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Reporting Season, And A Warning

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 | Feb 21 2018

In this week's Weekly Insights (published in one part this week):

-Reporting Season, And A Warning
-No Weekly Insights Next Week
-Index Changes (Vol 2)
-When Two Tribes Go To War
-Rudi Talks

By Rudi Filapek-Vandyck, Editor FNArena

Reporting Season, And A Warning

We are past the mid point of the month, but we've only seen the tip of the iceberg that is local reporting season in February.

As I write today's update, less than 100 companies covered by the eight stockbrokers in the FNArena universe have updated and triggered an analyst response so far. By early March that total will have surged past 300.

With the bulk of companies still in the queue, among them many market darlings and large cap, blue chip names, it's dangerous to try to identify solid trends. History shows the dominant narrative for this reporting season can still make a decisive turn from here, and it probably will.

Finding this year's narrative is not made any easier for investors with strong macro stories impacting on a daily basis, ranging from Chinese holidays, to American protectionism, to US bond yields and fear of inflation, not to mention derivatives uncertainty.

At micro level, there is one observation that stands out: the general optimism that had characterised local previews in January has noticeably disappeared with the opening weeks of February delivering a rather mixed bag, not the bias towards strong performances that was expected.

The status operandi so far is probably best illustrated through the percentages in beats and misses recorded to date. While 35% of companies beating expectations is near the highest level recorded by FNArena, so is the near 30% in misses. It's a polarised market with companies operating in multi-speed segments of both the local and offshore economies, to say the least, on top of ongoing disruption and technology evolutions taking place.

Before I move on to one particular potential reason behind the share market's bifurcation, let's have a quick look at what some of the other experts have to say.


Market strategists at Citi believe underlying the trend remains positive, albeit skewed towards specific sectors that are enjoying better operational dynamics. Outside of resources, such sectors would seem to include diversified financials, energy utilities, medical products and infrastructure exposures.

Think companies including Macquarie Group ((MQG)), Computershare ((CPU)), ResMed ((RMD)) and CSL ((CSL)).

Sectors gripped by headwinds include banking, telecommunication, and retailing.

All in all, Citi observes average growth projections are rising; mostly with resources companies in the drivers seat. Irrespective, on Citi's observation, upgrades and downgrades to FY18 profit estimates have to date remained relatively equal.

What most pleases Citi strategists is the absence of major calamities and full-on disaster announcements; this is in-line with an overall quiet confession season beforehand.


Market strategists at Credit Suisse are among the most bullish in the market, and they make sure their analyses find their way to Fairfax journalists, hence why the initial assessment in the Australian Financial Review tends to have an equally bullish undertone.

Regardless, Credit Suisse finds overall statistics to date have been skewed unfairly by just a few bad apples, identified as CommBank ((CBA)), Fletcher Building ((FBU)), and Wesfarmers ((WES)). This explains the title above their preliminary update: Not as shabby as it first seems.

Dividends and new buybacks are surprising to the upside, considered evidence of a "solid underlying tone" for Australian companies. Upgrades to growth expectations continue to underperform those in the past, but for CS strategists this implies FY19 forecasts are probably due a catch-up.

And whereas rising business investment proved the outstanding feature of last year's August reporting season, this year's upgrades are less eye-catching, acknowledge the strategists, plus they are more concentrated inside commodities.


What needs to be taken into account is that most strategists assess results and outcomes in line with stocks covered by that particular stockbroker. The combination JPMorgan/Ord Minnett covers more smaller caps, which might explain why their intermediate assessment is putting the emphasis on the large number of "misses"; on Ord Minnett's counting no less than 43% of companies having reported by last week had failed to meet expectations.

IT and industrials take the honours on the positive side, according to the broker, while consumer discretionary shines on the dark side.

Ord Minnett also observes many weaker-than-expected growth achievements stem from offshore growth companies, with CSL highlighted as one major exception.


In case anyone still has to catch up on the newest addition to the FNArena website; we now operate a permanent, whole-year-around Results Reporting Monitor for Australian companies featuring in excess of 400 companies covered by eight major stockbrokerages.

