Rudi's View | Nov 08 2018
In this week's Weekly Insights:
-When Uncertainty Is The Only Certainty
-Rudi On Tour
When Uncertainty Is The Only Certainty
By Rudi Filapek-Vandyck, Editor FNArena
"There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."
[Jesse Livermore, legendary speculator]
After an unusually savage October sell-off, the subsequent bounce-back rally has been rather mild and unconvincing in character, raising the obvious question: is there a message in there somewhere about the future direction of risk assets?
To some with a negative mindset, and on my observation there is a growing number of bears out there, the answer is unequivocally affirmative. The weak bounce, these expert voices argue, is but another bad omen for what the future holds for global investors in risk assets.
I am not yet convinced by this argument, as there simply is too much uncertainty out there to allow for a quicker and bolder move upwards. Within this context, I'd suggest it would have been rather surprising if equity markets by now had rallied strongly at a time when corporate results in the US are rather lukewarmly received, while stress is rising in Europe, the Federal Reserve is about to provide an update, bond yields are on the rise (again), and all eyes are on deteriorating indicators for the Chinese economy.
We also have mid-term congressional elections in the US this week and here the short term outlook is actually positive. Below is a chart released by Tracey McNaughton, global strategist at Wilsons this week. It shows that, irrespective of the outcome, US equity markets have always rallied post the mid-term elections; at least going back as far as 1950.
Hence if history repeats we should see the return of positive momentum later in the week, which no doubt is what short term traders are looking forward to. For investors looking beyond this week, however, there is no certainty but for the fact that uncertainty remains a key ingredient for financial markets, and is likely to remain exactly that for the weeks ahead.
In Australia, the banks' financial results have been "encouraging", at least for the short term, but for the fact they were not worse than feared, but these results are not good enough to trigger a sharp rally, potentially dragging the rest of the market along. Banks are the most and closest researched sector of the local market, by a long way, thus hoping for something substantially better than what the crowd is already anticipating almost never pays off.
Share prices of domestic banks look cheap, yes they do. But a lot more is needed to re-rate the sector and within the present context that simply does not seem feasible. Investors should note the best the Big Four can do under the circumstances is keep costs contained and pay out a flat dividend. In contrast, Macquarie Group ((MQG)) has no such operational restraints, again lifting guidance for the full year with analysts confident guidance for 10% growth can still be beaten.
Compare the pair, and draw your own conclusions. But I'd add: if you ever wonder why "value" investors are having such a hard task at hand, the evidence is right in front of us. Macquarie versus ANZ/CBA/NAB/WBC/BOQ/BEN. The riddle to solve is only too difficult for those who refuse to see.