Is It Rotation Or Risk We Should Worry About?

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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 21 2019

Dear time-poor reader: Amidst forecasts for share market outperformance by cheaper 'Value' stocks, investors in Australia better watch out for ongoing profit warnings

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

-Is It Rotation Or Risk We Should Worry About?
-Conviction Calls
-Are Dividends Telling The Story?
-Rudi On Tour

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

Is It Rotation Or Risk We Should Worry About?

By Rudi Filapek-Vandyck, Editor FNArena

As we approach the final weeks of calendar year 2019, the global investment community remains as polarised as ever on what to expect next and how best to position portfolios.

According to industry consultant bfinance, large institutional investors globally and in Australia are increasingly opting for a lower risk portfolio positioning, preparing for the end of this cycle and seeking safety through ongoing diversification, including in non-listed assets.

A number of technically-oriented experts on the other hand remain confident equities are set-up for an end-of-year rally, as is usually the case. Market researchers at ANZ Bank published research this week offering further support to this view. For equities, points out the ANZ Bank team, Santa Claus comes bearing gifts more often than not.


On ANZ Bank's historical analysis, Australian equity indices finish the annual holiday period higher no less than 75% of times from where they started it. Their analysis has extended into related currencies and here the picture/correlation seems less clear. The Kiwi dollar (NZD) tends to benefit from the upward bias in equity markets into year-end, but not so much the AUD.

Investors should note: the team at ANZ Bank is of the view that a so-called Phase One deal between the Trump administration and China looks more likely than not. The researchers also believe the annual Santa rally for equities is often but a self-fulfilling prophecy.

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Unsurprisingly, in an environment that looks nearly as polarised as during the opening months of 2016, expert opinion about which sections of the share market are likely to perform best remains equally sharply divided.

While it remains true that laggard stocks, otherwise known as "cheaply priced", have staged somewhat of a come-back since August, with stocks including Nufarm, Lendlease, Janus Henderson and BT Investment making up a lot of ground inside a relatively short window, opinion remains highly divided whether this is simply a direct result of bond yields correcting higher, on top of various idiosyncratic reasons for the sudden resurrections, or whether we are indeed witnessing the early signals of a profound rotation in market leadership?

As most active managers have found 2019 an extremely tough year, following broad underperformances throughout 2017 and 2018, many are hoping there is more substance to this attempted rotation in equities leadership. It would mean active "Value" managers have finally a good story to tell the investors who remained loyal throughout the tough years past.

Their most preferred point of reference right now is Europe where "Value" has significantly outperformed "Growth" as financial markets priced out the prospect of an imminent recession. In Australia, however, re-positioning for a similar switch remains fraught with danger. This much has again be proven by events this month.

One of the prime examples of the dangers in owning cheaply priced laggard stocks in the Australian share market is perennially disappointing childcare centres operator, G8 Education ((GEM)). The stock has looked cheap on numerous occasions throughout the years past, but every time management has found a way to disappoint and to cause yet another pull back in the share price.

G8 Education fell below $2 during the broad-based market meltdown of late 2018. Following its second profit warning in three months, the share price has again sunk below the $2 mark. This is where G8 Education shares were trading at in early 2013, nearly seven years ago.

In contrast, a lot of market attention and commentary has been spilt on the fact that smaller cap technology stocks have lost a great deal of their gains in recent months. Even so, on Monday one of the most doubted in the local sector, Appen ((APX)), increased guidance for the year and its shares have shot up no less than 13% in an overall down market.

Irrespective of active funds managers' desire to see yesterday's winners turn into losers and vice versa, the simple observation remains that for many of those market outperformers the operational momentum continues to look favourable, while making similar assumptions for laggard stocks remains fraught with danger.


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