Rudi's View | Jun 18 2020
Dear time-poor investor: as investor enthusiasm has temporarily run out of breath, not every ASX-listed stock is treated equally
-Momentum Swings Now Maketh The Market
-Baillieu’s Restart Australia strategy
-Monthly Biotech Update
-FNArena Talks (And Presents)
-Watch The Index Deletions & Inclusions
Momentum Swings Now Maketh The Market
By Rudi Filapek-Vandyck, Editor FNArena
There are times when earnings forecasts and dividend estimates are the most important driver for equities, while at other times they are largely being ignored.
Where are we at now?
Depends which side of the market we choose to focus on. When it comes to quality, such as reliable performers Woolworths ((WOW)), a2 Milk ((A2M) and Appen ((APX)), investors think they have a reasonable idea what growth looks like this year and next.
This immediately puts a restraint on how high these share prices can rise, unless investors suspect upside surprise, which might apply to, for example, Appen.
In the absence of such positive surprise potential, a lack of investor enthusiasm has kicked in over the weeks past, as witnessed by share prices for Woolworths and a2 Milk drifting lower.
Where Forecasts Don’t Matter (As Much)
It’s not that there’s anything wrong with the above mentioned companies. They most likely will continue to chug along, doing what they do best, which is growing the business and servicing more customers. In a relative sense, though, these stocks now seem “boring” and “uneventful”.
Elsewhere, taking on more risk can reap rewards of 20%, 40%, or even 60% in a single day. In the share market, it’s not always what the company itself can achieve that is most important; sometimes it’s the fact that higher returns can be had elsewhere.
Nobody knows, really. It’s all dependent on variable scenarios, and how this translates into bottom lines in FY21, but there are so many possibilities and questions, it really is up in the air, whichever way the wind blows.
Hence for this second group of companies, whatever is available in terms of forecasts is taken with more than just a grain of salt. Here ongoing liquidity and positive news flow are much more important.
So, if you view the stock market through the prism of two polarised groups of stocks, you would have witnessed the momentum switch out of the first group and into the second, at least until risk on has taken things too far, which immediately swings the pendulum back to Woolworths & Co.
This Is Normal Share Market Behaviour
Note there is nothing unusual about this market behaviour. Eighteen months ago, when share markets recovered from five months of downward spiralling in late 2018 until the Federal Reserve changed its policy, the best performing stocks were banks and other cyclicals, while CSL ((CSL)), ResMed ((RMD)), Cochlear ((COH)) and the like could not keep up with the newly found market momentum.
In 2019 it lasted until about mid-year. Then the wheels fell off for oil and gas companies, industrial cyclicals and banks, with many announcing dividend cuts in August and beyond.
This in itself makes the current situation different. By now, we’ve had the profit warnings, the fresh equity raisings, the dividend cancellations, reductions and deferrals, and the lay-offs, closures and restructure announcements.
Stockbroking analysts are still busy reducing forecasts for many ASX-listed companies, but that part has turned significantly less one-way-direction.
As pointed out in our weekly update on ratings, targets and forecasts published on Monday morning ( https://www.fnarena.com/index.php/2020/06/15/weekly-ratings-targets-forecast-changes-12-06-20/ ) many companies are by now enjoying a positive trend in forecasts.
Most importantly, the downtrend in price targets and valuations has stopped. Price targets and valuations are back in an uptrend.
With more than 50% of all recommendations for ASX-listed stocks now Buy or an equivalent of Buy, there seem to be plenty of opportunities out there to put money into undervalued stocks.
Contrary to what many an investor might think, instinctively, total Buy recommendations lifting above 50% is quite a rare event. It only happens during bear markets. The second factor in play is the extreme bifurcation in appreciation and daily momentum.
This is not your grandfather’s share market.
Where Does Gold Fit In?
What is not widely understood among investors, judging from the many questions I received over the weeks past, is how this extreme bifurcation equally impacts on gold, and on listed gold stocks.
To make it very simple and straightforward: gold is now very much trading with the same headwinds that have been holding back Coles, and ResMed, and Altium ((ALU)). It trends lower when copper, zinc, silver et cetera are in vogue, and it swiftly makes a come-back when risk-on morphs into risk-off.
The other obvious difference between now and the first half of 2019 is that many question marks remain about the exact economic fall-out and what this global pandemic looks like post society lockdowns.
Last week, many of the so-called recovery stocks started to receive downgrades which indicates that even during a time of rather rubbery assumptions and forecasts, share prices still run into headwinds if market enthusiasm lasts too long, taking share prices too high for what seems plausible.
Half-Way Through, Says JP Morgan
Strategists at JP Morgan have already started to cool investor enthusiasm. On their assessment, the current momentum switch in favour of recovery stocks is expected to last between four to six weeks – we’re half-way through it now.
Time to become more selective, and less risk accepting. Those are not my words, here is how they put it: “we recommend being very selective in adding new positions and being nimble footed on existing positions”.
The second consideration is, if second wave threats/fears trigger a sharp correction in cyclical and value stocks, JP Morgan would encourage investors to jump on the newly created opportunity.
