Rudi’s View: Telstra, CSL, Xero & Charter Hall

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 | Apr 09 2021

In today's update:

-The Iron Ore Riddle Solved
-Not Giving Up On Technology
-Morgans: Be Active, Take Advantage
-The Dividend Disconnect
-Canaccord's Model Portfolios
-FNArena Talks
-Research To Download

By Rudi Filapek-Vandyck, Editor FNArena

The Iron Ore Riddle Solved

This year's reflation trade is just that, a temporary reflation trade and not the beginning of a new Supercycle for commodities, stated the team of mining sector analysts at UBS last week.

Once 2021 is gone, so will disappear the strong upward momentum that is feeding into the sector this year. UBS very much prefers base metals and new battery materials over bulk commodities, including iron ore, and precious metal gold.

The battle lines are drawn. The public debate is heating up. Is Fortescue Metals ((FMG)) thus a Sell? Or is this simply a signal that South32 ((S32)), to name but one alternative, is now a superior opportunity?

Not everyone agrees with UBS on every conclusion drawn, and that is putting it mildly. Macquarie, to name but one expert with an opposing view, continues to update on local iron ore producers with a seemingly iron conviction (pun intended) supply is to remain in deficit, and that means lower prices seem unreasonable, if not unrealistic.

Australian market strategists at JPMorgan, well aware of the schism in public views and predictions, decided to sit down with colleagues from the resources desk at the firm. Together they worked out iron ore prices may well decline by between -5%-10% this year. This sounds like UBS might yet be vindicated, but that's not the conclusion drawn at JPMorgan. Not at all.

Offsetting the price decline are the fact EPS forecasts continue to climb (and more is yet expected), the sector continues to enjoy near-record high free cash flow levels, while balance sheets this time around are in "pristine" condition, whereas large scale M&A remains out of the question and dividends should remain plenty and high (with JPMorgan anticipating DPS estimates have further to rise).

All in all, JPMorgan would not sell out of BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals just yet. Instead, the Model Portfolio has exited from Harvey Norman ((HVN)) and Qube Holdings ((QUB)) while adding Qantas Airways ((QAN)) and Domino's Pizza ((DMP)) to further enhance the portfolio bias towards value stocks and this year's reflation trade.

Given the strong gains achieved by Materials and Financials already, JPMorgan's Model Portfolio has reduced its Overweight position to both sectors, while decreasing its Underweight position to local healthcare stocks. Positions in Telstra ((TLS)) and CSL ((CSL)) have increased, while those in Rio Tinto and Super Retail Group ((SUL)) have decreased.

The in-house forecast is that the US ten-year treasury will be at 1.95% by year-end, which underpins the portfolio's bias and the adjustments made.

Not Giving Up On Technology

Technology analysts at Credit Suisse remain of the view that unless government bond yields have a lot further to rise, and those increases prove sustainable, local technology stocks retain the ability to outperform on a twelve months horizon. Many of the better quality companies in the sector are multi-year compounders, the team points out.

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