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Rudi’s View: Value Ready For Catch-Up

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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 19 2020

This story features XERO LIMITED, and other companies. For more info SHARE ANALYSIS: XRO

Dear time-conscious investor: Fresh developments and investor optimism now favour Value over Growth & Quality

In this week’s Weekly Insights:

-Value Ready For Catch-up
-Conviction Calls

Value Ready For Catch-up

By Rudi Filapek-Vandyck, Editor FNArena

Nothing lasts forever, in particular not in financial markets, or as I like to put it: this too shall pass, eventually.

With “this” I am referring to the relentless, and extreme, bifurcation of equities into “winners” and “losers”, with very few shades of grey in between, certainly since the arrival of the pandemic.

Before the virus hit economies and life as we knew it up until that point, many a market expert had already observed the distance between “popular” and “unpopular” had probably never been recorded as wide as it had become.

Since the arrival of the virus, however, the distance between the two opposing categories of equities has only widened further.

Now we really can conclude the gap between Winners and Losers, Growth & Quality versus Value and Cyclicals, might have never in the history of financial markets been pushed out as far as it has in 2020.

Just about every market researcher has published a chart to illustrate equity markets’ extreme polarisation in recent years, and many of them are updating the data this month.

The example I picked below is from Morgan Stanley. It shows how much further the elastic band has been stretched; much, much further than at any other point over the past three decades.

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The theme of share market polarisation is far from new.

The current dynamics favouring Growth & Value started during the GFC, initially in the US where the origin of that crisis -housing and finance companies- gave way to global tech giants and emerging new technologies.

Australia caught up after the euro-crisis of 2011/12. First gradually, then relentlessly with companies such as Xero ((XRO)), Afterpay ((APT)) and NextDC ((NXT)) climbing up the rankings of the ASX200, while large cap energy producers, the banks, and property owners ended up as the proverbial ball-and-chain throughout the elongated bull market.

It has been a torturous seven years for many an investor who likes to pick up “cheap” looking value stocks, with rather brief periods of relief along the way. Which is but one reason as to why many today are looking forward in full anticipation.

Could it be? Can 2021 finally bring the turnaround that switches market momentum from expensive looking winners into the beaten down cheaply priced stocks in markets?

The chart above suggests such a narrowing of the gap, at the very least, is long overdue.

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The answer, this time around, may well be provided by corporate results and AGM updates post August reporting season.

Thus far, corporate updates and announcements in November have created a positive news flow, which in return is feeding into a distinct wave of upgrades for earnings expectations in Australia.

For example, the FNArena Corporate Results Monitor (see further below) is currently showing 44.7% of companies reporting financial performances are beating market expectations with an additional 21.1% performing in-line with consensus forecasts.

These numbers do not include trading updates and AGM commentary which are equally contributing to the current upswing in market forecasts for next year’s corporate profits.

What makes the current turnaround different from the recent past is it is no longer exclusively carried by Winners like Xero, Afterpay et al. This time around Amcor ((AMC)), AusNet Services ((AST)), EclipX Group ((ECX)), GrainCorp ((GNC)), CSR ((CSR)), and News Corp ((NWS)), among many others; they are all forcing analysts to lift estimates for the year ahead.

The importance of this lays with the difference in relative valuations: the Winners are still performing well, but their share prices are already reflective of it. The laggards have now started to build up positive momentum, but in most cases their share prices are much more cheaply priced.

This is why investor expectations are growing for a general revival of the “Value” part of the markets. Think banks, small caps and cyclicals, and mining and energy stocks.

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As businesses increasingly return their focus towards post-covid and growth, the return of M&A deals is one logical consequence, and one straightforward reason to get excited about exposure to Value stocks again.

All of AMP ((AMP)), Coca-Cola Amatil ((CCL)), Link Administration ((LNK)), the Vitalharvest Freehold Trust ((VTH)) and Village Roadshow ((VRL)) have seen corporate suitors come knocking on their door recently.

Many more deals should be expected as forthcoming.

Again, here too, one important detail is the willingness of share market laggards to restructure and to invest in order to leave behind the malaise of recent years, and (finally) unleash/create value for shareholders.

One prime example of exactly such a beneficial restructure was announced by long-term shareholder disappointment Telstra ((TLS)). The decision to restructure all operations into three separate divisions instantly opens up a variety of options, including selling the farm, or substantial parts of it, to the highest bidder.

One logical and straightforward way to look at the potential benefits from the restructure for shareholders is through Telstra’s balance sheet: the mobile towers are currently valued at $280m while their true market value is estimated at $4bn, or close to that figure.

Telstra’s balance sheet currently has the fibre, ducts and pipes valued at $9.8bn versus an estimated market worth of circa $28bn.

A similar no-holds-barred corporate transformation is taking place at mortgage-lender Resimac ((RMC)) which, through partnerships with four technology providers, is reinventing itself as a lower-cost, digital fintech.

