Rudi's View | Jul 19 2019
This story features LINK ADMINISTRATION HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: LNK
In this week's Weekly Insights (this is Part Two):
-In Search Of 'Value', Avoiding 'Cheap Junk'
-All-Weather Portfolio Update
-Unveiling The US Corporate 'Secret' – Three Charts
-Rudi On Tour
All-Weather Portfolio Update
By Rudi Filapek-Vandyck, Editor FNArena
It only took one highly unusual race at the Winter Olympics of 2002 for Australian Steven Bradbury to become a colloquial reference in modern day language.
Just type in Steven in Google search and it is the second suggestion that pops up. No additional info required.
Bradbury has become synonymous for the unexpected victor, the result that nobody expected, the win that is achieved through external and uncontrollable circumstances; when Dame Fortuna smiles upon you and luck is blatantly on your side.
Having read about how the final cricket world cup contest was decided between England and New Zealand, or the Wimbledon tennis final between Novak Djokovic and Roger Federer, I think maybe it's time we also developed a quick reference for playing the game of your life, and still ending up losing by the narrowest of margin at the final finish line.
The thought came to my mind even before both sporting finals had come to their conclusion, when I was doing the sums and calculations for the All-Weather Model Portfolio at the close of mid-2019. In isolation, the Portfolio experienced its best performance over a six months period since its launch in late 2014.
But, really, a return in excess of 13% (before fees) looks rather pale when the ASX200 Accumulation index achieves nearly 20% over the same period. Enter the New Zealand cricket team, and Roger Federer who's understandably taking a full month's rest from tennis.
Below is an overview of how the Portfolio has performed over the past twelve months. Last week, I shared some of my analysis as to why the index outperformed the Portfolio with stocks like Amcor, CSL, REA Group and TechnologyOne, but also Reliance Worldwide, Link Administration, Bapcor and Orora.
See also "Do I Have A Few Surprises For (Most Of) You" https://www.fnarena.com/index.php/2019/07/04/do-i-have-a-few-surprises-for-most-of-you/
The news about active managers versus passive investment returns has taken another negative bend, according to data supplied by Chant West.
As reported in the Australian Financial Review on Thursday, the two best performing growth funds in Australia, QSuper Balanced and UniSuper Balanced, have achieved returns of 9.9% for the financial year ending on June 30th (FY19).
S&P/ASX 300 Index returned 11.4% over the period while the S&P/ASX 200 Index returned 11.5%. In line with my own observations, the ASX50 performed best, while small cap indices barely managed to return a positive result.
Equally typical for this year's market dynamics, data released by Mercer revealed the Martin Currie Australia Real Income Fund was the best performing over the year with a total return of 18.8% before fees. According to Mercer, the median manager among 134 strategies measured in the Australian shares category delivered a 9% return before fees.
At the bottom of Mercer's total return rankings we find Forager Australian Value with a loss of -18.8%. Next sits Bennelong Concentrated's -6.4% loss. Remarkable, because at the end of the prior financial year Bennelong had ranked the second-best Australian strategy with a 33% gain.
Not all funds are ranked and monitored by Chant West or Mercer. The worst result spotted by FNArena is -20.6%.
Unveiling The US Corporate 'Secret' – Three Charts
For many years, investors in Australia have marveled at the continuous up-trend in US equities carried by what seemed a superior class of corporate entities run by a superior class of business leaders, managing to grow profits for shareholders, year-in, year-out, year after year after year, irrespective of how high the US dollar or how low US Bond yields.
But maybe there is a lot more to this story than meets the lazy eye from far-away Australia?
Glushkin Sheff's Chief economist and strategist, David Rosenberg, always keen to highlight the finer details most bullish commentators elsewhere prefer to ignore, included the three charts below in his daily market commentary last week, and at the very least the three charts combined should answer a large number of questions, while raising a few more.
Consider, for a few seconds, that contrary to bullish market sentiment in the USA, and that one President that cannot get enough of new record highs, the fact that corporate profits, without accountancy adjustments or divided by outstanding shareholders capital, has largely remained stagnant since 2013.
Yes, correct. Stagnant. Similar to what essentially has occurred with corporate profits in Australia over the past six years. See chart number one below.
So how can we explain the American growth numbers that have been supporting this extended bull market? Charts number two and three provide a rather incisive look-in.
Corporate debt (chart number three) has steadily risen to all-time highs and chart number two suggests businesses have been using the additional balance sheet leverage on the back of the historically low cost of debt, to buy in ever more shares.
Anno 2019, the total number of outstanding equities in the US has fallen to a 19-year low (chart number two).
Basic economic theory teaches us that growing demand combined with falling supply equals rising prices, and that's exactly what US share markets have experienced over the past six years.
But these three charts combined also reveal how important the fall in bond yields and ongoing support from the Federal Reserve have been to keep this positive growth story alive.
MST Marquee investment strategist Hasan Tevfik, prior employed by Credit Suisse for many years, points out equity markets are shrinking in the US, Europe, New Zealand and this year also in Australia.
Tevfik predicts that, because of the exceptionally low cost of debt, de-equitisation is like to stay with us for longer. While this might work to the benefit of investors, it does make for an awfully challenging backdrop for business models that are leveraged to expanding volumes and expanding equities supply.
