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This Could Be The Start Of Something Different

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 | Oct 25 2018

In this week's Weekly Insights:

-This Could Be The Start Of Something Different
-Digital Advice – The New Frontier

-Rudi Talks
-Rudi On Tour

This Could Be The Start Of Something Different

By Rudi Filapek-Vandyck, Editor FNArena

There is a whole bunch of scaremongers out there, waving index charts that look as scary as they can for any human mind with doubts about the future direction of risk assets. But the untold truth is most of these perma-bears have been waving similar charts for at least the past two years, which as far as I am concerned, gives them no credibility in today's tough environment for risk assets globally.

It's a bit like grabbing the media-megaphone and telling everybody CSL shares are extremely over-priced when they are trading at $120 and now claiming victory because they have retreated, finally, -20% from an all-time high of $230.

In my humble opinion, none of this provides any evidence such prediction/opinion was correct. It proves the opposite.

Having said all this, I have been paying attention to price charts and technical analysis myself of late. Not because technical analysis reveals the future (it does not), but because it is important to keep an eye out for how internal dynamics are changing for global equity markets. In case anyone has any doubt, still: apart from most markets being oversold, which is a temporary status, internal dynamics for equities have deteriorated quite markedly this month.

Markedly lower volumes on up-days, with indices holding up on support from a shrinking number of stocks is but one way to describe the current situation. Another observation is that a growing number of stocks are well-off their year high, and trading below the 200 day moving average. The Dow Jones Industrial Average (DJIA) and the Nasdaq are among few equity indices that are still in positive territory for the running calendar year.

We can all deduce from daily, direction-less and volatile soul-searching in markets, investors are not quite certain how to deal with this.

In Australia, of course, we are inclined to feel doubly disempowered. Tomorrow's direction is either going to be determined by the latest earnings reports in the US, or by movements in US Treasuries, another Tweet from Capitol Hill, or maybe also from news snippets coming out of Beijing (not that we fully want to ignore what happens in Europe either).

From a fundamental angle, modeling by stockbroker Morgans suggests fair value for the ASX200 sits a little above 6000, but if one takes a bullish view a la JP Morgan the year-end target shifts to 6500. But how wise is it to adopt such an optimistic view?

Given US equities have outperformed (by quite some mileage) the rest of the world in years past, and in particular throughout 2018, it seems likely that whatever happens with the likes of Apple, Amazon, Boeing, JP Morgan, etc will also determine the immediate direction for equities in Australia.

Here, in particular, we should all be paying attention to updated insights and views from the global strategy team at Morgan Stanley in New York. On my observation, Morgan Stanley's committee of strategists has read this year's deflation of the US bull market very accurately, which gives them a lot more credence than those who have remained bullish optimists all through the past ten months, as well as those scaremongers I referred to in my opening sentence.

Unfortunately, this doesn't suggest the outlook is getting any rosier, in particular not in the short term.

Morgan Stanley sees a mix of typical bull market correction characteristics with elements of an early stage bear market. As such, the team thinks we should all brace for more weakness in US equities, and for not much in terms of overall net return for the year ahead. While this month's correction might not be the start of a fresh bear market, the underlying expectation is we are nearing the end of the cycle and we should, all else being equal, expect to be a lot closer to the next bear market than we were during the prior correction in February-March this year.

In case you're curious: the notable jump in US real and nominal bond yields, signalling tighter financial conditions are impacting on equities, accompanied by a rally in crude oil futures and credit spreads widening (with exception of US high yield) are all ingredients for a (potential) bear market unfolding for equities.

For good measure: Morgan Stanley does worry about a deeper correction for US equities short term, but then thinks share prices are likely to bounce somewhat into year-end. This should not entice investors to start chasing stocks again, the strategists warn. US economic growth has likely peaked, and so has US corporate earnings growth, while the Fed wants to keep hiking rates, while also unwinding its balance sheet, while the US government is building ever larger deficits, and a macro-conflict with China.

Complicating this picture even further is the cost of hedging for foreign owners of US Treasuries has risen to a 20-year high, which explains why central banks in Russia, Japan and China have been offloading some of their US Treasuries of late, and why bond yields in the US suddenly spiked.

The underlying suggestion here is this reset to higher bond yields could become an unruly process, with commensurate impact on equity markets, globally.

From what I have read among recent assessments from technical analysts, there seem to be enough indications that more weakness is a real possibility for US equities which, essentially, suggests support from 200 day moving averages is not going to hold, which can potentially open the gate to more selling, and even to another of those good old fashioned capitulation days.

Not that anyone is looking forward to any of this, but it is not up to us to decide what happens next, unfortunately.

In terms of portfolio management, I have been making the suggestion for a few weeks now that pulling more cash to the sidelines seems but the prudent thing to do.

How much cash is necessary? As much as what allows you to sleep at night. Don't try to make things more complicated. The age old rule of thumb is best adhered to.

For investors thirsty for yield/income, you can also consider corporate bonds, which carry less risk (not by definition, but in a general sense. You still have to make choices and consider that elevated yield equals elevated risk). In addition, high yielding ETFs might be less risky than individual stocks, they will still fall in line with equities in general.

