Rudi’s View: BHP, Codan, Macquarie, Santos And QBE

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 | Oct 14 2021

In this week's Weekly Insights:

-Forecasts Are Falling
-Conviction Calls
-Research To Download

By Rudi Filapek-Vandyck, Editor FNArena

Forecasts Are Falling

As if investors didn't already have enough to worry about, earnings forecasts around the globe are now in a negative trend, as in: forecasts for corporate profits are falling, but they are still positive and likely to remain positive for the year ahead.

But falling forecasts in combination with fragile investor sentiment because there are so many other factors to be concerned about, while average valuations are still perceived as high, even after weeks of volatility and weakness, is not an ideal combination for equity markets, to say the least.

Not helping matters is growing awareness that companies are still being affected by lockdowns and hesitant consumers, as well as by the rising price of oil and other input costs.

In the USA, another quarterly reporting season is about to commence and both analysts and investors will be keen to find out whether expectations need to be lowered. In Australia, the results post-August have been rather weak, but then we are to date still only talking about 12 stocks and the banks are yet to report their full-year financials.

Bank of Queensland ((BOQ)) is scheduled to kick off the seasonal local bank reporting season on Wednesday (October 13) and nobody is anticipating a shocker of an announcement. The likes of Unibail-Rodamco-Westfield ((URW)), ResMed ((RMD)), Janus Henderson ((JHG)) and Macquarie Bank ((MQG)), plus three of the Big Four banks in Australia will follow suit over the coming month.

FNArena's Corporate Results Monitor will be keeping track of the finer details:

But more than the three dozen or so local companies that will soon be revealing their financial performance over the past six months, this year investors' attention shall be primed towards the flood in AGMs that are scheduled for this month and November. Who will be brave enough to quantify the outlook for the six or twelve months ahead?

More importantly: are companies preparing to downsize expectations?

Those worried about a potential gap opening up between market forecasts and what companies can reasonably achieve in light of deteriorating momentum, ongoing supply challenges, labour constraints and rising input costs worry there might be more negative adjustments ahead, which might well create the trigger for more weakness in equities.

As per always, the proof will be in the statements delivered to shareholders over the weeks ahead, be it with the release of interim or quarterly financials, be it in front of anxious shareholders at the annual corporate gathering.

Quant analysts at Macquarie believe investors should expect a positive catalyst from the likes of Aurizon Holdings ((AZJ)), Charter Hall ((CHC)), Coles ((COL)), Cleanaway Waste Management ((CWY)), Mineral Resources ((MIN)), and Seek ((SEK)) among the Top100 companies on the ASX.

Outside the Top100, these analysts expect positive updates from Australian Finance Group ((AFG)), City Chic Collective ((CCX)), Codan ((CDA)), Charter Hall Retail REIT ((CQR)), Elders ((ELD)), Healius ((HLS)), Imdex ((IMD)), Karoon Energy ((KAR)), Liberty Financial Group ((LFG)), Monash IVF Group ((MVF)), Premier Investments ((PMV)), Resimac Group ((RMC)), Shopping Centres Australasia ((SCP)), Steadfast Group ((SDF)), Seven West Media ((SWM)), Southern Cross Media ((SXL)), and Universal Store Holdings ((UNI)).

That list contains exposure to the local housing market, alongside traditional media laggards, a number of specialised retailers, and landlords, plus some cyclicals. Summary: 'value' stocks rather than quality or growth.

Worries, in a general sense, are concentrated around companies that have performed well to date, but are facing lockdown-impact or a change in consumer spending, including companies such as Carsales ((CAR)) and Baby Bunting ((BBN)), as well as Bapcor ((BAP)), JB Hi-Fi ((JBH)), and Corporate Credit ((CCP)).

As per always: we will have to find out who or what exactly. Meanwhile, investors' nerves will be tested by the price of oil and gas remaining in a persistent up-trend.

Two weeks ago, I wrote the following concluding sentences to Weekly Insights dated 30th September 2021:

"Combining all of the above, I think it is more than likely some hard questions will be asked from financial markets in the months ahead and only a brave man, or a fool, would pretend to know what all the responses will be.

Previously, I have written that having some cash on the sideline, for comfort, but also to jump on opportunities that might open up, seems but appropriate for investors with only a moderate appetite for risk and, let's call it that, "adventure".

I think that statement remains valid, without getting too bearish or panicky about what can possibly lay ahead.

That edition of Weekly Insights can be read in full here:

Conviction Calls

Short-term risks and volatility? Yes, say Michael Knox and share market strategists at stockbroker Morgans. But Australia will be enjoying a number of boom years on the back of a strong recovery in global trade and this -all else remaining equal- will translate in ongoing positive gains -net- for the local share market.

In Morgans' view on the world, global growth is poised for better-than-expected growth numbers once we move past the present lull, significantly supported by ongoing firm spending deficits in the USA. Inflation will remain contained and central bankers will remain in a non-hurry (if that's a word) to start hiking interest rates.

So get prepared for mildly higher bond yields, a weakening US dollar, AUD at US80c and onto US90c by late next year and the local ASX200 index on its way to 8100 over the year ahead. Volatility in the short term means opportunity for those who can look over the bridge.

The RBA is not going to move on rates and the Federal Reserve will eventually get there, but the year will be 2023, not sooner.

To deal with the current uncertainty and volatility, Morgans' model portfolios have lifted the cash component. Favourite exposures remain linked to the reflation trade, i.e. energy, commodities and financials, as well as the re-opening trade, i.e. travel, gaming and traditional retailers.

Most preferred exposure is the energy sector. Plus Morgans' forecast is that, when all is said and debated about the outlook for China and global steel, the price of iron ore will settle inside a price range of US$120-140/tonne for years to come.

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