Rudi's View | Nov 26 2020
This story features AFTERPAY LIMITED, and other companies. For more info SHARE ANALYSIS: APT
Dear time-constraint investor: A shift is happening in financial markets as year-end approaches
In this week's Weekly Insights:
-Same But Different, Different But The Same
-Question Of The Week (on All-Weathers)
By Rudi Filapek-Vandyck, Editor
Same But Different, Different But The Same
Earlier this year I wrote a story titled "The Bear Market That Changes The World". In it, I predicted further unprecedented central bank market support measures and interventions, as well as governments joining in on the act through accumulating a heavy load of additional debt.
As we all know today, those forecasts have proven accurate and as the story title suggests, it will be incredibly difficult, if not nigh impossible, to wind back the enormous mountain of debt that has been built to fight off the economic consequences from this year's global pandemic.
And this story is not over yet. Global debt is still rising, and it will continue rising as governments cannot escape the cold reality that businesses that stop operating no longer pay tax, no longer keep people in jobs and they certainly won't be making any investments needed to lift the economic recovery onto a sustainable trajectory.
Last week the Institute of International Finance reported global debt has surged by over US$15trn since 2019, reaching a new all-time record high of US$272trn-plus during the September quarter of 2020, projected to grow further to US$277trn by year-end, equal to 365% of global GDP.
Anyone who still thinks governments will finally come up with a credible path towards reducing this historic mountain of public and private debt is seriously deluding him/herself. When you're this deep down into the rabbit hole, there simply is no way back. The Rubicon has now well and truly been crossed.
How exactly this scenario plays out over the decades ahead, I don't think anyone genuinely knows, but I can confidently make one prediction: we all have to get used to the fact that debt, in its broadest concept possible, is now an integral and crucial part of governments, businesses and households for the times that lay ahead.
And the more time passes by, the more the world is changing. In a sense, that title I chose in March is misleading. This year's pandemic and societal lockdowns have not changed the world per se; they have made sure that running trends, such as accumulating debt and extreme central bank policies, have now become irreversible.
There are many more ways in which the world is changing, and has been post-GFC, including the inner dynamics of financial markets. Negative real interest rates and government bond yields are forcing investors big and small higher up the risk ladder while the rise of passive investing, predominantly through Exchange Traded Funds, or ETFs, is equally unstoppable.
It's not easy to establish by how much both phenomena have impacted on prices and relative valuations for financial assets, but the impact itself is undeniable. Consider, for example, the market for global government bonds has traditionally been significantly larger than the size of global equities, but that gap between the two asset classes has been shrinking rapidly in recent years.
At the current pace, it is not inconceivable most of us will live through the moment that equities replace the once all-mighty bond market as the world's number one destination for superannuation and other investment funds. Will that shake things up a little? You bet it will!
Even in pre-GFC days, financial markets have always been influenced by the number and types of participants. 2020 has introduced a fresh group of share market enthusiasts: twenty- and thirty-somethings who not only helped create the fastest bear market recovery on record post-March, but who are equally contributing to the rise and rise of so-called "story-stocks".
Think Nio, China's equivalent of Tesla in the US, or, closer to home, Afterpay ((APT)).
It is not possible to determine who or what exactly influenced what and when, or how exactly. Such data are simply not available, let alone the context and insights necessary to obtain an accurate insight, but those expert voices who keep a firm eye on global liquidity might be looking into the right direction.
Investors need not look any further than recent price action in crypto currency Bitcoin which seemed to be bobbing along between US$9000 and US$12000 after having sold off in line with global equities in February and March. Since the beginning of October the price has -quite literally- exploded to the upside, by now having surged past US$18000. At the start of 2020, Bitcoin was languishing below US$8000 and only true believers seemed to still be interested.
Given its popularity among younger generations, Bitcoin's stellar come-back this year can be interpreted as the clearest sign those younger enthusiasts are making their mark. It can also be seen as the ultimate indicator for excess liquidity inside the global financial system.
Viewed from the latter's perspective, this month's stellar rise for Bitcoin bodes well for the Australian share market, and for risk assets in general. As the old adage goes: money first finds its way into financial assets before it is spent in the day-to-day economy, making the recovery happen that has been anticipated and priced-in first.
And Bitcoin, those eagle-eyed experts will assure all of us, has been preceding the next upswing for global equities on more than one occasion since its inception in 2008.
It may not necessarily be obvious to all and sundry, but general investor sentiment has made a dramatic turn in the past few weeks.
Having kept a finger on the pulse of the Sydney property markets myself, I have witnessed the change in general dynamics whereby, at first, everyone seemed convinced property prices looked vulnerable and destined for weaker prices in 2021, thus only high quality properties were finding willing buyers at reasonable prices.
Post the latest RBA rate cut, and the (unexpected) subsequent follow-through in banks' owner occupier mortgage rates, those hesitant tyre-kickers are now driven by FOMO. Properties that couldn't attract a decent offer only weeks ago, are now flying off the shelves at prices $100k-$200k above reserve, with multiple candidate buyers bidding against each other.
