Rudi’s View: Collins Foods, Rio Tinto and Aurizon

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 | May 20 2021

In this week's Weekly Insights:

-June Index Rebalancing
-Inflation Is The 2021 Grand Debate
-Conviction Calls
-Research To Download

By Rudi Filapek-Vandyck, Editor FNArena

June Index Rebalancing

Since March 2007, reports Morgan Stanley, stocks that have been picked as the next fresh inclusion in the ASX200 have generated relative outperformance of no less than 7.5% from the period starting 20 days prior to the announcement, up to implementation.

Throw index exclusions into the mix and the relative outperformance becomes 13.7% at a success rate of 81%.

No wonder stockbrokers pay attention to potential index changes. The numbers speak for themselves.

Looking forward to the next announcements to be made by index guardians at Standard & Poor's, Morgan Stanley suggests Appen ((APX)) could potentially become the first of the WAAAX stocks to be dropped from the ASX100.

The plausibility of such a move is not considered very high, but it remains a possibility and Morgan Stanley suggests if Appen were to be dropped, Harvey Norman ((HVN)) appears best placed for replacement.

More important are potential changes to the ASX200 (see numbers mentioned earlier).

Morgan Stanley thinks there is a reasonable chance lithium producer Orocobre ((ORE)) will become part of the ASX200. The stock is considered a lower risk inclusion than its proposed merger partner Galaxy Resources ((GXY)). The merger between the two is expected to be finalised by August.

Other potential fresh index inclusions, according to Morgan Stanley, are Chalice Mining ((CHN)) and Uniti Group ((UWL)), and maybe (at a lower probability) Centuria Capital Group ((CNI)) too.

Stocks to potentially get booted out at the next revision include Resolute Mining ((RSG)), Austal ((ASB)) and Perenti Global ((PRN)) with added candidates at a lower risk being G8 Education ((GEM)) and Westgold Resources ((WGX)).

Morgan Stanley is equally toying with the possibility that TPG Telecom ((TPG)) might be replaced by Metcash ((MTS)) in the ASX100 while Orica ((ORI)) doesn't appear safe inside the ASX50.

Orica's potential replacement would be Northern Star Resources ((NST)), while if Ampol ((ALD)) might be replaced, that would potentially trigger the inclusion of Seek ((SEK)).

Changes in the ASX200 tend to be of more importance as they often include institutions selling out of or climbing on board the corporate register to recalibrate portfolios in line with the new index composition.

Inflation Is The 2021 Grand Debate

Financial markets have proven too much of an enigma for many an investor and share market commentator in 2021. Is it all about elevated valuations, an abundance in liquidity and the come-back of Value vis a vis Growth?

Or is there a lot more to digest in order to explain the often extreme and seemingly illogical day-to-day volatility, while share market indices are near all-time record highs, and holding up?

Probably the most apposite assessment of financial markets this year is via the Grand Debate that is raging across the five continents: are we at an early stage of a new inflationary period, or are markets jumping at shadows and will we all look back next year and wonder what all the fuss was about, really?

The answers to that all-important question are formulated with fierce conviction, amidst utter division. The conviction on both sides of the argument seems so high, neither side seems to be able to understand why the others cannot see what they see.

If ever there was a Mexican standoff in global finance, this year's Grand Debate would be it.

In one corner we have the inflationists who see a major break with the past decade as the economic V-shaped recovery intertwines with generous government spending and overly accommodative central bankers.

Closed borders, interrupted supply chains, geopolitical tensions, climate change and water shortages, major infrastructure spending and cashed up consumers; it all points in one direction: inflation is about to go through the roof. History won't be kind on today's policy makers.

In the opposite corner we have the deflationists who only see inflation spiking -temporarily- because last year's reference numbers are so low, while closed borders and interrupted supply chains will be resolved, albeit not immediately.

The real damage done to economies is not reflected in standard data and surveys, so goes the counter-argument, while megatrends such as technology driven-disruptions and ageing populations continue to keep a lid on inflation, on top of zombie companies, the global search for income, a massive mountain of global debt, and economic momentum that is already showing signs of decelerating.

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