See also Weekly Insights from the past few weeks:

The good news, and yes, there is some positive news in today's edition, is that local share market strategists at Morgan Stanley have retained their year-end target of 5950 for the ASX200, which remains above a weakening share market index.

The strategists remain wary of exposure to a weakening housing market, this includes the banks, and they'll be looking at the unfolding AGM season for further clues, while observing earnings growth locally remains weak, offering not much in terms of upward momentum.

Morgan Stanley thinks discretionary retailers are able to deliver in line with heavily reduced expectations, which makes them some kind of a safer haven in a wobbly looking market. Top picks are Metcash ((MTS)), Domino's Pizza ((DMP)) and JB Hi-Fi ((JBH)).

Companies with global earnings make up around 27% of the index and their growth forecasts should receive a boost from a weaker Aussie dollar, argues Morgan Stanley. Key positions held are CSL ((CSL)), Cochlear ((COH)), ResMed ((RMD)), James Hardie ((JHX)), Amcor ((AMC)), Domino's Pizza and Treasury Wine Estates ((TWE)).

For investors looking to add resources stocks, the strategists highlight the outlook is not just about spot prices, which remain high, but equally about rising cost pressures. Morgan Stanley analysts continue to see sustainable upside potential in Mineral Resources ((MIN)), Whitehaven Coal ((WHC)) and Iluka Resources ((ILU)).

Among financials, the strategists highlight ongoing potential for QBE Insurance ((QBE)), Macquarie Group ((MQG)), Insurance Australia Group ((IAG)) and Link Administration ((LNK)) while Pendal Group ((PDL)) is believed to offer the best diversification among wealth managers locally.

Digital Advice – The New Frontier

Robo-Advice remains one of today's FinTech sectors desperately hanging out for a better label. Upon hearing the term, the mind digs up images of R2-D2, Bender or KITT, and there is very little Robo-Advisors have in common with such movie-stereotypes.

Digital advice might be a more suitable umbrella term for what is today an fledgling new sector full of initiative, bright ideas, vibrant entrepreneurship and… lots of barriers and misconceptions that need to be overcome. Try: FinTech is predominantly for Millennials. Or this one: it can never work because low margins imply there will never be enough customers to make it work.

Instead, this whole new extension of consumer finance services can be viewed as yet another step towards a shift in increased market power for consumers. Already established financial services providers, including the Big Four banks, have taken a keen interest with alliances and early stage investments being made throughout the sector landscape. Finance tomorrow will not be similar to what we thought of as standard and acceptable yesterday.

It goes without saying the entire industry feels energised and emboldened post Royal Commission. But the industry that is promising to deliver more client focus and increased transparency is, above anything, still very much characterised by a lack of transparency itself. How does the Australian consumer looking for a better deal in terms of insurance, estate planning, investment advice, household budgeting and cashflow planning connect with the right digital tools and service(s) out there? And how do we know we are not just a number in the click bait campaign of a few whizzkids looking to retire before they get to thirty?

Advisor Ratings is hoping to become the natural destination for all of us searching for answers. The platform started in October 2014 with the aim of making the opaque world of financial advisors a lot more transparent and today Australians can search for advisors and look up their reviews, derived from consumer experiences. Since this week the platform also includes 36 robo-advisors. Or maybe we should stop using that term; 36 digital advisors that are being subjected to the same scrutiny from happy or disgruntled customers.

Those 36 digital FinTech services are quite the varied bunch, ranging from advice about super, pensions and life insurance, to saving and household budgeting tools, to investment strategies, to find out about your personal credit score, to crowd funding in real estate, to research options for aged care facilities.

Today's plethora in FinTech services has moved well beyond international money transfers and investing on Wall Street type of applications, and they are not aiming solely at the below-30s demographic either. Some of them are working closely together with existing financial (planning) services. Advisor Ratings reports Australia currently numbers 24,000 financial planners, but six out of every seven Australians are not using their service or advice.

This means 86% of Australians remain un-advised by the traditional finance services industry. Smart Tools, as Advisor Ratings likes to call the robo-solutions providers, are expected to grow their assets under management from $1.4bn to $5.5bn in 2022; a compound annual growth rate of 43%, if achieved.

Word from Money 20/20, the world’s largest FinTech event taking place in Las Vegas, is that the financial sector, including both the banks and the emerging FinTech industry, has firmly put the focus on artificial intelligence, or AI as it is now commonly referred to. More intelligent applications will assist with combating fraud as well as with improving client retention and services, while opening up new possibilities such as personal financial coaching.

It remains early days yet, but one thing stands above any doubt: there is a whole lot more coming from all of this, including here in Australia. See

Rudi On Tour

-AIA Celebrity Lunch, Brisbane, on November 3
-ASA Parramatta, on November 14, 5.30-7pm

(This story was written on Tuesday 23rd October 2018. It was published on the Tuesday in the form of an email to paying subscribers at FNArena, and again on Thursday as a story on the website).

(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).



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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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