Rudi's View | Jul 11 2019
In this week's Weekly Insights (published in two parts):
-This Too Shall Pass
-The Other Story About Small Caps
-Afraid About Growth: Nearmap
-Who Invests In Negative Yielding Bonds?
-Rudi In The Australian
-Rudi On Tour
This Too Shall Pass
By Rudi Filapek-Vandyck, Editor FNArena
"We expect markets to continue to provide attractive returns for investors but are prepared for an increase in volatility that typically comes with late-cycle investing."
[Tracey McNaughton, head of asset allocation, Wilsons Advisory and Stockbroking]
One of the key characteristics of the 2019 bull market rally is not only has the uptrend been exceptionally strong, with the ASX200 Accumulation index up nearly 20% over six months, the average volatility along the way up has been unusually low at the same time.
To illustrate my point, I have put together the monthly returns for the first half of 2019. And just in case anyone needed to be reminded, I also included the monthly performances from the prior four months in 2018:
It is good to remember ourselves that while the overall trend has changed dramatically for equities worldwide, the Big Question Mark that caused the trend to reverse towards the end of 2018 is still intact: is the US economy, and by extension the rest of the world, decelerating towards an economic recession or not?
Before you answer that question, do note I am not going to attempt to answer it myself. Nobody knows the answer. My guess, no matter how well-researched, is as much worth as yours.What we do know is that central bankers are now united in their attempt to prevent worst case scenarios, and governments might join in next with infrastructure spending and more alternative forms of support.
Last year, financial markets sniffed out the rising risk and found central bankers and governments asleep at the wheel. Hence the relentless down-trend. Then came the Fed's public acknowledgement -we received your message- and other central bankers in China, Australia and elsewhere joined in.
Hence the swift trend reversal and relentless, low volatile up-trend over the past six months.
It's easy to now get carried away and put all our trust in the world's leaders and monetary authorities, but the Big Question Mark hasn't been answered yet, and outside of lower bond yields and central banks cutting cash rates, nothing else has changed much. We still need to see concrete evidence of economies stabilising, then trending back upwards.
This might take a while. There is no guarantee financial markets will remain confident and patient. In the meantime, experts, strategists, traders and authorities will be trying to figure out what follows next. The safest bet at this point in time, I believe, is that continuously rising indices on low volatility is not going to last. This too shall pass. Share market weakness on the first two trading sessions this week in Australia might well be the harbinger of what is yet to come.
Morgan Stanley has just declared it is moving to Underweight global equities. Many an institutional wealth manager has been increasing the level of cash in the portfolio recently. Equally noteworthy: many remain positive on Australian equities on a relative basis; meaning they might go Neutral or Underweight equities in Asia or in the US, but are likely to make no changes to their Australian allocation, unless they were Underweighted in the first place.
For investors, it is equally important to understand the positive view on Australia is mostly a relative call, and it happens against a background of equally challenging domestic economic dynamics. As once again became apparent when National Australia Bank released its monthly business survey on Tuesday morning.
This survey is widely seen as the best insight into how businesses are performing in Australia; inside the Reserve Bank building at Martin Place, Sydney as well as among economists and journalists across the country.
"Overall, the survey results for June continue to suggest that the business sector has lost significant momentum over the past year or so. Business confidence largely unwound the bounce in May and while business conditions rose in the month, they remain below average. The recent run of results also suggest that the economy is unlikely to record a significant pickup in growth in Q2. Further, forward orders also remain below average (and are negative), suggesting a near-term turn around in business activity is unlikely."
Thus reads the opening paragraph of the day's press release, in which NAB Group Chief Economist Alan Oster seems to be making the extra effort to emphasise this latest survey suggests investors should not be hoping for significant improvement in the near term (his specific words are "in the next few months").
While the NAB survey explains why investors continue to avoid large swathes of the Australian share market, not confident there won't be a profit warning or disappointing outlook statement forthcoming, or that the worst has now been seen in case that profit warning has already been issued, ultimately the direction of global equities will be determined by corporate earnings, economic data and stimulus actions in China and the USA.
With the Q2 corporate earnings season about to commence in the US, investors will be super-keen to find out what the latest trends and insights are from the bottom up. In Australia, there are still four weeks left before corporate earnings updates will be unleashed on a daily basis.
One mega-trend that needs to be watched closely, and which is unlikely to be impacted significantly by whatever comes out of these corporate profits releases, is what happens on bond markets. Ever lower bond yields -meaning: bonds are rising in price- have had a significant impact on equities, and not only on stocks such as Goodman Group, Transurban and Charter Hall, but equally for Altium, Xero, Carsales and, in fact, equity markets in general.
Bond traders are just as gung-ho as their peers on equity trading desks to price in changes in rate cut projections, and the US market might have been pricing in too much too soon. Any changes over there are poised to impact on equities. As I said earlier, plenty of reasons to get prepared for a less straightforward outlook for equities.
Make sure you also read "The Global Fiscal Panic" published on the FNArena website on Tuesday morning:
See also: Crucial Question: Is It 1995 or 2007?
Who Invests In Negative Yielding Bonds?
It's a crazy world we are living in with trillions of investment funds parked in negatively yielding government bonds, and with no sign on the horizon this situation is about to change anytime soon.
Negative yields on bonds means investors are paying money for the privilege of owning a loan to the provider (not from, but to). In practical terms, this means investors are given a guarantee they will end up losing money; and still they buy more bonds.
So who exactly is buying these bonds?
When I wrote "Change. Investing in a Low Growth World" I dedicated a few pages to what surely must be a mind-boggling question for most mere mortals among investors: who lends out money knowing it will guaranteed result in a negative return?
GaveKal's Charles Gave recently returned from Europe with another fine example of modern day craziness, which partially answers that question. I thought I'd share it with you:
"When meeting some clients a few weeks ago in Amsterdam, I made my usual remark about the stupidity of running negative interest rates. In response my host told me a sobering story. He manages a pension fund and had recently started to build large cash positions. One day he was called by a pension regulator at the central bank and reminded of a rule that says funds should not hold too much cash because it’s risky; they should instead buy more long-dated bonds. His retort was that most eurozone long bonds had negative yields and so he was sure to lose money. “It doesn’t matter,” came the regulator’s reply: “A rule is a rule, and you must apply it.”"
Rudi In The Australian
My recent story on Australian gold producers got picked up by The Australian newspaper to lead the Wealth section on July 2nd.
Unfortunately, the times when I was able to include a direct link to my story are well and truly past – News Ltd likes to keep its content behind a stringent pay wall.
For those who missed the story, there is always the opportunity to still read the story via the FNArena website:
Audio interview on Wednesday about how much central bankers are invested in today's financial markets, and how far exactly is this going to take them:
Rudi On Tour In 2019
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1
(This story was written on Monday and Tuesday 8th & 9th July 2019. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. Part two follows on Friday).
(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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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)
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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.)