Rudi's View | Nov 30 2017
In this week's Weekly Insights (this is part two):
-This Is It Folks!
-Make Risk Your Friend: Don't Ignore The Future
-Old Media Versus New
-No Bear In Sight
-Conviction Calls: Ord Minnett, GS, Macquarie, UBS, CLSA and Morgans
-Rudi On BoardRoom.Media (Updated)
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
[Note the non-highlighted items appeared in part one on the website on Wednesday]
No Bear In Sight
By Rudi Filapek-Vandyck, Editor FNArena
As the end of year is nearing and global equities (and other risk assets) are having a jolly good time, it is fashionable for experts to express warnings and bearish forecasts. Of course, we all know, or at least should know, that as night follows day, this low volatility, robust bull market for global equities is not going to last forever.
But does this mean it is all about to wither soon?
Not at all, say market strategists at Citi. Their view is based upon a self-compiled list of what makes Citi's Global Bear Market Checklist. Drawing experience from the emerging bear markets back in 2000 and 2007, Citi strategists have put together 18 potential stress signals that could indicate things are about to go pear-shaped.
Right now the Grand Total Score is three out of 18. In comparison, back in 2000 the score had (in hindsight) run up as high as 17.5 and in 2007 the score was 13. Citi's message remains thus: no need to lay awake at night. Sure there will be dips and corrections ahead, but those simply provide buying opportunities.
Conviction Calls: Ord Minnett, Goldman Sachs, Macquarie, UBS, CLSA and Morgans
Equity market strategists at JP Morgan are worried that investors in Australia have now moved Overweight resources stocks, which means portfolio rotation into the new calendar year can cause a little bit of mayhem despite the world getting excited about global synchronised growth in 2018.
Ord Minnett, as is the custom, happily copied the market view and communicated it to the firm's stockbrokers and clients on Monday morning. Not that JP Morgan/Ord Minnett are outright negative on the sector. The strategists would rather describe the situation as a risk/reward proposition that is more evenly balanced. Time to take some profits and reduce exposure thus.
In the weeks ahead, the strategists suggest the path of least resistance looks to the downside "given the backdrop of fading global growth, well supplied markets and potential profit-taking by traders".
Note: with a clear preference for domestic gold producers, there's no sign of Newcrest Mining ((NCM)) in JP Morgan/Ord Minnett's list of favourite exposures. The stock is rated Hold, albeit with an increase in price target to $22.50 from $21.
Goldman Sachs too has cooled on Newcrest, downgrading its rating to Neutral from Buy and thus removing the stock from its Australia/New Zealand Conviction Buy list. Operational performance has improved, acknowledge the analysts, but they also believe this is by now truly reflected in the share price.
Goldman Sachs has a price target of $24.
Macquarie predicts the ASX200 will rise 9% in 2018 to reach 6500 carried by 4% growth in profits and a slight increase in the average Price-Earnings (PE) multiple. The RBA sitting pat next calendar year is also an important ingredient underpinning this forecast.
Whereas others are warning about High PE stocks potentially running too hot, Macquarie instead warns investors about pumping money into laggards and cheap valuation stocks; many might be representing classic value traps without a sustainable rebound in growth, warn the strategists.
Both banks and resources have been downgraded to neutral weight. Macquarie prefers cyclical industrials stocks (Overweight) seeking exposure to the domestic infra/capex theme through Adelaide Brighton ((ABC)) and Downer EDI ((DOW)), to the US home building cycle via Boral ((BLD)) and James Hardie ((JHX)) and to broad upside in industrial activity via soft commodities, via Incitec Pivot ((IPL)).
Macquarie suggests a period of Australian dollar weakness has the potential to add a "substantial tailwind" to offshore stocks in the first half of calendar 2018. The surprise forecast, however, is that while US equities will continue to show the way forward in 2018, Australian equities are poised to outperform.
Top picks for the year ahead are: Aristocrat Leisure ((ALL)), Bingo Industries ((BIN)), Boral, Coca-Cola Amatil ((CCL)), Cochlear ((COH)), Downer EDI, James Hardie, Seek ((SEK)), Treasury Wine Estates ((TWE)) and WorleyParsons ((WOR)).
Equity strategists at UBS predict 2018 will be yet another year of above-average returns on the back of above-trend EPS growth globally. They see Australia continuing as a laggard in this bull market, but the local share market should still be able to post a return of 8-10%, which is far from bad given "comparatively sluggish EPS growth".
Australian resources could be the surprise package next year, says UBS. The strategists have downgraded banks to Neutral portfolio weight, preferring other financials instead. UBS remains Underweight REITs and High PE sectors such as healthcare.
UBS strategists have a 2018 year-end target for the ASX200 of 6275. Favoured stocks for the year ahead are: AGL Energy ((AGL)), Aristocrat Leisure, BHP ((BHP)), Brambles ((BXB)), Janus Henderson ((JHG)), Link Administration ((LNK)), Origin Energy ((ORG)), Qantas ((QAN)), Star Entertainment ((SGR)) and Woolworths ((WOW)).
CLSA has issued a 125 page in-depth study into what could possibly still lay ahead for the online classifieds sector in Australia. The conclusion: ongoing strong growth as these companies are now in a position to use their market dominance and clout to wrestle more growth out of Australian consumers and their competitors.
CLSA's sector favourite is Carsales ((CAR)) whose price target has lifted to $17.34, while for REA Group ((REA)) the price target has risen to $93.10 (not a typo). Seek ((SEK)) was upgraded to Outperform from Underperform, with a new price target of $21.35. Newly spun-off Domain ((DGH)) is the sole Sell rated stock, alongside a price target of $3.25.
Back in mid-2014 Morgans economist Michael Knox predicted a bull market for the US dollar. That proved prescient and the reason why the stockbroker has been advocating its retail clientele move part of its cash/equities to pure USD exposure via ASX-listed ETFs.
Today, Knox is advocating investors switch their cash to euro exposure with the European currency projected to appreciate 22% relative to AUD in the years ahead. The Betashares Euro ETF (EEU.AXW) is seen as offering the cleanest and easiest way to gain exposure.
Interestingly, underlying this prediction is Knox's assertion that FX crosses are not significantly led by interest rate hikes, but instead by budget deficits. The euro area budget deficit is projected to shrink considerably in the years ahead, hence the above prediction, on the back of projected increase in the region's current account surplus.
Weekly Insights has been reporting on Conviction Calls since early February this year with only a rare exception this year. Paid subscribers can access the archive via Rudi's Views on the FNArena website.
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: email@example.com
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
-Wednesday, Switzer TV, between 7-8pm
-Friday, 11.15am Skype-link to discuss broker calls
Rudi On Tour
– I will be sharing my views and market observations via online seminar organised in cooperation with FP Markets on December 12th, 7pm. More info to follow.
(This story was written on Monday 27th November, 2017. The first part was published on the day in the form of an email to paying subscribers at FNArena, and again on the following 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: firstname.lastname@example.org 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.
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
(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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