Does (Lack Of) Substance Mean (Lack Of) Momentum?

rudi-views
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 | Oct 17 2019

Dear time-poor reader: the real question to ask might not be what is the outlook for equities, but rather for which part of the share market exactly?

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

-Does (Lack Of) Substance Mean (Lack Of) Momentum?
-Conviction Calls - Part One
-Uncorrelated Yield - Research Reports
-Conviction Calls - Part Two
-Rudi Talks
-Rudi On Tour

[Items not in bold are included in Part Two, which will be published on Friday morning on the website.]

Does (Lack Of) Substance Mean (Lack Of) Momentum?

By Rudi Filapek-Vandyck, Editor FNArena

Brief recap of what has transpired across the Australian share market since January: upon an initially tepid recovery from deeply oversold levels, equity markets put in a multi-month rally which saw cheaper-priced laggard stocks lead the rest of the market higher by some 20% by late July (total return, including dividends).

In professional funds management parlance the period can today be classified as a brief return to outperformance for "Value" over "Growth". In other words: this was the time for miners and banks, and for industrial cyclicals to shine. It's not that the operationally more solid Growth performers weren't performing; they still did, just not to the same extent as their much cheaper priced brethren.

As the general focus started shifting to the increasingly challenged global outlook, and to the fact many companies operating under the "Value" label were issuing profit warnings ahead of the August reporting season, momentum in the share market swung back to the relative safety of proven, reliable performers such as CSL ((CSL)), REA Group ((REA)), Goodman Group ((GMG)) and smaller cap popular favourites Afterpay Touch ((APT)), Jumbo Interactive ((JIN)), and others.

The swing in relative momentum proved justified throughout the August reporting season with most stocks in the "Growth" basket meeting or beating market expectations, while their (still) cheaper priced peers, in general terms, continued to display weakness, vulnerabilities and an overall inability to beat already much reduced expectations. Underlying, the first cracks have started to appear in Australia's outlook for shareholder dividends, but this story will have a much longer tail ahead.


Shortly after the August reporting season, global equities made another attempt to swing momentum back to "Value" away from "Growth", at times helped by corrections in bond yields and pompous announcements by the White House marketing machine about the Greatest Inter-Country Deal about to be signed off on in human history.

Naturally, if such a deal were ever forthcoming, and it would genuinely stimulate economic growth in 2020 and beyond, this would undoubtedly benefit miners, banks and other cyclicals, which is why these shares rally harder whenever financial markets decide to run along with the official White House narrative.

In the absence of any concrete appeasement containing a lot of substance, those same cyclicals, otherwise referred to as "Value" stocks, continue to face slowing economic momentum, and possibly worse. Ongoing negotiations between the USA and China, with regular updates on prospective outcomes, have directed investors' attention away from corporate profits, and from specific threats and vulnerabilities.

Here is where things might become interesting in the coming weeks. The Q3 corporate results season in the US is about to take off. In Australia, investors focus is about to be awoken by banks reporting financial results, as well as the likes of Australian Pharmaceutical, Unibail-Rodamco-Westfield and Orica, all firmly in the "Value" basket, while expectations remain buoyant for quarterly and out-of-season financial reports from "Growth" companies including ResMed, Xero, TechnologyOne and Macquarie Group.

Of equal importance: the AGM season for corporate Australia is about to commence and this sees many boards updating or issuing guidance for the first half or full financial year, and shareholders will be voting on remuneration and other resolutions.


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