The once almighty Deutsche Bank earlier this month decided to quit trading equities. Tevfik predicts more of such decisions are in the pipeline worldwide.
I am fully aware that the title mentions three charts and one extra will exceed that number, but I nevertheless thought it apt to add the one below, published by economists at National Australia Bank on Thursday morning, as a reminder of how US equities have mostly outperformed just about every other equity market around the globe.
It's not just you, Australia.
On Wall Street, Morgan Stanley equity strategist Michael Wilson (and the rest of the strategy team) stand above the crowd in that the investment bankers' view on the outlook for equities hasn't changed in 18 months.
That view is that US equities are now capped inside a rather large trading range in between 2400 on the downside and 3000 at the upper end of the range.
Back in January last year (2018) when the S&P500 index surged towards 3000 for the first time, Morgan Stanley strategists warned their clientele to prepare for a multi-year consolidation period. As we know now, US equities sold off subsequently, then made a gradual come-back to again stare at 3000 within reach by September.
After that came the Big Sell-off, as I am sure we all still remember.
By late December, the S&P500 had fallen to around 2350 which, strictly taken, is below the 2400 suggested bottom but what are 50 points between friends, n'est-ce pas?
Approximately seven months of upwards and onwards rallying has now put the S&P500 back near the top end of the suggested range. The index last week rose slightly beyond the 3000 level.
And yet, Morgan Stanley's view has not changed. The decline in interest rates has made US stocks more attractive, acknowledges strategist Wilson in his latest market update, which largely explains why the US index is back near the top of the trading range, but the fundamentals underneath the rally have weakened considerably.
Investors should prepare for disappointment which shall pull back the S&P500 from its current lofty high, warns Wilson. Both corporate earnings and economic growth are on his assessment most likely to disappoint from here onwards. Market consensus still sees a significant resurgence into 2020, but Morgan Stanley remains of the view those expectations will be proven too optimistic.
To be continued, without a doubt.
Sector updates are usually heavily dominated by relative valuations, and the latest update by stockbroker Morgans on local insurers and diversified financials is no exception.
Having marked-to market for all sector members under coverage, Morgans lined up its sector favourites in order of preference, and relative valuation shines through like a full moon on a stormy, dark night in Cornwall. Never been to Cornwall, but that's how I imagine it, and it sounds kinda funky.
The order of preference for investors seeking access to this sector is thus Link Administration ((LNK)) first, followed by Kina Securities ((KSL)), Afterpay Touch ((APT)), QBE Insurance ((QBE)), Zip Co ((Z1P)) and Suncorp Group ((SUN)). Other names missing on that list, such as Computershare or Perpetual, are rated Hold with one exception: the local stock exchange ASX ((ASX)) carries the sole Reduce rating due to elevated valuation.
Equally noteworthy: Morgans analysts believe the risk during reporting season for this particular sector remains to the downside; if not in actual released results, than potentially via forward guidance. Health insurers are seen as the exception.
Sector analysts at Citi have a different take on things. Number one observation is there are no Buy ratings left for the sector at Citi.
This does not stop the Citi team for putting together a ranking order in terms of preference, but investors should note: most stocks mentioned are rated Neutral, with the exception of ASX and IOOF Holdings ((IFL)).
One most interesting High Conviction Call was released by CLSA analysts Richard Barwick and Mark Wade this week.
Interesting because, as one industry observer put it, "amazing there's still research coming out of there". For those not up to date: US competitor Jefferies has raided the CLSA office luring the core of the Australian operations over (probably offering a lot more money) and market rumour has it talks are continuing with what used to be the local equities team at Deutsche Bank, but no concrete result has been announced thus far.
Apparently, the ex-Deutsche Bank team is trying to stay together. Meanwhile, a number of industry predators are trying to cherry pick their preferred candidates. It truly is a dog-eat-dog world in equities.
Back to CLSA. This week's High Conviction Call was equally interesting because it involves Treasury Wine Estates ((TWE)), of which the share price has been failing to keep any momentum going with market speculation rife distributors are left with excess inventories in China, which must, if accurate, at some stage create a painful bottleneck for the company.
CLSA analysts toured through China, spoke with 45 wine distributors locally, of which 30 distribute Treasury Wine produce, and they have found no indications there is any truth behind the market speculation.
Instead, CLSA reports Penfolds continues to perform well, with Rawson's Retreat a distant second. US based Beringer is doing it tough because of tariffs. Forget about all the other brands in the portfolio: these are the only ones that measure in China.
Chinese consumers continue to love French wine the most, further underpinning Treasury Wine Estates' strategy to develop its own French brand under the label of Maison de Grand Esprit.
Most importantly, management is still aiming at increasing the company's distribution foot print in China by 50% over the next three years. This, CLSA explains, simplistically translates into roughly 15% growth per annum.
On the basis of these fresh on-the-ground insights, CLSA suggests Treasury Wine Estates shares could well present themselves as a huge opportunity in August. Price target is $23 (unchanged). Rating: High Conviction Buy.
Audio interview on Wednesday:
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 15th & 16th 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: email@example.com or via the direct messaging system on the website).
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