Rudi's View | Sep 28 2016
In this week's Weekly Analysis:
– The Future Has Arrived In Australia
– No Update Next Week
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV
The Future Has Arrived In Australia
By Rudi Filapek-Vandyck, Editor FNArena
"Growth, Growth, Wherefore Art Thou Growth?"
[Title of Citi research report, published 20th September 2016]
There's a mind numbing multitude of changes taking place around the world today.
I am not even including climate change, refugees, social inequality, demographics or the many side-effects from ultra-low interest rates and bond yields. Focusing solely on new technologies is more than sufficient to back up that opening statement.
Viewed through an economic lens, most changes are still in early days of development. Their true impact will only be felt in 5-10 years' time. But societies have started to pay attention. It's why new buzzwords like "sharing economy", "fintech" and "disruptors" have entered the vocabulary of investors and economists – even of politicians.
My eBook published last year, "Change. Investing in a Low Growth World", draws a comparison with the roaring and fabulous 1920s; the last time in which such whirlwind of innovations and technological breakthroughs re-shaped global society. If my comparison proves accurate, and I have no reasons to doubt it will, we haven't even seen the full tip of the iceberg of future transformations just yet.
Collectively, new technologies and "disruptors" are already making their presence felt. By opening up monopolies, breaking down market barriers, lifting transparency for consumers and commoditising popular goods and services there's already a good argument to be made all this partially explains today's lack of economic growth, lack of inflation, lack of growth in wages and lack of genuine, sustainable corporate profit growth across developed economies.
In Australia, where a relatively small population in a vast geographic space has facilitated duopolies dominating markets over many decades, the arrival of new business models and challengers has been an important co-contributor as to why the ASX20 has significantly underperformed the broader share market since late 2012.
So far not so good for Australian share market investors. It's easy to feel excluded with companies including Facebook, Alphabet, Tesla, Apple and Alibaba contributing to the feel-good factor in US equity markets. Unbeknownst to many, the Australian share market is going through major transformation, and modern day explosion in new innovations and capital-light business models sits at the coal face of it.
Raging Bull Market Downstairs
As the calendar is about to close off on the third quarter 2016, the ASX20 is still at the same level as where it was in February 2013. This means no net returns from holding a basket of shares with Wesfarmers, Telstra, BHP Billiton, the banks et cetera in it, other than dividend payouts and franking, over a period extending more than 3.5 years.
Over that same period, the All Ordinaries index, comprising of 500 mostly mid and small cap stocks in addition to the Top 20, appreciated by nearly 12%. Still not a fabulous result, given the S&P500 in the US added 43% since then, but nevertheless a world away from the moribund and sorry state at the top of the Australian stock market.
No double guessing as to why many a focus has descended outside the Top 20 in Australia, including from funds managers previously specialised in large cap blue chips. This looks like the ideal environment to introduce new ASX-listings. No coincidence thus, the numbers of new IPOs are rising rapidly in 2016, and so is investor appetite for new public market additions.
According to data provided by OnMarket Bookbuilds, not only are fresh IPO numbers on the rise, so is their average size and their popularity among investors. There's sufficient evidence for the latter in the observation the average first day-of-trading performance for all 21 IPOs on the ASX in Q2 this year is no less than +24.5%. Please note: this is the average gain at 4pm on the first day of trading on the ASX.
OnMarket Bookbuilds observes there's a trend to IPO more foreign companies on the ASX, as well as more new listings originating from private equiteers. Note to us all: private equity IPOs do not turn into mud by default, as long as the owners remain on board with a substantial stake in the equity.
Technology Rules Among IPOs
Most importantly, and under-reported to date, is the transformation of the ASX that is occurring through the current wave in new stock market listings. As shown in the 20-year overview below, new ASX-additions post 2010 have expanded the offering on the ASX with many new technology, healthcare and finance & professional services companies. In 2016 half of all IPOs consists of technology and finance companies with many of the latter carrying the label "fintech".
Gone are the days when the majority of new listings comprised of mining, energy and mining services providers. That is so 2005-2010!
For Australian investors, this means they do not only see the ugly side from today's technological transformation in the form of corporate heavy weights that are increasingly being challenged and "disrupted". They do not by default have to venture overseas to seek exposure to new challengers and innovators; they can stay here at home, at the ASX.
It goes without saying, irrespective of current popularity and average past performances, new ASX listings are not a risk-free, guaranteed money printing option. (Even though current exuberance might -temporarily- suggest otherwise). More than one IPO has caused many a shareholder severe headaches, if not significant capital losses. Once the initial euphoria post public listing ebbs away, there is no guarantee investors stay on board or join in. Most of these freshly minted ASX-additions are young, unknown and they still have a lot to prove.
Corporate profitability is not always included, not even after a few years.
Don't Ignore The Future
As a daily observer and analyst of financial markets and of global macro-economic developments, I do believe new IPOs over the past two years have enriched the local stock exchange overall, and investors should definitely pay attention because in between the many newbies of today might be the next REA, ResMed or Carsales.
Below are ten newbies from the 2014-2016 harvest who, on my assessment, have shown enough substance to suggest a future success story might be in the making. Investors should always conduct their own research and consider their risk appetite and positioning on the risk curve. If you do intend to look into some of the potential new stars of the future on the ASX, the list below could be a good starting point.
iSentia: media intelligence offered as Software as a Service (SaaS), expanding into Asia
Speedcast International: network and satellite communications services worldwide, headquartered in Hong Kong
Catapult Group: wearable athlete tracking and analytics solutions
oOh!media: out-of-home advertising services, increasingly digital
Appen: speech technology and search services for international technology customers
Link Administration: back office administration services to companies and financial services providers in Australia
MYOB: desktop accountancy software, migrating into the cloud
Class: cloud-based services for SMSF trustees, their accountants and their advisors
WiseTech Global: cloud-based software solutions for the logistics industry, worldwide
A special thanks goes out to OnMarket Bookbuilds for sharing data and charts. "Change. Investing in a Low Growth World" is available via Amazon or any other online book sellers platform. Paying subscribers at FNArena receive a free copy.
No Update Next Week
Your Editor will be taking a few days off next week to reload the battery and refresh the mind. As a result, there will be no Weekly Analysis on the long weekend-Monday. I shall return with even more interesting notes and observations on Monday,10th October 2016.
Rudi On Tour
I will be presenting:
– Christmas Special for Chatswood members of Australian Investors' Association (AIA), December 14, 7pm
– 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 Thursday, I will appear as guest on Sky Business, 12.30-2.30pm
– 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
– Still on Friday, I will re-appear as guest on Your Money, Your Call Fixed Interest, Sky Business, 7-8pm
(This story was written on Monday 26th September 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: [email protected] 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 August 31st. Paying subscribers can request a copy at [email protected]