In February, this Monitor is updated daily with delayed access for non-paying members:

Given we monitor eight stock universes against consensus projections with an intelligent human approach, we might just be providing the most accurate market wide assessment that is available.


No euphoria, thus, and a rather polarised corporate sector where not everyone seems to be enjoying joyous conditions from global synchronised growth and still loose monetary conditions. Impacting factors remain tech disruption and increased competition from online, while accumulating stress on Australian households should not be ignored either.

One factor that is not getting any attention is a possible slow down in the Australian economy. Probably because everybody is so focused on US inflation and rising global bond yields, and what this means for the RBA.

To get a more timely insight into how the Australian economy is performing, Credit Suisse quant analysts have constructed what they call a "real-time activity tracker". The name says it all. It combines trend retail sales growth derived from stats published by the Australian Bureau of Statistics with sentiment and confidence signals from the Westpac consumer survey, combined with building and infrastructure spending data, as well as commodity price inflation from the RBA.

The idea is to have a good indication before everybody else catches up with delayed releases of various surveys and updates by the ABS and others. On the team's assessment, the CS real-time tracker leads real Gross Domestic Activity – a blend of production (GDP) and income (GDI) concepts – by roughly three months.

The reason as to why this instrument deserves investor attention is because it is currently falling off a cliff (see below).


The quant team at Credit Suisse finds vindication in recent labour market updates, as they showed hours worked fell noticeably ("sharply" in their wording) in both December and January. A slowing in NSW, the most infrastructure- and housing-intensive state, has been quite noticeable, the analysts point out.

What this means is that any suggestion about the RBA hiking the cash rate is premature at best. At worst, it could wreak havoc in an economy as polarised as is Australia's. At the very least, suggest the analysts, one would have to conclude there is a mismatch between the bond market anticipating rate hikes from later in the year onwards, and what seems to be growth momentum slowing.

Bottom line: the quant analysts think investors should not let themselves be blindsided by what is apparently being suggested by a large number of economists and the local bond market. Might be a good plan to go contrarian, and prepare for a more bearish scenario, suggests the team.

Quality exposures in the share market should outperform in case the activity tracker at Credit Suisse proves spot on. Those familiar with my concept of All-Weather Performers will find there is a lot of overlap as most of the names selected would qualify under the quality label.

While overall consumption indicators remain soft in Australia, there is also a slowing in business capex intentions. But what seems to have alerted CS's quant team most is the sharp deterioration in forward indicators of residential building activity. As they observe: "Building approvals collapsed in December, with apartment approvals falling particularly sharply. Approvals are now running below completion levels, consistent with weakness in demand and prices."

Perhaps, the team offers, perhaps the Australian economy is merely navigating a temporary soft patch. But what if it's not?

To be continued, albeit not next week.

P.S. Citi has added Newcrest Mining ((NCM)) to its list of Conviction Buys in Australia.

No Weekly Insights Next Week

Due to reporting season and other commitments, there will be no Weekly Insights next week. The next edition will be written and published on March 5.

Index Changes (Vol 2)

Last week I included predictions by Morgan Stanley about the March reweighting of local share market indices by Standard & Poor's.

Since then, Macquarie has released its own predictions, and they are slightly different.

Macquarie thinks there is a good chance that Amcor ((AMC)) -finally- replaces QBE Insurance ((QBE)) in the ASX20 while also adhering a small chance that Cochlear ((COH)) could be replacing Incitec Pivot ((IPL)) in the ASX50.

There might be some reshuffling for the ASX100 as well, with Cleanaway Waste Management ((CWY)) considered the standout candidate for new inclusion. Mineral Resources ((MIN)) has a chance to be included as well, as does Xero ((XRO)). Potential candidates for demotion are Fairfax Media ((FXJ)) and Vocus Communications ((VOC)).

Any changes to the ASX200 are likely to have a much larger impact on short term price movements, and here Macquarie nominates Xero, Bellamy's ((BAL)) and Smartgroup Corp (SIQ)), with a good chance for IDP Education ((IEL)) to also be included. Those under threat of losing their membership to, arguably, the most important index in the country, are HT&E ((HT1)), Myer ((MYR)), Australian Agricultural Co ((AAC)), Asaleo Care ((AHY)) and Retail Food Group ((RFG)).

