.

Because of this built-in impatience, driven by our collective urge to make decisions, to anticipate the market's next move and to find and explore the next opportunity, investors often find themselves chasing their own tail, going through mood swings, from panic to exuberance and back, triggering volatility either way, and screaming self-reinforcing headlines in newspapers, while all the while in the real world little as yet has changed.

That's the all too common scenario we witness time and time again and investors might be forgiven when thinking this applies to last month's Brexit vote as well. However, it is far more likely they will be proven wrong and the real Brexit impact, irrespective of impatient investors, is yet to reveal itself.

It is a classic case of short term-oriented investors and speculators versus slowly progressing economic development. But contrary to most precedents, this time what is going on behind the curtains of the global stage is positive, not negative, for global equities.

Brexit, The Blessing?

On Friday last week, IHS Markit released a flash composite Purchasing Manufacturers' Index (PMI) assessment for the UK economy; the first broad, in-depth data collation since the surprise Brexit vote outcome.

The first sentence of the accompanying press release says it all:

"The UK economy opened the third quarter on a weak footing. Output and new orders both fell for the first time since the end of 2012, while service providers’ optimism about the coming 12 months slumped to a seven-and-a-half year low."

For those interested in the finer detail: data were collected between July 12-21. The headline Markit Flash UK Composite Output Index fell to 47.7. Fifty (50) is the cut off between growth and shrinkage, signaling the UK economy is rapidly falling into recession, as forecast by many an economist prior and immediately after the referendum.

I hesitate to use the term "normal" in whatever context these days, but were we in more "familiar" circumstances, when bad news (like a UK recession) was actually bad for risk assets (such as equities) then markets would have sold off, the pound would have come under pressure, the US dollar would have strengthened and safe haven assets, such as government bonds and gold, would be sought after.

Some of these reflexes still occurred post Brexit: the pound has been smashed, the US dollar seems back in an uptrend, government bonds have appreciated further, gold has experienced a mini-correction but remains otherwise in an uptrend and global equities have quickly switched dynamics from bear market into bull market.

These truly are extraordinary times.

Feeding The Multi-Asset Bull Market

Today's story for investors is that for as long as global government bonds remain in a multi-decade-long bull market (started in 1982), many other financial markets can have their cake and eat it too. This is because ever rising bond prices continue to push yields lower and this is directing money flows into higher risk assets, as well as re-rating assets that benefit from a lower so-called risk free rate.

Economic shocks, like the pending separation of the UK from the eurozone, are both deflationary and recessionary, prompting central banks into extreme measures to help prevent worst outcomes. All of this feeds into further support for government bonds, which pushes yields down -further into negative if they are already below zero- and this leads to money flows into property and equities, and to re-ratings for bond proxies and long-duration assets and high quality cash flow generating business models in the share market, et cetera.

In short: what is good for the bull market in bonds is good for bull markets in real estate, in gold, and in equities.

Let's not make this more complicated than necessary: the smart money decided in early July a new bull market has begun for global equities. Not because Brexit doesn't matter, but because it matters a whole lot and because its impact will be felt, over time, and it is going to extend the bull market in government bonds.

What is good for bonds is, right now, good for equities.

I know it sounds like a mighty crazy idea, but such are the financial world conditions in 2016 and it seems way too early to go contrarian; the trend is and remains an investor's best friend.

The fact central banks outside Europe are equally believed to be on course to deliver further monetary loosening, or other forms of stimulus and support, including the BoJ, BoC, the RBNZ and the RBA, only adds to the global conviction behind the trend.

Admittedly, the one that can potentially spoil this party is the Federal Reserve. Any surprise from Janet Yellen & Co in terms of earlier-than-expected hawkish commentary or -Heaven Forbid- a quicker-than-expected follow-up rate hike won't be taken lightly by investors in equities.

Which is probably why equities are merely grinding higher, not sprinting, but they are accumulating gains nevertheless.

History Favours Further Upside

July is offering equity investors the best of both worlds thus far: share prices grinding higher with minor pull backs only. History suggests a prolonged period of more of the same lies ahead.

Take note of the following observation made by Bespoke Investment Group: "In all the previous times when the S&P 500 has made a new all-time high, following at least 52 weeks below the old high water mark, the average return over the next 12 months has been 12.28% (median +12.30%) with an average pullback of 5.48% (median 2.73%)."

Don't get too hung up on short-term overbought signals. Bond yields grinding lower are the ultimate force that over-rules every other factor.