All of a sudden the buzzword in Sydney is: limited stock available.
In similar vein, two-three months ago the big debate among investors seemed to have returned to how "expensive" equity markets looked in light of historical comparisons and the many risks and uncertainties ahead. That too has quickly shifted into a "more risk is good"-type of mindset.
Now, major international asset managers at the likes of Morgan Stanley, Goldman Sachs and others, are toying with the possibility of double-digit percentage gains for equities next year, on top of a firm rally into year-end. Value-stocks are priced too cheaply and most commodities are facing deficits as economic growth is expected to recover strongly after this year's steep falls.
Bitcoin's sharp resurgence is simply the most visible indicator of this sudden switch in general sentiment. The ruling narrative is that todays newfound popularity follows investors realising central bankers and governments have no other viable option than to continue to debase their fiat currencies.
It's the same narrative that can be heard among true blue gold bulls, but thus far this late in 2020 it is not benefiting the price of gold bullion. Rising US bond yields are most likely responsible for the latter. It also means excess liquidity, not that popular narrative, might well be the primary driver for Bitcoin.
Caveat emptor, as per always, but Bitcoin's rally might bode well for equities in the weeks ahead.
Fittingly, the latest monthly global fund manager survey by Bank of America has been labeled the most bullish survey of the year with cash levels dropping as money is flowing into equities and with growth forecasts rising fast on the back of positive news flow about vaccine candidates.
Overall, observe market strategists at BofA Securities, cash levels have now returned to below pre-covid level; 4.1% versus 4.2% in January while global growth and profit optimism is at a 20-year high. "Early stage" and "steepening yield curve" have become the two most popular expressions used.
Emerging Markets are back on the agenda. And so are energy producers.
Taking note of the general spike in market optimism, BofA Securities market strategists are keeping their attention focused on signs the last bull has put his money in the market. Markets are approaching the point BofA strategists call "Full Bull" mode. Their advice is investors should start preparing to take money off the table.
Market moves are as much about general sentiment as they are about underlying fundamentals.
Apart from the prospect of having at least one vaccine to beat the virus in 2021, growing investor optimism is carried by company updates beating market expectations and rising forecasts for the two years ahead.
But that's not the full story, not by a long shot.
Central banks are still keeping short-term bond yields pinned close to the zero yield level, while also guaranteeing sufficient liquidity to keep the economic recovery alive and on track, while governments continue to provide further stimulus and support. Inflation is low, though bond yields at the higher end (longer-dated) are on the rise.
The matter of inflation or not is guaranteed to remain the subject of lively debate for many years to come. Arguments on both sides of the Grand Disagreement are equally persuasive and valid. But as long as inflation remains modest, and economic growth and corporate profits continue to improve against a background of ongoing stimulus and excess liquidity, it is likely equities might be enjoying the best of all worlds in 2021.
Further fueling bullish forecasts is the realisation many a consumer has been adding additional cash to savings in 2020. What if this money is being spent next year?
While some might still offer the counter-argument that, when measured on simple Price-Earnings (PE) multiples, equity markets have seldom looked as "expensive" as today, the key offsetting argument is that, on a relative comparison between bond yields and dividend yields on share markets, equities do not look over-priced at all.
And that, as they say, is the crucial factor when investing in the share market in 2020 and beyond. You have to accept the world is changing, and keeps on changing, and this also affects how assets like equities are being valued vis-a-vis government bonds and other (yielding) assets.
A recent update on strategy sees Macquarie upping the prospect for rising bond yields in the year ahead, in particular if the news flow regarding potential vaccines to fight the global pandemic remains positive.
As a result, Macquarie strategists have implemented further adjustments to their Model Portfolio settings, adding Suncorp ((SUN)), Computershare ((CPU)) and nib Holdings ((NHF) while adding additional exposure to both Westpac ((WBC)) and ANZ Bank ((ANZ)).
Evolution Mining ((EVN)) and GPT ((GPT)) have been removed to fund these changes, while portfolio exposure to Spark Infrastructure ((SKI)), Charter Hall ((CHC)) and James Hardie ((JHX)) has been reduced.
All changes made can be explained by forecasts for higher bond yields next year.
Strategists at Wilsons have by now directed their Focus List towards a 60% orientation to next year's economic recovery story through list inclusions Worley ((WOR)), Santos ((STO)), Aristocrat Leisure ((ALL)), National Australia Bank ((NAB)), CommBank ((CBA)), ANZ Bank, and Aurizon Holdings ((AZJ)).
Model portfolio managers at stockbroker Morgans have decided in favour of a larger exposure to the beaten-down energy sector with both Santos and Woodside Petroleum ((WPL)) having been added to the Balanced Model Portfolio, while equity holdings in Rio Tinto ((RIO)) and Sonic Healthcare ((SHL)) have shrunk.
