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Outlook 2019: The ‘Bear’ That Keeps On Rolling?

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 | Nov 29 2018

In this week's Weekly Insights (published in two parts):

-Late Shock: 2018 Is The Annus Horribilis
-Outlook 2019: The 'Bear' That Keeps On Rolling?

-The Curse Of The Magazine Front Cover
-All-Weather Portfolio Observations And Considerations
-Gartman's Rules Of Trading
-Final Weekly Insights For 2018
-Rudi On TV
-Rudi On Tour

[Non-highlighted parts will appear in Part Two on Friday]

Late Shock: 2018 Is The Annus Horribilis

By Rudi Filapek-Vandyck, Editor

One expert voice who should have been mentioned more in my writings throughout the year is Morningstar's head of equities research in Australia, Peter Warnes. From the start of the new calendar, and with most investors and commentators preparing for yet another year of abundant investor cheer, Warnes stuck to his view that 2018 would not be a year of joy for equity investors.

For nine long months it seemed he was just another "bear" who would be forced to eat his words by year end. But momentum did turn, eventually, and when it did there was nothing to keep share prices and indices in positive territory for the year.

As I pointed out two weeks ago, Warnes is anticipating the end of the bull market with a classic -15%-20% retreat. For those who missed it, here's the exact quote:

"The market's enthusiastic response to the US midterm elections does not alter the fact macros are either peaking or deteriorating.

"The bounce in equity markets provides another, possibly the last opportunity, to reduce exposure to stretched equities before a traditional end-of-bull market correction of 15-20% proportions occurs."

All kudos to Warnes for sticking to his contrarian view, even when share markets in the US and in Australia kept on rallying to a new high, seemingly proving him wrong. But I very much doubt whether Warnes was realising at the start of the calendar year how bad exactly things would look eleven months down the track.

And let there be no mistake: 2018 truly and genuinely has proved to be an annus horribilis for investors globally.

Look no further than the 70 asset classes monitored by analysts at Deutsche Bank. As the end of November approaches, 90% of all these assets have posted a negative total return for the year to date. This, according to Deutsche Bank, has never happened before; not in the 1920s or 1930s, not in the 1980s, not even in 2000-2003 or 2008-2009.

Deutsche Bank data goes back to 1901.The previous high was in 1920, when 84% of 37 asset classes were negative. In 2017 only 1% of asset classes delivered a negative return, which was the record low of all times.

Outlook 2019: The 'Bear' That Keeps On Rolling?

Looking back over the past twelve months, most ASX-listed stocks have lost -15%-20% in value; just not all at the same time. As predicted by Morgan Stanley strategists, 2018 saw a Rolling Bear Market sweep through equities, whereby sector after sector was being pummeled, until there was only one left standing.

And when technology growth stocks in the US finally keeled over in September, there was no rotation into those stocks that had previously been hit because the reason why -concerns about global growth outlook and corporate profit margins- equally applied to banks, retailers, car dealerships and producers of energy and industrial materials.

A lot has been written and said about healthcare stocks and High PE growth stocks, and how they have fallen since August, but one easy to make observation is that performance of stocks like CSL ((CSL)) and ResMed ((RMD)) is actually still positive year to date, which is not something that can be said of, say, large mining companies (BHP is an exception), energy producers or major banks.

Now that we have completed the full Roll Over, and every part of the share market has been affected at least once, investors find themselves confronted with a whole lot of questions, and that one big dilemma: what next?


Last week, the Alphinity Global Equity Fund organised a close-up meeting with journalists to discuss performance and views for the year(s) ahead. Some among you might remember portfolio manager Nikki Thomas from when she represented Magellan.

The ruling theme at the meeting was probably best summarised by Macquarie global strategists the following day: "Investors are facing one of the most complex environments in years". It just so happens both teams of experts have drawn the same conclusion. Time to dial back on too much risk in investment portfolios.

It's plain impossible for investors to find all the necessary answers right now, and then get it right in portfolio composition as well. For both teams of investment experts, the withdrawal of global liquidity by central banks, led by the US Federal Reserve, is one major uncertainty the full impact of which cannot be accurately predicted this early in the process.