And this, possibly, marks the outlook for the share market in the medium term. Investors shouldn’t necessarily be concerned about the next major general pullback possibly waiting to reveal itself.
The outlook for their own portfolio is most likely determined by the market pendulum favouring one particular segment over the other, and how this relates to the specific composition of their portfolio at a particular point in time.
Looking Over The Horizon
Ultimately, investment choices made this year shall be judged by two crucial questions next year and beyond:
-what exactly will change because of covid-19 and other influences?
-what exactly will remain the same post covid-19 and societies in lockdown?
Greg Peel recently shared his views and insights alongside many expert attempts to anticipate the future in two feature stories which I highly recommend for additional reading:
-Life After Covid, Part I https://www.fnarena.com/index.php/2020/06/02/life-after-covid-part-i/
-Life After Covid, Part II https://www.fnarena.com/index.php/2020/06/10/life-after-covid-part-ii/
Baillieu’s Restart Australia strategy
Malcolm Wood, chief investment officer at stockbroker Baillieu, remains very much in favour of investors continuing to play the “reopening of the economy” theme, which favours banks, discretionary retail, leisure, transport, infrastructure, housing, and online classifieds portals.
Baillieu’s ten most preferred stocks are:
-Discretionary retail: Wesfarmers ((WES))
-Housing: Reece ((REH))
Monthly Biotech Update
Independent Investment Research has launched a monthly newsletter/update on pharma and biotech stocks in Australia.
The document (in PDF) can be downloaded here
FNArena Talks (And Presents)
I recently shared my markets insights via two webinars with members of the Australian Investors Association (AIA) and the Australian Shareholders Association (ASA), section Ballarat (Vic).
A replay of the first webinar (1 hour-plus, incl Q&A) is now available through Youtube and the website, see FNArena Talks.
Paying subscribers have access to the SPECIAL REPORTS section on the website, where they can download a copy of the slides I used during the broadcast.
In addition, I participate weekly on AusbizTV’s The Call every Thursday, midday-1pm.
Last week’s The Call: https://www.ausbiz.com.au/media/the-call-thursday-11th-june?videoId=1838§ionId=1900
I also provide a brief contribution to AusbizTV on Fridays around 11am, highlighting some of the interesting broker moves during the week.
On Wednesday I am scheduled in for Elio D’Amato’s Spotee, on TickerTV, 12.30-1pm.
Watch The Index Deletions & Inclusions
This Friday, 19th of June, all major indices run by Standard & Poor’s in Australia will see changes in composition happening. There could be specific consequences.
The ASX200 will include Centuria Industrial REIT ((CIP)), Megaport ((MP1)), Mesoblast ((MSB)), Omni Bridgeway ((OBL)) and Perseus Mining ((PRU)) instead of Estia Health ((EHE)), Hub24 ((HUB)), Jumbo Interactive ((JIN)), Mayne Pharma ((MYX)), Pilbara Minerals ((PLS)), and Pinnacle Investment Management ((PNI)).
The ASX300 will add no less than 15 new members: Australian Ethical Investment ((AEF)), Australian Finance Group ((AFG)), City Chic Collective ((CCX)), Elmo Software ((ELO)), Electro Optic Systems ((EOS)), Integral Diagnostics ((IDX)), Kathmandu Holdings ((KMD)), Medical Developments International ((MVP)), Opthea ((OPT)), Paradigm Biopharmaceuticals ((PAR)), PointsBet Holdings ((PBH)), Red 5 ((RED)), SeaLink Travel Group ((SLK)), Tyro Payments ((TYR)), and Uniti Group ((UWL)).
The following 12 will no longer be included: Amaysim Australia ((AYS)), Cardno ((CDD)), HT&E ((HT1)), iSignthis ((ISX)), Integra Group ((ITG)), New Century Resources ((NCZ)), OceanaGold ((OGC)), Paladin Energy ((PDN)), Speedcast International ((SDA)), Seven West Media ((SWM)), Syrah Resources ((SYR)), and WPP AUNZ ((WPP)).
The importance of all of the above has been researched by the team of quant analysts at Macquarie.
Their findings are that stocks being added to the ASX100 typically underperform ahead of their inclusion, probably because professional investors in small cap stocks can no longer own them.
Stocks that lose their inclusion in the ASX100 typically underperform for months following.
The strongest measurable impact is usually reserved for additions to and removals from the ASX200 with Macquarie research suggesting new inclusions typically experience 10% excess return over the 40 days prior to being added.
This outperformance stretches a little farther post inclusion, but next follows a largely sideways trajectory that can last many months.
Stocks that are booted out tend to underperform in the months prior, with Macquarie research detecting no consistent pattern once index membership is no longer.
Additions and deletions for the ASX300 index tend to be smaller sized companies and thus extreme volatility can be the result.
Leading into fresh inclusion, shares tend to outperform over 8% during the month prior, with outperformance in many cases lasting well beyond inclusion (up to multiple weeks).
Deletions can become very volatile both prior and after removal, reports Macquarie.
(This story was written on Monday 15th June, 2020. 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 will be published 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: firstname.lastname@example.org or via the direct messaging system on the website).
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