Equally, US corporates continue to battle a genuine earnings recession, now in their sixth straight quarter of declining profit growth. Bad news, right? Again, consider the following historical analysis by Bespoke Investment Group: "the 14 other times since 1940 when TTM earnings [trailing twelve month earnings] declined for at least four straight quarters, the median return during those streaks was 20.09% (average 11.97%), and the median return over the following year was 7.63% (average 9.29%)".

Equally important: in the 14 precedents before today's "break-out" situation for US equities, the index was higher a year after the new high every single time. The average 12-month gain was 18%, and the smallest gain was 3.1%. In addition, the next major peak for the stock market occurred a minimum of 15 months after the new high.

All of the above are currently reflected in price action and in charts, with technical analysts unsurprisingly reporting the picture looks bullish for equities.

A Wall Of Worry For Equities

I am like most of you (I assume). I like to believe the companies I own and buy are growing their earnings and value and benefits for shareholders and this is why their share price will be higher in months, if not years to come. But share prices do not always move on earnings growth or valuation. Plus sometimes financial markets do not offer a choice.

Buying equities that are moving higher for another reason than growing profits, or at least the expectation of, feels unnatural, uncomfortable even.

Which takes us to the obvious question: how long can this bond bull market continue?

At the risk of being proven foolishly wrong in the future, changing forecasts seem to be converging towards 1% for US 10-year Treasuries, as well as for the RBA cash rate sometime in the first half of 2017. This is down from respectively 1.58% and 1.75% today.

All else being equal, incorporating these trends into asset revaluations translates into double-digit share price gains for bond proxies and other beneficiaries in the share market.

Even so, were the Federal Reserve to (finally) push its funds rate higher, and government bonds across the world  at some point stop rising (yields falling), this will not necessarily kill off the bull market in other asset classes, as long as there are no sudden, significant and sharp trend changes. In today's world, we all have to keep our fingers crossed the Federal Reserve and other central bankers are able to manage the future reversal for bonds, when the time finally arrives to do so.

One more change to take into consideration: the Brexit aftermath and further central bank stimulus, if only by anticipation at this stage, has also changed the outlook for the Australian dollar. Probably best to abandon expectations AUD/USD is on its way to below 70c. In the post-Brexit world, we should probably get used to the present level and then only because of further cuts by the RBA. In other words: from now onwards, so it appears, further RBA cuts won't necessarily pull back the Aussie, but they merely prevent the currency from moving too much higher.

Elevated Prices Means Elevated Risk

Markets are, in a broad sense, prepared to go along with the rise in asset valuations driven by ever lower bond yields, but only insofar promised earnings and cash flows do not blatantly fall short of expectations. Investors should still take note and be mindful of the risk for disappointment in today's share market.

Because share price valuations are elevated, market punishment can be extremely painful. Witness, for example, recent price action in Silver Chef ((SIV)) and in Cimic Group ((CIM)) shares. A better example might be Aseleo Care ((AHY)), owner of Sorbent and Purex toilet paper, Libra tampons and Handee household paper towels, whose profit warning on Friday triggered a share price fall in excess of 30% on the day.

Prior to Friday's shock revelation Asaleo's profits will be a lot lower this year and next compared with FY15, the market had indulged itself in the assumption that defensive cash flows from staple products would take care of all pressures from competition and from input costs. The promise of a "safe" dividend, further underpinned by a share buyback, led to a significant re-rating as bond yields continue their descent.

Aseleo Care was one of this year's best performers in the FNArena All-Weather Model Portfolio, would you believe. The share price peaked in the week leading up to Friday's confession at $2.29, for a capital gain of 43% year-to-date. The company is likely to defend its 10c per share annual dividend payout with all means, but fierce price competition is hurting nevertheless, and the investor psyche has now been severely damaged.

There remains the over-ruling impact from falling bond yields, but it is equally possible Aseleo Care shares will be put in the doghouse for a while, until more clarity is gained about exactly who is winning the fierce battles for shelf space in Coles and Woolworths supermarkets, and at what cost.

The shares will find yield support as long as the company doesn't have to cut. This is unlikely to occur in the medium term.

FNArena doesn't think this is necessarily where the bad news stops and thus the All-Weather Model Portfolio is waving goodbye to Asaleo Care.

Investors might follow our example for risk management in that Aseleo Care represents less than 4% of the Model Portfolio, even after such a stellar run prior to Friday. Given the broad context of tough economic circumstances, with plenty of threats and impediments, it is almost impossible not to experience an unforeseen negative event in one's portfolio. Not allowing one single stock to represent too large a weight in the Portfolio seems but a logical strategy to minimise risk.

Investors who acknowledge the risks, while understanding the current market dynamics, are in my view positioned for better investment decisions.

