Rudi’s View: Rotation Anxiety & Conviction Buys

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 | Sep 13 2019

Dear time-poor reader: updates on stockbrokers' Conviction Calls plus extra updates post the August reporting season

In this week's Part Two of Weekly Insights:

-Conviction Calls
-Post-August Afterthoughts

-Rudi Talks
-Rudi On Tour

Conviction Calls

Rudi Filapek-Vandyck, Editor FNArena

A correction in bonds globally is causing portfolio rotation in the share market this week, with some outsized impacts on share prices in popular midcap favourites including Pro Medicus, Appen and Charter Hall. It has to be noted though, share market strategists at UBS do not seem nervous about it.

Instead, they published a dissertation this week as to why ultra-low interest rates are here to stay, and with the RBA continuing to cut the cash rate locally, UBS is strongly suggesting investors should retain a close eye on stocks that benefit from lower long-term bond yields.

The strategy team has come up with the moniker "Defensive Income and Growth", shortcut "DIG". Key sentence in the report: "Although the DIG trade has run hard already, we think that, as analysts recalibrate their valuation models to use lower risk free rates, DIG stocks will benefit more than other stocks."

UBS has identified four groups of companies that stand to benefit the most from widespread acceptance the ultra-low bond yield environment is more permanent than previously thought.

First up are pure-play defensive income stocks such as GPT Group ((GPT)), Shopping Centres Australasia ((SCP)), Telstra ((TLS)), Transurban ((TCL)) and Woolworths ((WOW)).

Less yield-exposed income names that should also benefit include Aurizon Holdings ((AZJ)), Crown Resorts ((CWN)), Star Entertainment ((SGR)), Tabcorp ((TAH)) and Wesfarmers ((WES)).

Then there are the typical Growth stocks, of which UBS's most preferred names are Altium ((ALU)), Appen ((APX)), CSL ((CSL)), Goodman Group ((GMG)), REA Group ((REA)) and ResMed ((RMD)).

Last but not least are Growth companies trading at a reasonable price, including Aristocrat Leisure ((ALL)), James Hardie ((JHX)), Lendlease ((LLC)), News Corp ((NWS)) and QBE Insurance ((QBE)).

While bond yields globally are on the rise this week, UBS still sees Australian 10-year yields falling to 50bp by year-end.


A special mention goes out to Morgan Stanley Chief Investment Officer Mike Wilson in the US who has kept to his forecast, originally made in 2018, that the S&P500 would remain capped inside a trading range with the ceiling at 3000 points and the bottom of the range some -10% lower.

The US share market index threatened to break-out to the upside in July, but ultimately didn't. It has remained near the top end of the identified trading range since. Wilson's belief is that the bottom of the range will be revisited in the next six weeks or so.

Further out, Morgan Stanley leans very much towards a likely recession for the US economy, with Fed rate cuts proving ineffective to stop the economy from sliding further downwards.

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