Rudi's View | Oct 26 2017
In this week's Weekly Insights (this is the second part):
-Hard To Be Bearish
-Beware Australian Chemicals
-Conviction Calls: Citi, Morgans, Morgan Stanley, CS, Canaccord
-An Evening With Rudi In November
-Rudi On BoardRoom.Media (Updated)
-The CPI Battle Among Economists
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
[Note the non-highlighted items appeared in part one]
Beware Australian Chemicals
Shareholders in both Orica ((ORI)) and Incitec Pivot ((IPL)) cannot help but walk around with a big smile these days. Orica has posted a nice and steady gain for the calendar year to date while Incitec shares have put in a mean rally from the August lows.
Stating that both share prices have experienced some tough times in years past does not do justice to the frustration suffered by loyal shareholders post-GFC. In mid-last year Orica shares were back where they were near the lowest point of 2009. Incitec Pivot shares, despite a significant investment in Louisiana, have essentially gone sideways a la Wesfarmers, only for much longer.
Recent share price action would have been welcomed with open arms, feeding expectations of maybe a new cycle might have started for both. After all, global synchronised growth, et cetera.
Analysts at Morgan Stanley released a 72 page report on both and the news isn't that pretty. While acknowledging the bottom is probably in for key fertiliser and explosives end-markets, investors better not position for a sustained pricing up-cycle, conclude the analysts. Too much growth in capacity (see also: Louisiana) is absorbing most of the industry's upside potential, says Morgan Stanley.
Whereas management at Orica is doing a great job in keeping cost growth under control, the absence of price growth is about to reveal rather disappointing operational leverage, predict the analysts. They cannot see how the share price, post 26% rally, won't be heading south in a while from now.
For Incitec Pivot the analysis contains a double disappointment as neither explosives nor key fertilisers can look forward to sustained price increases. Yet if one has to seek exposure, this is the one preferred by Morgan Stanley. Because the ammonia plant in Waggaman, Lousiana is ramping up, and there should be prospect for capital management on the back of it. But the report suggests this preference is borne out of relativity with Orica, rather than expecting great returns for shareholders in the year ahead.
Morgan Stanley last week resumed coverage on both with an Equal-weight rating for Incitec Pivot and Underweight rating for Orica. Sector view is Cautious.
And for the geeks among us (that would include myself), both stocks have been reclassified into the Australia Industrials industry from the Australia Engineering, Chemicals and Packaging industry "to better categorize them", according to the report. Both Orora ((ORA)) and Amcor ((AMC)) were also reclassified into the Australia Industrials industry for the same reason.
Conviction Calls: Citi, Morgans, Morgan Stanley, CS, Canaccord
Investors: be careful when jumping on board bricks and mortar retailers. The past cannot be relied upon as the changes sweeping through the industry in Australia are not just cyclical, they are structural, warn analysts at Citi this week. Their warning was in particular directed at investors looking for juicy yields in the share market.
Share prices of retail landlords in Australia have suffered great weakness, and this has created value traps, suggests Citi. It is the analysts' conclusion retail rent growth will be "lower for longer". The implications for valuations will be significant.
Citi's latest sector update contains seven ASX-listed retail landlords, of which three are Sell rated; Abacus Property ((ABP)), BWP Trust ((BWP)) and Shopping Centres Australasia Property Group ((SCP)). Two other ones are Neutral rated; Charter Hall Retail ((CQR)) and Scentre Group ((SCG)).
The two remaining -GPT ((GPT)) and Vicinity Centres ((VCX))- are Buy rated. GPT because it owns plenty of non-retail assets and Vicinity because it remains attractively priced, with a high and sustainable yield in excess of 6%.
Short term, analysts at stockbroker Morgans believe overall trading conditions for retailers have softened in September/October which is disappointing given the reprieve seen in May and June. Given Amazon is yet to start operating from Australian soil, and retailers are likely to reinvest in additional protection in the meantime, Morgans believes the outlook for the sector in general looks benign.
There are some pockets of strength and Morgans cites Lovisa ((LOV)), Adairs ((ADH)), Bapcor ((BAP)), Apollo Tourism and Leisure ((ATL)) and Super Retail's ((SUL)) automotive operations. But when it comes to picking sector favourites, the stockbroker only puts forward three names: Apollo Tourism and Leisure, Bapcor and Baby Bunting ((BBN)).
Talking about "structural"; Morgan Stanley is convinced recent government initiatives to bend the negative trend in private health insurance is going to fail miserably. Declining participation is here to stay, predict the analysts, with falling rebates, discretionary incomes and affordability all pointing into this direction.
Underpinning this view is the stockbroker's own Macro team's forecast for discretionary income growth in Australia to decline to 0.7% in 2018. Not yet negative, but is anyone going to notice the difference? The analysts are anticipating premium increases of up to 5% next year. A survey of 1800 mortgagees indicated Australians are more likely to cut down on health insurance than on motor or life insurance.
Equity strategists at Credit Suisse have now added CSL ((CSL)) to their selection of "Australia Top Picks". The list now contains 16 names, of which two are included for negative reasons (i.e. to go "short"). Those two are APA ((APA)) and IDP Education ((IEL)).
Canaccord Genuity's Australia Focus List has been updated too and it now comprises the following ten stocks:
-BSA Ltd ((BSA))
-Credit Corp ((CCP))
-Dreamscape Networks ((DN8))
-Galaxy Resources ((GXY))
-Macquarie Telecom ((MAQ))
-Northern Star ((NST))
-Speedcast International ((SDA))
An Evening With Rudi In November
The idea is to enjoy a nice meal, have a few drinks, meet some interesting fellow-investors and -the cherry on the cake- have myself sitting around the table, explaining my insights and views on the local economy, interest rates, what stocks to avoid and what the future possibly might bring in 2018, and beyond.
The place of action is The Bellevue Hotel in Sydney's Paddington, on 22nd November. Tickets are limited and expected to sell out, so no more time left for procrastination. You can still secure your presence via the following link:
Rudi On BoardRoom.Media (Updated)
Audio interview from Tuesday:
2016 – L'Année Extraordinaire
It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.
If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).
For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
All-Weather Model Portfolio
In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.
This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: firstname.lastname@example.org
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, 1pm-2pm, Trading Day Live
-Friday, 11.15am Skype-link to discuss broker calls
Rudi On Tour
– I will be presenting in Adelaide on November 14th to members of Australian Investors Association and other investors, 7pm inside the Fullarton Community Centre, 411 Fullarton Rd, Fullarton. Title of presentation: Investing In A Slow Growing World – An Update
(This story was written on Monday 23rd October, 2017. This first part was published on the day in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. This is part two).
(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 the direct messaging system on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena (6 and 12 mnths) 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.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.
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(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.)
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