Market Rotation? It’s Complicated

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 07 2019

Dear time-poor reader: why is the Value rotation not working so well in Australia? Plus Conviction Calls and the Fortescue mystery solved.

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

-Market Rotation? It's Complicated
-Conviction Calls
Focus On Quality Yield
-Fortescue Is No Mystery
-Tickets to Conference on Agricultural and Veterinary Biotechnology
-Rudi On Tour

[The non-highlighted items will appear in Part Two on Friday]

Market rotation? It's Complicated

By Rudi Filapek-Vandyck, Editor FNArena

Global financial markets have priced out worse case scenarios for the world in 2020 and there are quite a number of investment experts out there who believe we might be near a turning point in terms of global growth and investor sentiment.

In simple terms this becomes: no recession, and potentially a new acceleration in growth instead.

Those who pay close attention would have noticed a few differences. The USD has weakened, bond yields have reset at a less subdued level and Emerging Market equities have, for the second time in 2019 after January, managed to outperform developed markets equities in October.

In the US, share market indices have surged to (or near) a fresh all-time high while FAANG stocks are not at all-time highs.

This can only mean three things: rotation, rotation, and rotation.

"Value" portfolios have finally enjoyed a good month of outperformance. In Australia, it has to be noted, beaten down disappointers including Amaysim Australia, CYBG, Challenger and BlueScope Steel have all sprung to life, mostly on no specific news, while a number of prior outperformers have witnessed the draw back from the switch in funds flows.

Smaller cap technology high-flyers in particular have felt the sudden impact from the switch in market sentiment. Apart from the likes of Altium, Appen, WiseTech Global and Afterpay Touch, October has not been kind to names including Pro Medicus, Jumbo Interactive and a queue of smaller cap gold producers.

But here is where things become a lot more complicated. Whereas share markets globally rose over the month, the Australian share market trod water and ultimately ended with a small loss (-0.3%). Locally, the best performing sector was Healthcare, which is very much the antithesis for a rotation into Value on the back of an improving growth outlook globally.

The worst performing sector locally were the banks, which retreated more than -4% in October, performing even worse than the local technology sector, which despite being the target of domestic and international shorters, only retreated by -3.9%. Materials and Resources equally ended October on a negative note.

So what exactly is (not) happening here?

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