Rudi’s View: All Eyes On November 3

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 24 2020

Dear time-conscious investor: US election remains too uncertain to call; a new strategy for dividend-seekers; plus one under-reported record from the August results season

In this week’s Weekly Insights:

-All Eyes On November 3
-Income Seekers Need A New Strategy
-Time To Say Goodbye
-Stats, Damn Lies, And Corporate Profits?

All Eyes On November 3

By Rudi Filapek-Vandyck, Editor FNArena

The share market is always a collection of different narratives that often exist in opposition to each other.

One of the popular narratives that has attracted quite some attention these days is that tech stocks in the US had become separated from fundamentals and had started to exhibit typical bubble-like characteristics.

There are pockets on US share markets that definitely lend support to this view.

But there is the equally apposite observation that many of the emerging technology disruptors are genuinely enjoying boom-time conditions, and there is a lot of growth hiding underneath those elevated share prices.

Apart from the fact that we are experiencing mega trend-changes that will reshape society as we know it, tech stalwarts such as Apple, Microsoft and Alphabet sit very much at the centre of tomorrow’s Brave New World.

Another popular narrative is that Australian shares have been underperforming the US because the ASX doesn’t have equivalents to the American technology-driven market leaders.

Here the opposing narrative, equally accurate, is that covid-19 caused a lot more damage to corporate profits and dividends in Australia than it did elsewhere.

And as I never stop emphasising during my presentations to investors, every reporting season in recent years, time and again, reveals a much weaker performance from the local Top20 than it does for Australian companies in general.

The same observation stands for last month’s August results season during which the performance of local large caps Westpac ((WBC)), Insurance Australia Group ((IAG)) and Telstra ((TLS)) -yet again- stood in sharp contrast to what was achieved elsewhere.

If shares are guided by corporate profits, why would Australian indices rise in tandem with US equities?

US equities have deflated noticeably over the weeks past, which should be expected given the strong rally that preceded, but all-in-all, indices are still above levels of July (go figure!).

Over here in Australia, while some downward pressure is exhibiting itself, if we take a multi-month view it can easily be argued local indices have essentially tracked side-ways since June, in line with lacklustre corporate earnings and economic data hit by a second lockdown in Victoria.

So pick your pick, but I still have to see a genuinely valid reason to become concerned about my exposure to the share market.

Those investors worried about historically elevated looking valuations might want to consider that interest rates, consumer price inflation and bond yields are all near an historical low – and they all have a beneficial impact on growth assets (see also further below).

Equally important: earnings for corporate Australia, in general terms, are currently very depressed, likely looking forward to 2-3 years of recovery (same story for those hard-hit dividends).

It is probably not very smart to be too negative about corporate profits that are likely to continue growing in the years ahead, whether it be through mega trend-changes or from a depressed, covid-19 level.

None of the above repudiates that valuations still matter in the share market, and they do, which is why we are experiencing weakness for markets globally in September.

****

Having said all of the above, as investors we should never underestimate the impact of sentiment on the direction of equity markets, and more precisely; the impact from changes in sentiment.

September is traditionally a weak month for US equities and this year we are facing the extra complication of a tightly contested US presidential election.

Some market commentators like to highlight historical parallels between when Republicans are in power, versus when Democrats are, or when the incumbent stays in power or loses the election but that’s very much analysing the world through the eyes of Harry Hindsight.

I think it’s much more important whether financial markets, this close to the November 3rd election day, can comfortably start preparing for one outcome or the other.

Back in 2016 most portfolios would have been positioned wrongly, but this year? Who’d been foolish enough to take a 100% bet either way?

It is true that challengers Joe Biden & Kamala Harris are ahead in the polls, but uncertainty reigns, and one outcome that is very much feared, and seen as a genuine possibility, is there won’t be a clear outcome on the day.

For example, one telling detail I picked up recently is that Republican voters are most likely to vote in person on the day while Democrat voters have signaled they prefer to cast their vote through US post.

Take a guess why the sitting president and Republican supporters have been actively undermining postal voting.

In recent days I have heard stories about American ex-pats living in Sydney who are trying to vote but are as yet to receive the official document.

What if the initial results show a probable win for the incumbent, but then the postal votes swing the balance in favour of Biden-Harris?

As I wrote last week, the last time we had no clear outcome on US election day share markets didn’t take it well. Investors don’t like uncertainty, and they prefer to vote with their feet if only to tell themselves they are managing the risk.

History shows the weakest period of the calendar year usually runs from mid-September till mid-October, but this year’s election uncertainty is likely to linger a few more extra weeks.

Meanwhile in Europe, Boris Johnson is preparing for a hard Brexit, willing to violate negotiated agreement and international law.


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