Rudi’s View: Plenty Of Clouds, Diverging Scenarios

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 | Sep 17 2020

In this week’s Weekly Insights:

-Plenty Of Clouds, Diverging Scenarios
-Conviction Calls

Plenty Of Clouds, Diverging Scenarios

By Rudi Filapek-Vandyck, Editor FNArena

According to at least one experienced technical market analyst, global equities, including in Australia, are now due for a consolidation period that potentially can last multiple months.

Such a prediction should hardly come as a surprise. The recovery off the late-March low has been swift and strong – and those terms don’t really do justice to what actually has occurred up until late August.

As is always the case, a lot of attention has been drawn to the apparent excesses along the way, with share prices in Apple and Tesla moving parabolically upwards on announcements of a stock split, while others have been doubling in price (or more) in what seemed like an awful short time to see that happening.

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Here in Australia, market volume has shifted towards stocks like Afterpay ((APT)), Zip Co ((Z1P)) and Mesoblast ((MSB)) -on some days responsible for the largest volumes- and a recent attempt by Morgan Stanley to identify what is happening behind the curtains is firmly pointing in the direction of re-born retail investors and traders.

I write “re-born” because anecdotal evidence suggests many trading accounts that had been dormant for a while have been re-activated during the recovery/upswing this year, but in reality, many of the additional inflows have come from freshly-minted, new market participants.

In the US, these people are being referred to as the “RobinHooders”, after a no-fee, popular trading app that has seen explosive growth over the six months past.

Here in Australia, SelfWealth ((SWF)) has been one of the major beneficiaries of a similar phenomenon, but let’s not discount CommSec, NABtrading and other platforms, as well as newsletters, blogs and financial data and information services, including FNArena.

To put the retail market-impact into perspective, at least here in Australia, on Morgan Stanley’s analysis market shares as far as daily volumes are concerned had remained fairly stable pre-covid between Institutional, Retail Advice, Retail Online, Clearing and Other/Miscellaneous.

But the past three months show a significant increase in volumes coming from retail online, rising by 50%, to push up total market share to 10% of volume in July, up from 6.7% in January.

This may not seem like much, but by nature financial markets are dominated by short-term money flows, not by opinions, expertise, fundamental research or other forms of analysis.

So, if one large group adopts one scenario and acts accordingly, and finds other groups to follow in its footsteps, then that scenario becomes “the trend”, at least for the time being.

2020 might have been the first time when cashed-up, bored mums and dads closed in at home decided to take a punt on shares -lower prices galore, must be more attractive now- and then forced the professionals -worried about losing mandates, if not their job- to join in and manufacture the quickest recovery in modern memory.

One valid point suggested by Morgan Stanley’s research is that any impact from these fearless mums and dads (and many youngins) would logically be highest for less liquid, smaller cap stocks – and when institutions are sitting on their hands, like in April.

The Morgan Stanley research suggests these additional inflows have predominantly been used to execute Buy-orders. And what have these new buyers been buying? Popular themes, including EVs and BNPL, and popular household names, such as Qantas, Telstra, Flight Centre, even Oil Search and Myer.

As such, market positioning is not solely in strongly rising, high-flying market darlings, but equally so in beaten-down share prices that should benefit from the post-pandemic economic recovery.

Trading activity data from eToro revealed many of the new market participants have equally directed their attention to the US with Nio Inc, Tesla and Amazon the three most traded stocks on the platform in August.

Trading volume in Apple shares on eToro rose by 149% month-on-month in August, while for Nvidia the increase was 135%.

Suffice to say, the phenomenon over here has direct links to some of the truly mind boggling, parabolic momentum moves in the US, which now leaves the Australian share market vulnerable to a correction to the downside.

Pure logic tells us when stocks go crazy and rally into the atmosphere in the US, while Australian shares do not follow suit, the Australian share market does not have to sell-off in equal fashion when those US shares deflate and come back to earth, but that’s simply not how market sentiment works.

If the US sneezes, the rest of the world gets covid-19 – without blinking.

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Further complicating matters is that when one trend stops, traders will look for other trends to jump on and make money from.

In the current context of a heavily polarised market, with extreme elements to it, this almost by definition means money will flow into the so-called “value” part of the market where sectors including banks and energy stocks have seriously lagged during this year’s bull market.

Such a move will be welcomed by many a value investor, and Australian institutions are in large majority value investors (which worked just fine pre-May 2015), meaning they own plenty of Woodside Petroleum, Telstra, QBE Insurance and the likes, and potentially none of Afterpay, Mesoblast, Objective Corp ((OCL)), WiseTech Global ((WTC)) and others that have performed a lot better in 2020.

Some of such portfolios have outperformed in recent weeks while the super-hot segment of the US market encountered a well-overdue cooling down, but is it more than just a temporary blip?

On my observation, any of the attempts to portfolio-rotate out of Growth (healthcare, tech & other winners) and into Value (banks, cyclicals, laggards and losers) post 2014 has never lasted more than five months, with late 2016 and early 2019 the longest lasting market momentum switches.


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