Rudi’s View: Investment Themes For The Year Ahead

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In this week's Weekly Insights:

-September Blues
-Post-August: Five Themes For The Year Ahead
-August: The Final Numbers
-All-Weathers In August
-Conviction Calls
-Research To Download
-More on the August results season

By Rudi Filapek-Vandyck, Editor FNArena

September Blues

Last year, September was simply a pause in between the recovery from the pandemic sell-off and the subsequent low-volatility up-trend that still remains in place today.

In 2019, however, September delivered a lot more volatility and share market weakness. Things werent't looking too bright for the old economy parts of the Australian economy, and banks and cyclicals began announcing dividend cuts soon after.

In 2018, economic data started rolling over and the Federal Reserve seemed hell-bent on continuing to lift the official cash rate. Equities started to weaken and soon in quite the violent way, until the US Fed backtracked from its intention, but not before late December.

Pick your pick. September historically is the weakest month for US equities and more often than not does the month inject more volatility into financial markets, if only because we, the human participants, expect it to do exactly that.

Usually, the weakest and potentially most volatile period for the year announces itself between the second week of September and the second week of October. Roughly from mid-month to mid-month. Nobody knows exactly why.

So should we be worried?

As per the above mentioned three years past, the scenario for September is never set in stone. And only once in the three years did September open up the floodgate for something more serious to unfold than a pause or a temporary retreat.

This year, the focus is on decelerating global growth. How serious is it? How long will it last? I suspect most market participants are still quite sanguine about it. And there's a very straightforward reason for it: covid and lockdowns are to blame.

Media and commentators are constantly asking the question whether inflation is to remain 'transitory' or not, but I think most investors see the second half slump as 'transitory', and that's in itself an important observation.

It means investors are by definition looking beyond the months ahead and focusing on January 2022, and beyond. Covid and lockdowns are excruciatingly tough on small businesses and the most vulnerable in societies, but many consumers are running up their savings and are expected to re-emerge while wildly swinging their wallets, once they are allowed to.

It is this prospect, I believe, that will act as a natural deterrent to seeing markets drop into a violent black hole, irrespective of pockets of market exuberance, in particularly in the US, and generally elevated valuations, more so in the US than elsewhere.

My advice is therefore the same as with every other period of share market volatility: investors should use this period to reshuffle their portfolios.

Excellent long-term performers might become available at share prices that seemed impossible only a week ago.

And aren't we extremely lucky in Australia in that the August reporting season has only just finished; all data, forecasts, insights and views have been freshly updated.

Post-August: Five Themes For The Year Ahead

Corporate reporting seasons are the ideal event to update thoughts, views, even whole strategies. Ord Minnett's Australian Equities Strategist, Sze Chuah, has taken the opportunity to review key investment themes for the year ahead. An exercise that should benefit us all.

Investment Theme #1 – Reopening societies and recovering economies:

-Consumers will increase their spending, but probably more towards restaurants, travel and entertainment, and probably more domestically as international travel won't be as popular or even available;
-Increased mobility will lead to a pick-up in energy usage and transport;
-This theme is most likely to favour the so-called 'Value'-trade

Ord Minnett's list of stocks to play this theme already contained ANZ Bank ((ANZ)), Origin Energy ((ORG)), Ramsay Health Care ((RHC)), SeaLink Travel ((SLK)), Star Entertainment ((SGR) and Tyro Payments ((TYR)). Post-August, Webjet ((WEB)) has now been added to the selection.

Investment Theme #2 – Income remains important

Interest rates and bond yields remain exceptionally low, hence investors' demand for income through the share market remains strong.

Post-August, Amcor ((AMC)) has been removed from Ord Minnett's list of preferred stocks to play this theme, but only because a rising share price had pushed Amcor's prospective yield below 4%. Weakness in September can make this assessment redundant quite quickly.

The four remaining favourites under theme #2 are APA Group ((APA)), Bank of Queensland ((BOQ)), Charter Hall Retail REIT ((CQR)), and Waypoint REIT ((WPR)).

Investment theme #3 -Financials that benefit from rising asset values

As an aside: the fact this remains one of the key themes on Ord Minnett's strategy menu tells us a few things about where the broker sees financial markets heading to over the year ahead. Merger and acquisition deals are equally included.

Ord Minnett's four theme favourites remain unchanged: Hub24 ((HUB)), Macquarie Group ((MQG)), Magellan Financial ((MFG)), and Perpetual ((PPT)).

Investment Theme #4 – Infrastructure investment

Ord Minnett remains of the view that governments, both in Australia and overseas, will continue their push for increased investment in infrastructure. This creates demand for raw materials and offers fresh opportunities for services providers through new contracts.

Ord Minnett has added Cleanaway Waste Management ((CWY)) to its selection of preferred exposures, with the stock joining Alumina Ltd ((AWC)), Orocobre ((ORE)), Rio Tinto ((RIO)), Service Stream ((SSM)), and Telstra ((TLS)).

Investment Theme #5 – Downside Risks

The fifth and final theme is a negative one; companies to avoid or to sell as it appears the risks are to the downside.