Combined with all other (major) uncertainties that might impact on risk assets in the two-three years ahead, the team at Alphinity has started shifting portfolio allocations towards big, international, solid, quality companies, including The Walt Disney Company and McDonald's.

Given the fund's mandate requires it to stay at least 80% invested in equities, these types of companies are seen as the least risky within an environment that awaits of slowing global growth, rising interest rates, lots of debt and leverage, and financial wizardy all around (from passive investment products such as ETFs to highly sophisticated algorithms and robots).

Equally important, maybe, is that portfolio managers Thomas and Lachlan MacGregor are aiming to stay style-neutral. So no bias towards "value" or "growth"; just less-risky growth at reasonable valuations. As such, the portfolio also contains names such as Alphabet (Google), Diageo, Microsoft, Bank of America, Target, Royal Dutch/Shell, and SAP.

The global strategists at Macquarie summarise their preferences as "quality" and "sustainability". In their view the current path of gradual policy normalisation by the Federal Reserve will become unsustainable "at some point" in 2019, but until then conditions will likely remain tough for Emerging Markets. Once the US Fed changes course, however, watch this space (with most distressed offering highest potential, including Indonesia and Philippines).

Macquarie has a third pillar for investing in tomorrow's world of inconsistencies and macro uncertainties: specific global thematics, such as "Replacing Humans" (through robots, industrial automation and artificial intelligence), "Opium of the People" (gaming, casinos and virtual reality), and "Disruptors & Facilitators".


Strategists at RBC Capital in Canada don't believe investors should worry about worst case scenarios, like an economic recession, just yet. They too predict the US Fed will pause in its tightening in 2019, while the economy and corporate profits in the US will slow down, but still grow at a reasonable pace.

No doom and gloom scenarios thus, but quite likely heightened volatility, thus RBC advocates investors trim their exposure to equities somewhat.

Enter Goldman Sachs, whose US strategists agree with all of the above. Goldman Sachs sees potential for mild gains, net, for US equity markets, but likely with a lot of volatility along the way. Hence, here too, the recommendation is to scale back portfolio exposure at this stage while at the same time advocating a shift towards higher quality companies.

In terms of increasing a portfolio's defensiveness, Goldman Sachs' US team recommends being Overweight Info Tech, Communication Services, and Utilities, while Underweight Cyclicals. Investors should focus on High Quality stocks, which in Goldman Sachs' world is determined by five key metrics: strong balance sheet, stable sales growth, low earnings (EBIT) deviation, high Return on Equity (ROE), and low drawdown experience.

Goldman Sachs' view on 2019 can easily be summarised via quoting some of the chapter titles in its 2019 US equity outlook report: "Return of risk means high quality stocks should outperform"; "Less favorable outlook for Growth, stick with quality"; "Decelerating S&P 500 EPS growth through 2020".

The list of High Quality US stocks contains one familiar name; ResMed, which is listed in the US.


Over in Australia, the local team at Goldman Sachs agrees with their US colleagues it remains too early to turn too defensive, simply because there is as yet no recession on the horizon. Equity markets are undoubtedly facing a more uncertain and challenging outlook, but that should be reflected in share prices already, is the view at Goldmans.

The recommendations for Australian investors is to keep a "moderate cyclical bias" while also making sure you hold a decent number of "select defensive exposures".

As such, Goldman Sachs is recommending to be Overweight both Mining and Energy, with preferences for BHP Group ((BHP)) and Rio Tinto ((RIO)) and for Origin Energy ((ORG)), Woodside Petroleum ((WPL)) and Beach Energy ((BPT)) for the second category.

The so-called "reflation trade" has had a rather checkered track record these past few years, but Goldman Sachs remains a believer and thinks it's best investors stick with the theme. Commodities have typically been a strong inflation hedge late in the cycle, the strategists advise. In addition, Resource stocks are one rare pocket in the market that screen as "cheap", while also seen offering positive earnings momentum.

Goldman Sachs also suggests investors should still be Overweight Offshore Earners with James Hardie ((JHX)), News Corp ((NWS)) and Aristocrat Leisure ((ALL)) its three top recommendations. Stay Overweight Quality is the final positive piece of the puzzle. In the strategists' lingo this "quality" translates as firms with stable earnings and stronger balance sheets that do not carry high levels of gearing. Thus instead of REITs and Infrastructure stocks, traditionally perceived as being "defensive", the strategists point in the direction of AGL Energy ((AGL)), Orora ((ORA)), Crown Resorts ((CWN)), Suncorp Group ((SUN)), and the freshly de-merged Coles ((COL)).