Resimac recently acquired IA Group. Perpetual ((PPT)) purchased Barrow Hanley and Trillium in the US. Nine Entertainment is investing in Stan Sports, while Pendal Group ((PDL)), formerly known as BT Investment Management, has publicly explained its ambition to grow funds under management by 50% over the next five years.

These are but a selection from recent announcements, but the message to investors seems obvious: Value stocks are no longer simply a victim of the times, best ignored. With a little bit of optimism added, they can easily become the next source of share market excitement.

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Economies in countries like the UK, France, Austria and Belgium are facing another uncertain time of lockdowns, but the world will survive and learn how best to deal with covid, one way or another.

Financial markets, looking forward beyond the immediate obstacles, have thus already absorbed the initial bouts of investor optimism.

As every student of financial history knows, economic recoveries go hand-in-hand with value stocks outperforming their Growth & Quality peers, as well as the broader share market indices.

Next calendar year should present the global recovery. To what extent this translates into a broad boost for the 2020 share market laggards remains very much dependent on the shape and speed of that recovery.

But some are already dreaming of the Biggest Boom in Modern History. Certainly, there is potential for upside surprise in 2021 and if everything falls into place, share market momentum can temporary become as one-sided as it has been with this time Value in favour.

Imagine the quick roll-out of a vaccine, with governments and central banks continuing to provide stimulus and liquidity, while businesses are restructuring, becoming leaner and better adapted, while consumers start spending their savings, and those businesses spend on capex and expansion.

The effect of all these factors combined would not only be much higher growth than is currently forecast by most, it most likely would trigger market concerns about inflation, pushing long bond yields higher, which is one additional factor in favour of Value and negative for Growth & Quality.

A broader economic recovery next year also favours Emerging Markets (EMs) over developed markets, as well as Australia over the US, while the US dollar should weaken, creating yet another obstacle for offshore operators on the ASX, which are mostly labelled Growth and Quality.

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Investors should remain cognisant, however, the above forecast would be the most optimal outcome. As many question marks remain, with many more subdued scenarios equally likely, it’s probably best to remain level-headed and risk-aware.

Equally important, while this year’s pandemic, and the prospect for next year’s recovery, have unexpectedly intervened in the dominant dynamics that have benefited the cohort of Big Tech, new technology disruptors, and High Quality performers, the tectonic changes in support of these companies will still be around, economic recovery or not, and with or without a vaccine.

As such, I remain of the view the best approach for investors is through combining both market opposites in their investment portfolio, and be prepared for bouts of high volatility along the way.

Extreme market positioning is likely to benefit bond yields moving higher and Value benefiting while yesterday’s Winner will not.

It will be equally beneficial for investors to understand this is but a temporary phenomenon, as the market rebalances to a less extreme set-up.

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Readers looking to rebalance their portfolio/share market exposure can draw plenty of inspiration from my recent writings:

Rudi Interviewed: Four Baskets For Equities Portfolio:

https://www.fnarena.com/index.php/2020/11/06/rudi-interviewed-four-baskets-for-equities-portfolio/

Rudi’s View: Equities Portfolio For 2021:

https://www.fnarena.com/index.php/2020/10/29/equities-portfolio-for-2021/

Rudi’s View: Quality & Growth, Confidence & Execution:

https://www.fnarena.com/index.php/2020/10/22/rudis-view-quality-growth-confidence-execution/

Rudi’s View: Investment Themes In Australia:

https://www.fnarena.com/index.php/2020/10/15/rudis-view-investment-themes-in-australia/

For more info about the FNArena-Vested Equities All-Weather Model Portfolio: see further below or send us an email at info@fnarena.com

To keep track with the FNArena Corporate Results Monitor: https://www.fnarena.com/index.php/reporting_season/

Paying subscribers have 24/7 access to a dedicated segment on the website to my research into All-Weather Stocks.

Conviction Calls

Remarkable, or at the very least noteworthy in my view, is last week’s Sohn Hearts & Minds Investment Leaders Conference put forward CSL ((CSL)) and Fisher & Paykel Healthcare ((FPH)) among best investment ideas for the year ahead.

Both ideas were suggested by respectively Paradice Investment Management and William Curtayne, alongside ASX-listed propositions Treasury Wine Estates ((TWE)) and Temple & Webster ((TPW)).

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Analysts at Moelis have updated their Key Research Ideas all which, the analysts emphasise, are not re-opening ideas. (Meaning: they only require a gradual recovery throughout 2021).

Best Ideas consists of 12 suggestions: Generation Development ((GDG)), MACA Ltd ((MLD)), Shine Justice ((SHJ)), GDI property ((GDI)), Primewest Group ((PWG)), Elanor Commercial Property ((ECF)), Imricor Medical Systems ((IMR)), APN Convenience Retail ((AQR)), NRW Holdings ((NWH)), Eagers Automotive ((APE)), Ingenia Communities Group ((INA)), and Aspen Group ((APZ)).