Post significant share price weakness -from near $7.50 to below $6- Boral ((BLD)) shares are now no longer included in the broker's Best to Avoid-list, but the following still are: AusNet Services ((AST)), Reece ((REH)), Orora ((ORA)), and OZ Minerals ((OZL)).

August: The Final Numbers

There are but a few certainties in life. Death. Taxes. And more disappointments are hiding in the tail end of each local corporate reporting season.

Now the dust has settled on the August season in Australia, the FNArena Corporate Results Monitor has determined that, out of the total of 346 companies covered by the seven stockbrokers that make up the Australian Broker Call Report, some 117 companies (33.8%) delivered a positive surprise ('beat'), while 75 companies (21.7%) surprised to the downside ('miss'), with the remaining 154 (44.5%) reporting broadly in-line with market expectations.

Historically, this still categorises as a net positive season, especially as estimates had been in an up-trend for 11 consecutive months prior to August, but the numbers looked a lot better two and three weeks into the season, as they always do.

Of more importance is that the exceptional numbers from post-August last year -when up to 49% managed to beat expectations- are now in the distant past, potentially to never be repeated ever again. 

The percentage of negative disappointments fell as low as 13% in February.

Last week I reported Macquarie's forecasts had been revised down to 10% growth on average, and in aggregate, for the year ahead for the ASX200. This week I can add according to data-service Refinitiv market consensus has 20% EPS growth penciled in for FY22. Morgan Stanley sits at 19.4%. UBS, on the other hand, has post-August only 7% left for FY22.

It goes without saying, the local index looks a lot less/more attractive depending on whose numbers we take guidance from. Equally noteworthy: UBS sees dividends per share (DPS) only growing by 2% in FY22 following the spectacular rise of 59% in FY21, which was preceded by last year's -37.3% decline.

Somewhat disappointing, I found, Ord Minnett's most favourite themes for the year ahead did not include Megatrends or Structural Growth, which features prominently in my own research, strategy and share market approach. Strategists at Wilsons, on the other hand, do pay attention to this theme and their observation matches mine in that large numbers of companies that enjoy structural growth might be looking "expensive" on static looking data; they do continue delivering the goods.

On Wilsons' assessment, such companies include: Xero ((XRO)), Domino's Pizza ((DMP)), James Hardie ((JHX)), Charter Hall ((CHC)), Goodman Group ((GMG)), Afterpay ((APT)), ResMed ((RMD)), CSL ((CSL)), Carsales ((CAR)), REA Group ((REA)), and Fisher & Paykel Healthcare ((FPH)).

Among so-called emerging business models, Wilsons points at ARB Corp ((ARB)), Breville Group ((BRG)), Nick Scali ((NCK)), NextDC ((NXT)), Rural Funds Group ((RFF)), ReadyTech Holdings ((RDY)), Telix Pharmaceuticals ((TLX)), and Clinuvel Pharmaceuticals ((CUV)).

The overlap with my own research into All-Weather Performers is noticeable (see dedicated section on the website for paying subscribers, 6 and 12 months).

Wilsons has equally lined up its favourite stocks to position for benefit from reopening economies: Qantas Airways ((QAN)), Crown Resorts ((CWN)), Star Entertainment, APA Group ((APA)), Cochlear ((COH)), CSL, Computershare ((CPU)), Insurance Australia Group ((IAG)), IDP Education ((IEL)), Ramsay Health Care, Seek ((SEK)), Tabcorp Holdings, Transurban Group ((TCL)), Worley ((WOR)), Vicinity Centres ((VCX)), and Boral.

But also the following emerging companies (smaller caps): Integral Diagnostics ((IDX)), Silk Laser Australia ((SLA)), Costa Group ((CGC)), and Select Harvests ((SHV)).

And then there is the flipside of the coin: companies that might find life tougher once covid and lockdowns are less of a dominant factor in our societies: Coles Group ((COL)), Metcash ((MTS)), Woolworths ((WOW)), Amcor, Sonic Healthcare ((SHL)), Reece, Reliance Worldwide ((RWC)), Fisher & Paykel Healthcare, JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Wesfarmers ((WES)), and BlueScope Steel ((BSL)).

And among smaller cap companies: Eagers Automotive ((APE)), ARB Corp, Autosports Group ((ASG)), Motorcycle Holdings ((MTO)), Marley Spoon ((MMM)), Collins Foods ((CKF)), Nitro Software ((NTO)), Breville Group, and Aroa Biosurgery ((ARX)).

Macquarie observes growth in FY21 mostly related to resources and banks, but both stories are labeled "one-offs" and growth's pendulum in Australia is expected to again tilt towards offshore earners. While shares in most of these companies are trading on higher valuations, Macquarie believes their EPS growth is equally poised to come out (much) higher than the market average.

Stocks to consider include: James Hardie, Ramsay Health Care, Cochlear, Brambles ((BXB)), Amcor, Seek, and Computershare.

