Rudi’s View: Value Stocks & Conviction Calls

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 | Jun 19 2020

In today's Rudi's View:

-‘Swoosh’ They Said
-V Means Value
-Value Means Australia
-Morgans’ Model Portfolios
-Buying On Weakness
-The Next Mini-Cycle
-Soon: The Central Bank Optimism Hangover
-Banks & Cyclicals
-Wilsons’ Five Convictions
-Best Ideas

By Rudi Filapek-Vandyck, Editor FNArena

‘Swoosh’ They Said

Global asset manager Aberdeen Standard reeled out its Australian chief economist, Jeremy Lawson, alongside senior investment director for Asian equities, James Thom, this week to share their views through a webinar with journalists across the globe.

Amidst fierce and contested public debates, exactly what shape should investors should expect from the post lockdown economic recovery -U, V or W?- the team at Aberdeen Standard has opted for the Nike “swoosh”.

It means: we should expect an initial strong bounce in key economic drivers like employment and consumer spending, but it won’t be back to where it was pre-lockdown. After the initial bounce should follow a long winded, gradual improvement.

It’ll take years to get back to levels of 2019 and investors should prepare for milder long-term trends, similar to what occurred post-2009.

It’s the damage that has been done to economic trend growth that keeps Aberdeen Standard in the “not-worried-about-inflation” basket.

Irrespective of all that stimulus thrown at economies globally by central banks and governments, Aberdeen Standard believes it’s the damage done that will prevail when it comes to consumer spending, trend growth, government budgets, central bank policies, and inflation.

Highly unsurprising, their general advice to investors is to not get too carried away by this month’s risk on share market sentiment and instead be picky and cautious; beware for exuberance that implies everything new shall soon be the same as the old.

The Federal Reserve is expected to leave US interest rates near zero until 2024. This so happens to coincide with Westpac expressing their view this week the RBA will equally leave the domestic cash rate untouched until “after 2023”.

V Means Value

Aberdeen Standard is far from the sole expert voice out there who simply cannot see how a V-shaped recovery can follow this year’s “Greatest of all times” economic recession, but some experts can, and some of those experts work at Morgan Stanley.

No surprise here either, if you do follow Morgan Stanley’s confidence, you should be stacking up on banks and resources stocks and add more of the beaten down industrial cyclicals to the portfolio.

A V-recovery means value stocks in equity markets will outperform, which in itself would be a major trend breach from the past 5-6 years. While Value has been on a tear already for two months or so, strategists at the firm can see this momentum switch lasting for longer.

In Australia, Morgan Stanley’s Model Portfolio has been adding exposure to the banks, on top of adding shares in Ampol ((ALD)), formerly known as Caltex Australia, Santos ((STO)), Super Retail ((SUL)), and Viva Energy ((VEA)).

Several of those stocks have been flying high recently. Champagne corks must have been flying in the Sydney CBD office on Chifley Square.

In particular if we also add the fact the Model Portfolio kept an Overweight exposure to bulk producers, as well as to gold. Interestingly, as at the end of May the Model Portfolio had given up all of its 200bp market outperformance at the peak of the March index decline, resulting in a mild underperformance.

Three stocks had been removed from the Model portfolio: Medibank Private ((MPL)), Woolworths ((WOW)) and Xero ((XRO)).

Morgan Stanley thinks increasing confidence in the post-corona economic recovery will push the ASX200 to 6200 over the next twelve months, with most of the investment returns over the period achieved through portfolio rotation into value stocks.

In similar form, Shaw and Partners CIO Martin Crabb didn’t think the local share market offered enough upside potential, even after three days of heavy selling last week and on Monday.

Crabb remains equally concerned about the steady increases in infection and death rates across the USA, and throughout Latin America.

Of course, anyone sharing Morgan Stanley’s confidence in a Big V would be worried about the return of inflation quicker than is now priced in by financial markets. But that certainly remains the debate of the century at this stage.

Value Means Australia

I don’t necessarily agree with Ord Minnett’s assessment that the relative underperformance of Australian equities in comparison with US indices can be fully explained through different sector weightings and compositions - what about capital raisings and dividend cuts?

But it’s hard to dispute the forecast made that if the world is now ready to allocate fresh money into the Value side of equities, Australia should outperform the USA.

Apart from that, Australian equities are relatively cheaper priced, the country is doing a much better job in containing the fallout from the covid-19 pandemic, and the Australian government has a lot more fire power available to jump start the domestic economy.

All music to the ears of Ord Minnett.

The strategists earlier selected five key themes to incorporate into investment portfolios;


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