Goldman Sachs does not like Consumer Cyclicals and REITs with explicit reference to the domestic housing cycle. Growth Stocks are equally in the naughty corner as rising interest rates will likely continue to compress valuations of so-called long-duration stocks, but the strategists also believe investors have seemingly grown complacent about the "quality" of many of the (former) market darlings.

Growth stocks that are still seen trading at stretched valuation multiples include NextDC ((NXT)), Domain Holdings Australia ((DHG)), Tabcorp Holdings ((TAH)), WorleyParsons ((WOR)), Bega Cheese ((BGA)), Cleanaway Waste Management ((CWY)), Steadfast Group ((SDF)) and Afterpay Touch ((APT)).

I personally remain a staunch sceptic about the idea of a reflation trade proving anything other than a temporary phenomenon, as it has done on every single occasion to date, plus I believe high quality growth stocks should remain a staple in every investor's portfolio,  with the explicit notion that "quality" (or the lack thereof) has now become a decisive feature for portfolios and investment decisions.

See also Part Two of this Weekly Insights in which I will explain in more depth the portfolio decisions that have been made running the FNArena/Vested Equities All-Weather Model Portfolio.


Calendar 2018 has only five more weeks left, and Morgan Stanley remains convinced the theme of the Rolling Bear Market will continue to apply into the new calendar year, but next year the Roll-On will trigger some major reversals in trends that seem firmly established this year.

As such, Morgan Stanley's forecasts are:

-for a weakening US dollar (the reserve currency is expected to post a cyclical peak)
-yields in the US and Europe to converge (which means: positive returns will be delivered by US Treasuries; US 10-year yield to drop to 2.75% in 2019)
-assets in Emerging Markets will stage a come-back (a view Macquarie strategists also adhere to) – including EM credit
-US equities and high yield will underperform (the reign of US equities is over with Morgan Stanley essentially predicting a flat return)
-"Value" stocks will finally outperform "Growth"

With a lower USD and lower US bond yields anticipated, we can all see how commodities, including energy and gold, can potentially move back into investors' favour. Mind you, things are a bit more complicated for Australian investors as one of 2019's Conviction Calls is for a weaker Australian dollar. Short term, the advice is to be Neutral equities and bonds, Underweight credit and Overweight Cash.

Final Weekly Insights For 2018

This is the final Weekly Insights for calendar 2018. I hope you all enjoyed reading my weekly snippets and analyses as much as I did researching and writing them. It's been a long and eventful year, and not just because of share market shenanigans at the very end of it.

During my presentations and media appearances this year I have felt on numerous occasions a genuine connection with investors in that they sensed the overall context for the share market was changing, but nobody had as yet properly explained the how and why of it all.

At FNArena, the team has continued developing new additions and further improvements to our service. Last week we launched ESG Focus, a new dedicated segment to our news service. We have one more fresh initiative up our sleeves before year-end holidays kick in.

That'll be my final-final effort for the year, before I retreat to spend some time near the water, hiding from the sun, catching up on a million things left to do, including reading some more, and recharging the inner battery.

I sincerely hope 2018 hasn't been too much of a disappointment, and that our efforts at FNArena, including my personal observations and insights, have made a significant and positive contribution. Next year will be different again, as is always the case. May Dame Fortuna smile graciously upon you all.

Weekly Insights will return at the end of January. Till then take care, and all the best. We shall continue this relationship in 2019, hopefully.

Rudi On TV

My weekly appearance on Your Money (the channel formerly known as Sky News Business) is now on Mondays, midday-2pm.

I shall make an appearance on Peter Switzer's program on Your Money on coming Monday, 7.30pm.

Rudi On Tour In 2019

-ASA Inner West chapter, Concord, Sydney, March 12
-ASA Sydney Investor Hour, March 21
-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22

(This story was written on Tuesday 27th November 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. Part Two will be published on the website on Friday morning).

(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.
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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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