Rudi’s View: Brambles, Orica, Reece and… Tesla

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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 | Dec 04 2020

In today's story:

-Index Changes: One More Time
-Secular Growth, With Conviction
-Conviction Calls
-Rudi Talks
-Research Reports To Download

By Rudi Filapek-Vandyck, Editor FNArena

Index Changes: One More Time

Next week Friday, 11th December 2020, Standard & Poor's will announce the final rejigging (in this calendar year) of Australia's major indices and as per usual professional investors are already trying to assess who moves into certain indices and who is about to get booted out.

For us mere mortals, the importance of the official announcement next week, as well as the preceding speculation, is it helps at the very least explain some of the potentially erratic behaviour in certain share prices as money flows in and out in anticipation. In some cases the end result can be quite brutal, even after the changes have become public.

If, however, the sole cause of short-term volatility is inclusion in or removal from certain indices, then it is likely the impact will be of short duration only.

The most important index, where additions and drop-outs tend to have the largest impact, is the ASX200. Wilsons thinks S&P will announce the inclusion of Reece ((REH)), Kogan ((KGN)), and Pointsbet Holdings ((PBH)), as well as Tyro Payments ((TYR)). Codan ((CDA)) is seen as a potential extra inclusion while the likes of Champion Iron ((CIA)), Hub24 ((HUB)) and De Grey Mining ((DEG)) are labelled possible, but unlikely.

Those predicted to lose their membership of the ASX200 are Cooper Energy ((COE)), Western Areas ((WSA)), Avita Therapeutics ((AVH)), GWA Group ((GWA)) and Service Stream ((SSM)). If Codan does get in, Tassal Group ((TGR)) has been identifed as most likely victim.

All other indices might not see any changes, but Wilsons has lined up a few "probable" and "possible" changes. As such, Mineral Resources ((MIN)) and Reece could find they will be added to the ASX100 with Flight Centre ((FLT)) and nib Holdings ((NHF)) the likely victims.

Same principle for the ASX50 where Afterpay ((APT)) and Xero ((XRO)) potentially can make their entrance, switching spots with Vicinity Centres ((VCX)) and Oil Search ((OSH)). A lower probability, thinks Wilsons, is that Evolution Mining ((EVN)) might be included too, with most likely loser Computershare ((CPU)).

The ASX20 traditionally is the most stable of all indices, but Wilsons thinks Afterpay ((APT)) might be swapped with Insurance Australia Group ((IAG)) to officially become part of what was once upon a time referred to as Australia's Blue Chip stocks.

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Morgan Stanley doesn't put too much probability on Afterpay entering the ASX20 but if S&P does decide to do it, Insurance Australia Group is seen as the most likely to be dropped.

Afterpay is seen as the most likely new addition for the ASX50 with all of Xero, Northern Star Resources ((NST)) and Evolution Mining seen as a lower probability. Vicinity Centres is thus most likely to lose its spot among the Top50 with question marks now over Oil Search, Computershare and Ampol's ((ALD)) Top50 inclusion.

Morgan Stanley thinks Mineral Resources has a high chance of being added to the ASX100, with Flight Centre likely to be dropped in response. It is possible that either of Reece or IDP Education ((IEL)) might also be included in which case Iluka Resources ((ILU)) and nib Holdings might be booted out.

When it comes to the ASX200, Morgan Stanley lines up the same candidates as Wilsons', with exception of Champion Iron and Hub24. The same list of Cooper Energy, Western Areas, Avita Therapeutics, GWA Group, Service Stream, and Tassal Group have been singled out to lose their spot in Australia's leading share market index from the close of trade Friday, 18th December onwards, when the announced changes kick in.



Secular Growth, With Conviction

With share market strategists of all flavours and colours guiding investors towards more leverage to re-opening borders and recovering economies in 2021, and possibly beyond, Morgan Stanley makes the point there remain secular growth stocks out there that can, and most likely will, withstand the headwinds from portfolio rotation, because of their idiosyncratic strengths.

42 of such companies have been identified. Unfortunately, this is research done solely on the US share market, but I nevertheless believe there's value in sharing the list, even if not every reader of this story is an active investor in foreign equities.


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