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Sze Chuah, Ord Minnett Senior Investment Analyst, last week did update on her favourite exposures to the re-opening and recovery theme: SeaLink Travel Group ((SLK)), Star Entertainment ((SGR)), National Australia Bank ((NAB)), Origin Energy ((ORG)), and Tyro Payments ((TYR)).

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Portfolio managers at Wilsons have further increased overall exposure to the anticipated domestic economic recovery by adding more bank shares through National Australia Bank, as well as adding Worley ((WOR)) and reducing exposure to News Corp and ResMed ((RMD)) and selling out of Collins Foods ((CKF)).

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Strategists at Morgan Stanley believe the prospects of economic recovery and portfolio rotation in the year ahead pulls into focus companies that can deliver both growth and yield/income.

In typical share market lingo, this then becomes GARY, or: Growth and Reasonable Yield.

The strategists identified a total of 33 ASX-listed stocks, with best ideas inside the ASX100 believed to be QBE Insurance ((QBE)), Insurance Australia Group ((IAG)), Stockland ((SGP)), and Suncorp ((SUN)).

Best ideas outside the Top100 are Arena REIT ((ARF)), National Storage REIT ((NSR)), Inghams Group ((ING)), and Monadelphous ((MND)).

(This story was written on Monday 16th November, 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).

(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: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

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CHARTS

AMC AMP APE APT APZ AQR ARF AST CCL CKF CSL CSR ECF ECX FPH GDG GDI GNC IAG IMR INA ING LNK MLD MND NAB NSR NWH NWS NXT ORG PDL PPT PWG QBE RMC RMD SGP SGR SHJ SLK SUN TLS TPW TWE TYR VRL VTH WOR XRO

For more info SHARE ANALYSIS: AMC - AMCOR PLC

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: APE - EAGERS AUTOMOTIVE LIMITED

For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED

For more info SHARE ANALYSIS: APZ - ASPEN GROUP LIMITED

For more info SHARE ANALYSIS: AQR - APN CONVENIENCE RETAIL REIT

For more info SHARE ANALYSIS: ARF - ARENA REIT

For more info SHARE ANALYSIS: AST - AUSNET SERVICES LIMITED

For more info SHARE ANALYSIS: CCL - COCA-COLA AMATIL LIMITED

For more info SHARE ANALYSIS: CKF - COLLINS FOODS LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: CSR - CSR LIMITED

For more info SHARE ANALYSIS: ECF - ELANOR COMMERCIAL PROPERTY FUND

For more info SHARE ANALYSIS: ECX - ECLIPX GROUP LIMITED

For more info SHARE ANALYSIS: GDG - GENERATION DEVELOPMENT GROUP LIMITED

For more info SHARE ANALYSIS: GDI - GDI PROPERTY GROUP

For more info SHARE ANALYSIS: GNC - GRAINCORP LIMITED

For more info SHARE ANALYSIS: IAG - INSURANCE AUSTRALIA GROUP LIMITED

For more info SHARE ANALYSIS: IMR - IMRICOR MEDICAL SYSTEMS, INC

For more info SHARE ANALYSIS: INA - INGENIA COMMUNITIES GROUP

For more info SHARE ANALYSIS: ING - INGHAMS GROUP LIMITED

For more info SHARE ANALYSIS: LNK - LINK ADMINISTRATION HOLDINGS LIMITED

For more info SHARE ANALYSIS: MLD - MACA LIMITED

For more info SHARE ANALYSIS: MND - MONADELPHOUS GROUP LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: NSR - NATIONAL STORAGE REIT

For more info SHARE ANALYSIS: NWH - NRW HOLDINGS LIMITED

For more info SHARE ANALYSIS: NWS - NEWS CORPORATION

For more info SHARE ANALYSIS: NXT - NEXTDC LIMITED

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: PDL - PENDAL GROUP LIMITED

For more info SHARE ANALYSIS: PPT - PERPETUAL LIMITED

For more info SHARE ANALYSIS: PWG - PRIMEWEST GROUP LIMITED

For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED

For more info SHARE ANALYSIS: RMC - RESIMAC GROUP LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: SGP - STOCKLAND

For more info SHARE ANALYSIS: SGR - STAR ENTERTAINMENT GROUP LIMITED

For more info SHARE ANALYSIS: SHJ - SHINE JUSTICE LIMITED

For more info SHARE ANALYSIS: SLK - SEALINK TRAVEL GROUP LIMITED

For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED

For more info SHARE ANALYSIS: TPW - TEMPLE & WEBSTER GROUP LIMITED

For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED

For more info SHARE ANALYSIS: TYR - TYRO PAYMENTS LIMITED

For more info SHARE ANALYSIS: VRL - VILLAGE ROADSHOW LIMITED

For more info SHARE ANALYSIS: VTH - VITALHARVEST FREEHOLD TRUST

For more info SHARE ANALYSIS: WOR - WORLEY LIMITED

For more info SHARE ANALYSIS: XRO - XERO LIMITED