Question Of The Week
FNArena receives regularly questions about the lists FNArena subscribers have access to as part of my research into All-Weather Stocks on the ASX. There appears to be some confusion about the selection of All-Weathers and related sub-selections. Below is my response to such questions last week.
I have identified exactly 20 All-Weather Stocks listed on the ASX. That selection doesn't change often, but what I do, sometimes, is shifting stocks from "Potential All-Weather" to "All-Weather" or to "All-Weather with a question mark".
That latter selection is simply me making investors aware there are some issues that might temporarily impede on this company's performance, but I am keeping it as an All-Weather. The latter is important as it indicates that whatever is creating the question mark might be temporary, or we yet have to find out whether it might be more permanent.
In the case of Ramsay Health Care, the private hospital sector has become increasingly caught out by governments not wanting to spend money, and this is squeezing the sector in many countries, including in Australia, the UK and France; all countries in which this company operates.
In Australia, Ramsay is facing the additional challenge of private health policies shrinking in total numbers, as younger people refuse to pay for older people’s costly care, creating a dog fight between health care providers and private health insurers about who will get the dirty end of the proverbial stick.
We have yet to find out whether this year’s pandemic will fundamentally change industry dynamics, as a lot will come down to government priorities post-2020.
I shouldn’t be telling you anything new about Ramsay Health Care; the above is exactly what has been reflected in the share price that hasn’t gone anywhere but sideways over the past four years. I think the outlook looks uncertain, but positive for the next, say, two years.
However, if by that time industry dynamics haven’t changed, I might remove this company from the list of All-Weather Stocks, with or without a question mark. For now, however, I am focused on the trajectory that should be ‘up’ for the foreseeable future.
There are cases where the question mark disappears and I move stocks back to All-Weather (without a question mark). One such example is Coles, together with Woolworths. Both have been listed as All-Weathers with a question mark for a while, but are now firmly back on the list of All-Weathers (no question mark).
That question mark related to Kaufland, the German discounter, who was preparing for a major expansion in Australia. This, I believed, would prove a major challenge to all grocery operators in Australia. As it turned out, Kaufland abandoned its intention and won’t be back anytime soon.
The Kaufland decision, in my view, marks a major turning point in the outlook and good fortunes of both Coles and Woolworths. Both are therefore back as an All-Weather Stock, no question mark. Instead, I have moved Wesfarmers, now without Coles, to the list of “All-Weathers with question mark”.
At the end of the day, whether any of this matters or not is completely up to the investors who pay attention to my research and my lists. And this includes myself. The FNArena-Vested Equities All-Weather Model Portfolio owns all of Ramsay Health Care, Coles and Woolworths, but not Wesfarmers.
To a large degree, this is due to personal insights and preferences. I am sure investors who own Wesfarmers shares are pretty happy about it. What counts is that no portfolio can own all the stocks listed on my selected lists. It’s about making educated and well-thought of choices.
My research into All-Weather Stocks has identified that some businesses are far more resilient than others, and this shows up during tough times and over longer periods of time. That’s the essence of my research. The selections I share through my writings and on the website are merely there as a broad guide for investors looking to build a better, more resilient portfolio. It’s there so that everyone can pick and choose at their own volition and in line with their own goals and strategy.
This is also why I don’t provide Buy recommendations, entry or exit levels, or recommended portfolio weightings. The aim is not to provide financial advice (which I am not allowed to), but to assist investors with understanding shares, the market, and the importance of portfolio construction.
The same base principles also apply to the sub-selections I included, like “Prime Growth Stories”, “Emerging New Business Models” and “Dividend Champions”. These selections are all an attempt to identify those businesses that have that little bit of “special” attached to them, which should show up, again, during tougher times and over a longer period of time.
At the risk of blowing my own trumpet, I do think share price performances for the selected stocks have, in general terms, vindicated the view that embedded business quality counts, for a lot, though not necessarily always and in the immediate moment.
I try my best communicating any updates and changes through my writings, usually as Weekly Insights. I guess the message for me to take away from your question, and other questions I receive, is that I need to update regularly, and explain my approach through 4 baskets, as well as the various lists on the website.
FNArena recently published the transcript of an interview, which I think explains it well. You can access this story via Rudi’s Views on the website: “Rudi Interviewed: Four Baskets For Equities Portfolio”.
I hope this explains it well.
(This story was written on Monday 23rd 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: email@example.com or via the direct messaging system on the website).
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For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED
For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED
For more info SHARE ANALYSIS: ANZ - AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED
For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED
For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP
For more info SHARE ANALYSIS: CPU - COMPUTERSHARE LIMITED
For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED
For more info SHARE ANALYSIS: GPT - GPT GROUP
For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC
For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED
For more info SHARE ANALYSIS: NXT - NEXTDC LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED
For more info SHARE ANALYSIS: SKI - SPARK INFRASTRUCTURE GROUP
For more info SHARE ANALYSIS: STO - SANTOS LIMITED
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For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION
For more info SHARE ANALYSIS: WOR - WORLEY LIMITED