Rudi's View | Jul 19 2018
In this week's Weekly Insights (this is Part Two):
-Is 'Value' Investing Now Dead?
-All-Weather Stocks: Bell Potter
-Rudi On TV
-Rudi On Tour
[Non-highlighted parts appeared in Part One on Wednesday]
By Rudi Filapek-Vandyck, Editor FNArena
When you look at the Australian share market, ignoring day-to-day noise and volatility, what do you see?
Stockbroker Morgans sees a complacent investor community ignoring the fact headwinds are building and the outlook is becoming less predictable, if not tougher. Investors can still look forward to making a reasonable return from their portfolio, the stockbroker believes, but maybe not if they continue crowding in the same segments of the share market.
Morgans likes Telstra ((TLS)) and local banks the most. Calendar year 2018 is seen as the window into a new normal wherein interest rates are on the rise, central bank stimulus is being wound back, and exceptionally calm markets are in for a lot more volatility. Whatever might transpire, 2018 is not a year for complacent investing, say the stockbroker's strategists firmly.
For investors looking to re-shuffle portfolios, a few ideas have been put forward. Morgans' favourite among the Big Four banks is Westpac ((WBC)). Among diversified financials, Suncorp ((SUN)) and Link Administration ((LNK)) are offered as best ideas.
Among consumer discretionary stocks, the preference goes to defensive business models of Bapcor ((BAP)) and Apollo Tourism & Leisure ((ATL)), plus Lovisa ((LOV)) and Baby Bunting ((BBY)). Elsewhere Orora ((ORA)) and Reliance Worldwide ((RWC)) remain in favour, as do Telstra and Superloop ((SLC)) in the telecommunication sector.
Equally important: the stockbroker has been advising its clientele to trim positions in stocks that have run hard in FY18.
Morgans' views about prospects for Australian equities would have resonated with market strategists at Morgan Stanley in the US. They have been warming up their clientele for portfolio rotation into defensive stocks and sectors. Last week, Morgan Stanley's view to sell US technology market darlings made headlines around the world, but among investors it was met with a big yawn, report the strategists.
One week later and they reiterate their more defensive view, "with increasing conviction".
The Q2 reporting season will be a bright one, say the strategists, but the market will be forced to focus on the sustainability of growth, and here headwinds are building.
Meanwhile, miners and energy producers continue to enjoy upgrades with every sector analyst who updates the numbers, including for average input prices and the Australian dollar (weaker). Given ongoing robust economic growth on the horizon, albeit slowing, and the recent pullback in share prices, analysts at JPMorgan/Ord Minnett retain a positive position ahead of the August reporting season.
Equally noteworthy: market strategists elsewhere have been scaling back their exposure to "Materials" (Commodities).
Big picture, point out global strategists at JP Morgan, below the surface red marks are increasingly appearing on forward looking models and indicators. The global economy is slowing, and investors should pay attention.
Analysts at Canaccord Genuity have updated their Australian Focus List, essentially their selection of High Conviction calls on stocks under coverage. The broker specialises on small cap stocks in Australia, so the composition of the list remains limited to lesser known names in the Australian stock market.
The selection now comprises of 11 members: CML Group ((CGR)), EML Payments ((EML)), FAR ltd ((FAR)), Macquarie Telecom ((MAQ)), Money3 Corp ((MNY)), Perseus Mining ((PRU)), Pioneer Credit ((PNC)), Redbubble ((RBL)), Scottish Pacific Group ((SCO)), Service Stream ((SSM)), and Speedcast International ((SDA)).
Global strategists at Macquarie describe the investment climate for the second half of calendar 2018 as "complex". No extreme outcomes are by definition on the agenda, but multiple risk factors are presenting themselves nevertheless, say the strategists. If it were up to them, investors should balance portfolios towards "quality", "sustainability" and "thematics", with less exposure to (or even avoiding) "value" and "cyclicality".
One of the conclusions drawn looks like a serious warning in itself: "Peak corporate returns and multiples are here; volatility lies ahead".
For good measure: Macquarie does not believe any of the more sinister scenarios like a recession globally or in the US are on the cards, but the strategists do highlight financial markets at present have embedded a "dangerous cocktail" whereby high asset prices are combined with peak efficiencies and returns for corporates, and expectations remain elevated too, while the pace of disruption is accelerating, at a time when policy errors seem more likely.
Something has to give, at some point.
"Ultimately, we believe policy U-turns are inevitable; it is just a question of timing and the degree of pain that might need to be endured."
All-Weather Stocks: Bell Potter
Most readers of my Weekly Insights market analyses and commentary would be well aware that my personal share market research post GFC has been dedicated to finding All-Weather Performers in the Australian share market; high quality achievers that don't buckle from the moment someone shouts "headwinds" or "change".
But I am not the only researcher whose focus goes beyond the here and now. Last week I reflected upon research conducted by analysts at Morgan Stanley into "Best Business Models". In the meantime, Bell Potter's head of research, Peter Quinton, has updated his selection of local Champion stocks.
These exercises in analysis are by no means exact copies, but they all share that same ultimate goal: finding stocks that are more reliable, more dependable, and more consistent in performance than the average ASX-listed entity. In particular when the going gets a lot tougher for equities, as it always does eventually, such stocks will increasingly attract investors' attention.
In Peter Quiton's words, "These Champion Stocks all have a long term positive thematic, which should drive superior earnings growth and shareholder value over the coming years, notwithstanding inevitable disruptions in the economic and investment environment as well as some corporate stumbles from time to time.
"Therefore, we are not particularly concerned about the current year’s investment arithmetic or the analyst's twelve month buy-hold-sell rating. And, of course, the balance sheet ratios must remain strong in order to provide financial support to the positive thematic driver."
The list contains nine stocks in total. The other eight are APA Group ((APA)), Transurban Group ((TCL)), Challenger ((CGF)), Lend Lease ((LLC)), Goodman Group ((GMG)), CSL ((CSL)), Sonic Healthcare ((SHL)), and Brambles ((BXB)). Investors should note APA Group is currently under take-over interest.
In the view of Quinton, all nine stocks should be seen as "must haves" for any standard, long term investment portfolio. Paying subscribers (6 and 12 months) have access to a dedicated section on All-Weather Performers on the FNArena website.
I will be attending a presentation by institutional investors on Monday, which is likely to impact on my productivity and available time on the day. As a result, Weekly Insights won't be e-mailed out late on Monday, as is the custom, but more likely in the afternoon on Tuesday. Non-paying members who receive the email on Wednesdays should notice no difference.
Audio interview from Tuesday on why value investing has become such a hard slog in the Australian share market, and what are the dynamics behind the scenery:
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Tuesday, 10am Skype-link to discuss broker calls (earlier than usual)
-Thursday, from midday until 2pm
-Friday, 11am, Skype-link to discuss broker calls
Rudi On Tour
-AIA National Conference, Gold Coast QLD, July 29-August 1
-ASA Presentation Canberra, 3 August
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10
(This story was written on Monday 16th and Wednesday 18th July 2018. Part One was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part Two shall be published on the website 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: firstname.lastname@example.org or via the direct messaging system on the website).
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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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