Potential changes are also considered for the AX300 with Netwealth Group ((NWL)) and Emeco Holdings ((EHL)) seen as prime candidates to lift total count back to 300. Other candidates for possible inclusion are NRW Holdings ((NWH)), Kidman Resources ((KDR)), Mount Gibson Iron ((MGX)), Big Un ((BIG)), Altura Mining ((AJM)), New Century Resources ((NCZ)) and Melbourne IT ((MLB)).

In addition, AVZ Minerals ((AVZ)), Integrated Research ((IRI)) and Pacific Current Group ((PAC)) might well become ASX300 members as well.

Those likely to lose their seat, according to Macquarie, include GBST Holdings ((GBT)), Thorn Group ((TGA)), Netcomm Wireless ((NTC)), Alacer Gold ((AQG)), Baby Bunting ((BBN)), Vita Group ((VTG)), Silver Lake Resources ((SLR)), Highfield Resources ((HFR)), Cabcharge ((CAB)) and Silver Chef ((SIV)).

Inclusions and exclusions regarding ASX200 and ASX300 can make a noticeable difference as funds managers' mandate might limit them from investing in stocks that are not part of these indices.

[See also last week's Weekly Insights]

When Two Tribes Go To War

The Trump administration seems to be readying itself (and the President's support base) for a major arm wrestle with China. The Donald is now regularly singling out Beijing for not playing fair and taking advantage of past administration's ignorance. You would have heard the rhetoric about "they are taking our jobs", et cetera.

No doubt, were public hostilities to translate into actions that actually hurt the Chinese, they'd be ready to show their own muscle in retaliation. Commodity analysts at RBC Capital, for one, have become uncomfortable enough to update their clientele about what all this might mean for commodities.

As you might have guessed, at this stage the best the team at RBC can formulate is a list of potential ifs and buts, ranging from potential more inflation in the USA to Iceland being hit hard through fish fillets which make up 20% of its export oriented economy.

But it's worthwhile highlighting RBC's conclusion in the face of, arguably, a rising risk profile:

"To summarise, at the risk of straying (well…) outside our levels of expertise, any erosion of the concept of globalisation as a driver of efficiency is bound to create additional uncertainty, which never warrants a premium in the market.

Coupled with commodity prices in general trading above our current forecasts, rising trade tensions do not appear to be factored into current trading levels. In a boxing tournament where there are two obvious heavyweight contenders, arguably the biggest losers are the smaller players less able to land the blows.

Given the dead weight loss of tariffs (so far the primary weapon in this altercation), those miners positioned, as always, at the lowest end of the cost curve can rest assured there will remain an economic margin for their business so long as their products are still used somewhere, by someone.

Sure, profits margins may decline, but fortunately the commodities scare of 2015 has resulted in an overall improvement in balance sheets and operating costs whereby many of the large-cap producers should be insulated. The proposition for investors is thus: if you must own the sector, pick the healthiest vehicles and hang on for what could be a volatile time.

For the rest, how will a trade war impact the other sectors you own? Maybe resources (especially low-cost, low-geared, primary producers…) aren't the worst idea…"

Rudi Talks

We have resumed my weekly audio interviews, thanks to Christopher Hall, Market Strategist at Arrow Securities Group and BRR Media (the old BoardRoomRadio). We also have taken your feedback on board and made these interviews snappier and shorter.

Last week's centred around early signals and expectations regarding the February reporting season:

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
-Friday, 11am Skype-link to discuss broker calls

Rudi On Tour

-Presentations to ASA members and guests Gold Coast and Brisbane (2x), in June
-Presentation to ASA members and guests Wollongong, in September

(This story was written on Monday 19th February. This first part was published on the Monday in the form of an email to paying subscribers at FNArena, and will be published again on Wednesday as a story on the website. Part two shall be published on Thursday).

(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: or via the direct messaging system on the website).



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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