Rudi’s View: A February For The Record Books

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 | Mar 04 2021

A February For The Record Books

By Rudi Filapek-Vandyck, Editor FNArena

It has been a while since a corporate results season in Australia was mostly about corporate performances. The last time this happened was, according to my memories, February 2018.

Back then, investors weren't so sure whether strong share price performances for companies including Altium and Appen could be maintained, but their financial market updates proved the doubters wrong.

Every subsequent season since has been overshadowed by macro forces, albeit to different degrees and mostly through attempts to rotate away from Quality and Growth into Banks, Value and Cyclicals.

The February 2021 season has proved a little different. That oft attempted, but seldom sustainable market rotation into banks, miners and energy producers is by now five months old, and it has been solidified throughout the month with investors unambiguously showing their preference for share market laggards that stand to benefit from the rollout of vaccines globally and the re-opening of regional and international borders.

At times it was almost heartbreaking to observe how strong performances from covid-winners would receive no reward, at best, while for companies such as Webjet ((WEB)) and Flight Centre ((FLT)) it almost didn't matter what financial results were being released as investors are keeping their attention firmly focused on the fact that global borders will re-open, exact timing unknown.

In 2021, the return of broad-based optimism about the economic recovery ahead has started to translate into higher bond yields which, in turn, have looped back into a weakening US dollar (stronger AUD) and a universal approval for investors to again start accumulating shares in small mining companies, banks, oil & gas producers, steel, construction and building materials, contractors and mining services providers, and other industrial cyclicals.

The sharp rise in bond yields was the big shadow hanging over February this year. Not only did it provide too big a headwind for most covid-beneficiaries, it also reignited market debate whether unprecedented stimulus and government support programs are heralding the return of consumer price inflation, which would justify even higher yields.

Central bankers joined the debate. They said: no, it doesn't. The alternative view is that bond yields fell in 2020 because of the global pandemic and as market optimism grows, those yields are simply pricing out the virus impact. On the first Monday of March, the RBA used its money printing power to put a halt to what risked becoming an unruly trend that could well grow beyond control. The Fed had been signalling similarly on the final February Friday.

Whether this settles this debate once and for all is highly unlikely, but if the temperature on bond markets cools down, which would be the prime target for central banks the world around, then at least equity investors can start focusing again on corporate earnings, balance sheets, quality of business models, structural trends and valuations.

For investors, maybe the key challenge is to find a portfolio balance between direct winners from higher bond yields and this year's economic recovery and those robust business models that might be temporary out of favour, also because they performed so well in the past, but whose runway for growth continues to be supported by new structural mega-trends and tectonic shifts into tomorrow's technology-driven new economic reality.

Certainly, a less dominant theme of rising bond yields will much easier allow companies such as ResMed ((RMD)), Xero ((XRO)), Charter Hall ((CHC)) and Altium ((ALU)) to regain firmer footing, and thus investors' attention.


Having said all of the above, there is no denying a rather large number of highly popular, highly valued, strongly growing businesses have come up short these past few weeks, which has weighed upon share prices irrespective of bond market shenanigans.

The aforementioned Altium is one of them, but we can easily add a2 Milk ((A2M)), Appen ((APX)), Nanosonics ((NAN)), and many of the smaller cap technology sweethearts, including Aerometrex ((AMX)), Bravura Solutions ((BVS)), Catapult Group ((CAT)), Infomedia ((IFM)), ResApp Health ((RAS)), Temple & Webster ((TPW)), and others.

During a time when share market laggards -from the banks to Western Areas ((WSA)), and from Lynas Rare Earths ((LYC)) to Telstra ((TLS))- proved they are still worth investor attention, as long as the economic recovery remains on schedule, many of the former can-do-no-wrong share market darlings revealed some of their own vulnerabilities and weaknesses. When taking a broad view, this even includes Australia's Champion among Champions, CSL ((CSL)).

No doubt, for some investors this has further galvanised their appetite for more cyclicals and less Quality, Defensives and Growth, but one needs to keep in mind the theme of backing last year's covid-victims will run its course at some point, while central banks remain convinced there is no sign of sustainable inflation on the horizon. I also believe there is one important message that should not be ignored from several of this season's failures, and that is that disruption and tectonic shifts that used to dominate the landscape until late last year are still around.

Beyond the short-to-medium term focus of the market sentiment pendulum, those shifting tectonic plates will continue to challenge moribund, under-invested business models even though there is equally a valid argument in that the accelerating shift towards decarbonisation of economies is creating a whole set of fresh dynamics, while it should be easier for companies to restructure, re-align and reinvent themselves when economic growth is strong (or so goes the theory).

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