Macquarie has also lined up a small selection that, based on their history, is likely to upgrade FY22 guidance later on: James Hardie, Charter Hall, Amcor, and Goodman Group.

Morgan Stanley has a target for the ASX200 of 7200 by mid next year. No surprise, the firm's local share market strategist is preaching caution.

All-Weathers In August

August, would you believe, marked the sixth consecutive month of relative outperformance with the All-Weather Model Portfolio returning 3.17% ex of fees for the month. The return over the past three months has risen to 12.27%.

I always feel inclined to add these returns are achieved without taking on above average risk. On my observation of the past 6.5 years (since inception) reporting seasons tend to mostly benefit the Portfolio. Maybe Quality has a habit of mostly performing well?

Changes made were few and far between throughout August. The Portfolio used weakness in Ansell to buy additional exposure and following weakness in Breville Group it was decided to initiate inclusion for the latter.

It is not expected the lists of companies on my personal radar will undergo a lot of changes post-August, as per tradition. A number of stocks did catch my attention, and they are mostly situated in the smaller segment of the share market, which means higher risk, even if management at the helm does nothing wrong.

Investors should always conduct their own research, but post-August they might well direct some of their attention towards: Audinate Group ((AD8)), Aussie Broadband ((ABB)), Class ((CL1)), Codan ((CDA)), EML Payments ((EML)), Fineos Corp ((FCL)), Hub24 ((HUB)), Jumbo Interactive ((JIN)), MNF Group ((MNF)), PWR Holdings ((PWH)), Silk Logistics ((SLH)), and Uniti Group ((UWL)).

Unfortunately, financial updates by the likes of Appen ((APX)), Altium ((ALU)) and Bravura Solutions ((BVS)) once again proved many inside the local technology sector are finding market dynamics a lot tougher these days, but then WiseTech Global ((WTC)) delivered one of the big upside surprises for the season. Gone are the days that offshore and local shorters seemed to have the last laugh.

Conviction Calls

Key large cap stocks to own on a 6-12 months view post the August reporting season, according to Wilsons, are: CSL, Goodman Group, Insurance Australia Group, James Hardie, National Australia Bank ((NAB)), News Corp ((NWS)), OZ Minerals, ResMed, Telstra, and Xero.

Key smaller cap stocks: Adairs ((ADH)), ARB Corp, Aroa Biosurgery, Collins Foods, Countplus ((CUP)), EML Payments, NextDC, Plenti ((PLT)), Pacific Smiles ((PSQ)), ReadyTech Holdings, and Universal Store Holdings ((UNI)).

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Macquarie's favourites to play the re-opening through vaccines trade are: Qantas Airways, Webjet, Star Entertainment, SkyCity Entertainment ((SKC)), Ramsay Health Care, Cochlear, Transurban, Dexus ((DXS)), Mirvac Group ((MGR)), Seek, IDP Education, and Cleanaway Waste Management.

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Morgan Stanley's ten selections for the Australia Macro+ Focus List remain: Ansell, APA Group, BlueScope Steel, Downer EDI ((DOW)), Qantas Airways, QBE Insurance ((QBE)), REA Group, Scentre Group ((SCG)), Telstra, and Westpac ((WBC)).

Research To Download

RaaS on Pointerra ((3DP)):

https://www.fnarena.com/downloadfile.php?p=w&n=4316BB9E-C01E-DA25-7F9B0697B29C2F1A

RaaS on Amaero International ((3DA)):

https://www.fnarena.com/downloadfile.php?p=w&n=43206941-DEBB-2654-EF2651FEC0832AF0

RaaS on Future First Technologies ((FFT)) – update 1:

https://www.fnarena.com/downloadfile.php?p=w&n=4350AEDC-E075-1121-74B972B81D05B66F

RaaS on Future First Technologies ((FFT)) – update 2:

https://www.fnarena.com/downloadfile.php?p=w&n=4356C5E0-A486-F68D-36F9E151FE67E925

More on the August results season:

-It's The End Of The Trend:

https://www.fnarena.com/index.php/2021/09/02/rudis-view-its-the-end-of-the-trend/

-BHP, Dividends, And Breville Group:

https://www.fnarena.com/index.php/2021/08/26/rudis-view-bhp-dividends-and-breville-group/

-August: It's A Joke

https://www.fnarena.com/index.php/2021/08/19/rudis-view-august-its-a-joke/

-Early Days, But Plenty Of Signs

https://www.fnarena.com/index.php/2021/08/12/rudis-view-early-days-but-plenty-of-signs/

-August Bonanza, But What's Next?

https://www.fnarena.com/index.php/2021/08/05/rudis-view-august-bonanza-but-whats-next/

-August Results: Anticipation & Trepidation:

https://www.fnarena.com/index.php/2021/07/29/rudis-view-august-results-anticipation-trepidation/

The FNArena Corporate Results Monitor (including archive for paying subscribers):

https://www.fnarena.com/index.php/reporting_season/

(This story was written on Monday 6th September, 2021. 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).

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: info@fnarena.com or via the direct messaging system on the website).

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– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
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– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
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