For what it's worth: I don't think the FOMC is anywhere near ready to stop US bonds from rallying further.

Australia's Lowest Rated Stocks

After last week's update on the highest rated stocks in the FNArena universe of stockbroker views, it was inevitable I'd have to follow up this week with an update on which stocks rank the lowest in terms of broker views and opinions.

The good news is there are only a few stocks with extremely negative views across the board. Having received a fresh downgrade from UBS, Charter Hall Retail ((CQR)) is now the least liked stock in the FNArena universe. Not only does it seem the ruling view among property trust experts that office peers offer better prospects and safety in market dynamics than retail trusts, there seems to be a strong case for too high a valuation too.

Cimic Group ((CIM)), having freshly released a disappointing FY16 report, is on equal footing according to the FNArena Sentiment Indicator, as is Shopping Centres Australasia Group ((SCG)). The latter pretty much holds the same negatives as Charter Hall Retail.

A little less negative, but we are splitting hairs, is the case for Monadelphous ((MND)) where expectations for ongoing downward pressure in profits are being met with a strong share price rally in the share market. Monadelphous is accompanied by gold producer Northern Star Resources ((NST)), which tells us a lot about the gap between market sentiment towards the gold sector and analysts' calculations and projections.

Northern Star's share price is currently falling off a cliff, having rallied as high as near $6.00 and now trading well below $5.00, and still falling. This in contrast to share price performances for the other four.

FNArena subscribers can access the FNArena Sentiment Indicator 24/7 via the website.

Highest Yields On Offer

Needless to say, high yield is as much an indication of above market average risk as it is about a potential opportunity for investors willing to go against the grain. Nine Entertainment ((NEC)) tops the FNArena table for highest yield on offer in the Australian share market, seemingly offering 11.16%. The fact the FNArena Sentiment Indicator shows a zero reading proves nobody is genuinely enthusiastic about jumping on the apparent opportunity.

The fact that National Australia Bank ((NAB)) ranks second highest with an implied yield of 7.45% gives us a lot of insight into how the market is treating the banks relative to other yield plays, and relative to the broader market in general. This becomes even more apparent when we consider Bank of Queensland ((BOQ)) sits on position number four, while Bendigo and Adelaide Bank ((BEN)) is ranked number nine with ANZ Bank ((NAB)) (not shown) ranked equal tenth with Spark New Zealand ((SPK)).

The FNArena Sentiment Indicator, available on the website, has pre-defined search options including high dividend yields and high/low rankings according to stockbroking analysts' ratings.

Australia's Highest Rated Stocks

Last week's Weekly Insights provided an update on the highest rated stocks in terms of views and opinions by the eight stockbrokers daily monitored by FNArena, so we don't usually update this quickly, unless there's very good reason to.

The relentless uptrend for equities in July is being met by an explosion in stockbroker downgrades, see also Monday's "Weekly Recommendation, Target Price, Earnings Forecast Changes". This is having a profound impact on our ranking for the highest rated stocks as well.

And so it is that our 27 stocks listed only one week ago have rapidly shrunk to ten. In other words: all optimism regarding stocks with ongoing upward momentum is quickly evaporating. Gone are NextDC, Burson Group, Programmed Maintenance and the likes. The ten left are (in order): Qantas ((QAN)), Lend Lease ((LLC)), Exclipx Group ((ECX)), QBE Insurance ((QBE)), Fairfax Media ((FXJ)), Westpac ((WBC)), Star Entertainment ((SGP)), ResMed ((RMD)), AMP ((AMP)) and Origin Energy ((ORG)).

FNArena subscribers can access the FNArena Sentiment Indicator 24/7 via the website.

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
– Later on that same Thursday, I shall appear for an interview on Switzer TV
– 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 25th 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

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

AHY AMP BEN BOQ CIM CQR ECX LLC MND NAB NEC NST ORG QAN QBE RMD SCG SGP SIV SPK WBC

For more info SHARE ANALYSIS: AHY - ASALEO CARE LIMITED

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED

For more info SHARE ANALYSIS: CIM - CIMIC GROUP LIMITED

For more info SHARE ANALYSIS: CQR - CHARTER HALL RETAIL REIT

For more info SHARE ANALYSIS: ECX - ECLIPX GROUP LIMITED

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: MND - MONADELPHOUS GROUP 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: 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: QBE - QBE INSURANCE GROUP LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: SCG - SCENTRE GROUP

For more info SHARE ANALYSIS: SGP - STOCKLAND

For more info SHARE ANALYSIS: SIV - SIV CAPITAL LIMITED

For more info SHARE ANALYSIS: SPK - SPARK NEW ZEALAND LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION