Rudi's View | Dec 02 2021
This story features WEBJET LIMITED, and other companies. For more info SHARE ANALYSIS: WEB
In this week's Weekly Insights
-2022 Looks Familiar, Though Not Quite The Same
-December Index Watch
-Research To Download
-FNArena Talks: All-Weathers
-Hendrik Bessembinder, Unsung Hero
-All-Weather Model Portfolio
2022 Looks Familiar, Though Not Quite The Same
By Rudi Filapek-Vandyck, Editor FNArena
This might come as a surprise to many readers, but, reading through investment strategy reports for 2022 and listening to funds managers on webinars, there is far more agreement than disagreement among the world's experts about what is likely to occur in 2022.
Global growth is slowing, and will continue to decelerate. Inflation will peak soon, and then start descending. Central bank policies become less accommodative. Bond yields are trending higher. And the world will have to start living with the virus and its multiple variants, with bumps and set-backs along the way.
Where disagreement kicks in is in the speed and timing of these events.
Questions like: "when exactly will the yield on the US 10-year government bond reach 2% and at what speed?" can momentarily become very important for a market that at times feels like it wants to have that big correction so many investors are fearful of.
Equally important: so many portfolios are positioned for re-opening borders and re-flation, but those trades have become crowded and volatile as also witnessed by share prices in Webjet ((WEB)) and Flight Centre ((FLT)) and the like; even before omicron announced itself.
At the index level, the Australian share market has effectively been in a moribund state since the second half of the August reporting season. And our two largest sector constituents -banks and iron ore producers- have been directly responsible for it. Investors can thank China and a disappointing banks reporting season.
At the smaller end of the market, things have soured quickly for stocks that enjoyed widespread popularity not that long ago. The likes of PointsBet Holdings ((PGH)), Codan ((CDA)), Bapcor ((BAP)), Damstra Holdings ((DTC)), Nearmap ((NEA)) and Appen ((APX)) have all been testing how much pain can be inflicted on shareholders without them capitulating and selling out (though many would have, by now).
Year-to-date the Australian market (ASX200 plus dividends) is still up more than 14%, which would be seen as a positive outcome in most calendar years, in particular given the many question marks and potential challenges that are on investors' minds.
The two most important factors for the year ahead might well be growth and inflation, with corporate profits and asset valuations squeezed in between.
2021 has brought back inflation but many remain of the view the narrative is overcooked and bond markets may have overdone it in the short term.
At the source of this year's spike in global inflation are the low comparatives a year ago, plus ongoing disruption from closed borders, lockdowns and other virus-related impacts, and, in the US, the mystery disappearance of more than 4m workers that may or may not return into the labour market.
While the debate rages on, and there are valid arguments and forecasts either way for each of the separate constituents, fact remains the chances of international shortages and bottlenecks remaining in place for (much) longer are genuine and real, and this increases the chance that inflation might become a self-reinforcing process, in particular if those 4m non-job seekers in the US remain missing.
Hence, last week economists Bill Evans and Elliott Clarke at Westpac revised their timeline for the Federal Reserve in the US next year with the central bank expected to announce accelerated tapering at its upcoming December 14-15 meeting with rate hikes to follow in June, September and December next year (25bp each).
What follows next is equally important as Westpac too is of the view that inflation will decelerate throughout 2022, and GDP growth is to remain healthy so Jerome Powell & Co can remain accommodative which, on Westpac's forecast, should result in a fairly benign pace of rate hikes in 2023-25.
Westpac only anticipates three more hikes (3x) -one every six months- between June 2023 and June 2024 which takes the federal funds rate to 1.625%.
The above scenario has major implications for the trajectory of currencies. The USD is expected to strengthen over the next six months, pushing the AUD potentially below 70c, but start weakening from the moment other regions like Europe are strong enough to embark on their own rate hike cycle.
Most importantly: the pulling forward of the timing of US rate hikes is not expected to have any impact on the RBA timeline. Westpac is still of the view Philip Lowe & Co won't lift a finger before February 2023.
It goes without saying, Westpac is but one forecaster in a world of many, but in particular Bill Evans has built up a commendable track record over his long career. It's why his name is held in high esteem among colleagues, journalists and investors in Australia.
Let us for the time being assume Evans and Clarke are closer to next year's actual outcome than the many dissenting, hyper-ventilating voices on TV and social media. This has a number of major implications for asset markets:
-bond yields today are too low, but yields won't need to double again as they did earlier between mid-2020 and early 2021
-global inflation will eventually trend back to where central bankers like it to be, assisted with a relatively small number of rate hikes (certainly within historical context)
-economic growth too will trend lower, but this need not mean another recession is inevitable or on the immediate horizon
-the RBA need not follow the FOMC in haste, contrary to what the local bond market is suggesting
Underlying, the key message for investors seems to be that market volatility will remain high, in particular if US 10-year bond yields make their way from currently below 1.50% to, say, 2.50%.
However, in the absence of much stronger and more persistent inflation, or much weaker economic growth, next year should not mark the end of the bull market for equities.
In fact, if we take the above cocktail and add historically elevated valuations there is a fair argument to be made that 2022 shares a whole lot of common characteristics with the year past.
Without further much ado, I thus predict multiple attempts for portfolio rotation into Value and Cyclicals and out of Growth, Quality and Defensives.
Some of these attempts will be more successful than others, but on a likely middle-of-the-road scenario outcome, investors better not forget that mega-trends carry their label for very good reason, and covid and technology are changing the world and reshaping the future.
Higher bond yields might lead to a sell-off in higher valued, strongly growing companies-of-the-future, as long as that growth remains in place, their share prices will stage a come-back, and move beyond, ever onwards and upwards.
Because investing in the share market is ultimately investing in growth. Nothing more and nothing less. As long as you don't pay a crazy price to get on board.
Within the context that creates itself from the ingredients above, the importance of patience and "timing" might become more prominent in 2022.
One key difference that needs to be highlighted is the outlook for corporate profits locally which looks a lot less broad-based and less promising than it was earlier in 2021 and last year.
This difference is easily illustrated through the numbers. FY21 saw Australian companies on average improve earnings per share by more than 25%.
For FY22 that number is circa 13%, but… most of that growth seems already behind us. On assessment by market analysts at Morgan Stanley the twelve months forward looking EPS growth number has recently sunk to 4.7%.
Market consensus for FY23 and FY24 sits at rather weak 3% and 2.6% growth projections.
In Australia, contrary to the USA, market consensus aggregate EPS expectations peaked in August, and have been in noticeable decline since.
Apart from the banks, insurers and iron ore producers, forecasts are falling for Webjet, Crown Resorts ((CWN)), Lovisa Holdings ((LOV)), Appen, United Malt Group ((UMG)), Nufam ((NUF)), Virtus Health ((VRT)), and numerous others.
This, I think, is the real message to take home for the year ahead: overall dynamics are getting tougher for corporate Australia. In order to avoid being hit by the next profit warning or otherwise corporate disappointment, it looks wise to dial back on the overall risk-taking.
It's very striking, also, that in the US experts are debating how much leaner and more profitable American companies are becoming as they adopt new technologies and adapt to the changing times, while in Australia, at the top end in particular, the corporate dynamics look a lot less promising.
Also, if we take a leaf from the 2021 playbook, things are bound to get hairy at times, sometimes scarily so. As we've all observed over the year past, indices do not necessarily reflect what is really going on across the market, and portfolio rotation can inflict significant damage on individual stocks, even if it lasts only temporarily.
The lesson I learned from experiences from the years past is it is best to use volatile times to cleanse the portfolio and get rid of disappointers and never-deliverers. Many an investor secures profits and gets stuck with the losers. I believe best practice consists of doing exactly the opposite.
And, of course, it's always great to have cash on the sidelines. Have as much as you need to sleep well.
This is the final edition for 2021. Weekly Insights returns in late January.
Recent editions of Weekly Insights
The Secret Ingredient:
Ansell, Mach7, Nitro Software, ResMed And Santos:
Three Risks Into Year-End:
Bonds Versus Earnings:
Australia's Share Market Sweet Spot:
December Index Watch
Standard & Poor's will announce changes made to local indices on Friday December 10th, to be put in place after the close of trade the following week, on Friday the 17th.
Analysts at Wilsons are anticipating a number of changes for each of the ASX20, ASX50, ASX100 and ASX200. As is usually the case, any changes to the ASX20 are only "possible" while a higher plausibility is reserved for the potential changes to the other indices.
More probable is that the ASX50 might undergo some changes with Aurizon Holdings' ((AZJ)) likely to be dropped in favour of Seek ((SEK)), on the broker's analysis. Also possible: LendLease ((LLC)) losing its spot in favour of BlueScope Steel ((BSL)).
M&A is creating extra gaps for the ASX100 and ASX200 meaning there are more candidates to join than to be dropped from both indices.
For the ASX100, Wilsons thinks Orocobre ((ORE)) and Pilbara Minerals ((PLS)) -both lithium miners- stand a good chance to be included, while insurance broker Steadfast Group ((SDF)) might be called upon too with the inclusions of Link Administration ((LNK)) and Orora ((ORA)) now under a question mark.
For the ASX200, Wilsons sees potential inclusions for Sandfire Resources ((SFR)), Imugene ((IMU)), Liontown Resources ((LTR)), Paladin Energy ((PDN)) and Event Hospitality & Entertainment ((EVT)) while probable exclusions for Kogan ((KGN)), Redbubble ((RBL)), Omni Bridgeway ((OBL)) and Monadelphous ((MND)).
Traditionally, and still dependent on other factors such as general market sentiment, changes announced to the ASX200 tend to have a larger observable impact on the share prices involved as professional funds managers move in and out, if they haven't already done so in the lead-up to the official announcement.
The team at Shaw and Partners that is -without competition- the most enthusiastic in the country about software companies listed on the ASX, has initiated coverage on Zoom2U ((Z2U)) with a Buy rating and 65c price target.
Zoom2U is a delivery services marketplace platform plus a delivery management software-as-a-service (SaaS) provider which is not yet profitable but the team at Shaw sees it as fully funded until that operational break-even can be established.
Total coverage now comprises of 15 ASX-listed companies, and only five do not carry a Buy rating; PushPay Holdings ((PPH)), Class ((CL1)), TechnologyOne ((TNE)) and WiseTech Global ((WTC)) are all Hold-rated, with Iress ((IRE)) holding the sole Sell rating.
For those looking to add exposure to gold producers during times of increased volatility and uncertainty, Wilsons has expressed its preference for Northern Star ((NST)) with Newcrest Mining ((NCM)) least preferred in the sector.
For those looking for higher-risk developers and explorers, Canaccord has selected Bellevue Gold ((BGL)), De Grey Mining ((DEG)), Orecorp ((ORR)) and Titan Minerals ((TTM)) as its most preferred favourites.
Research To Download
RaaS on Chimeric Therapeutics ((CHM)):
RaaS on Shekel Brainweigh ((SBW)):
RaaS on AML3D ((AL3)):
RaaS on Schrole Group ((SCL)):
FNArena Talks: All-Weathers
My final departing gift, on video, for calendar 2021: a 17 minutes-long explanation of my research into All-Weather Stocks on the ASX:
Also available via YouTube: https://youtu.be/fx6wgH_uCps
Hendrik Bessembinder, Unsung Hero
I mention Hendrik Bessembinder's research in the above video, and I have mentioned his research in my writings in the past, but there is an updated paper titled "Wealth Creation in the U.S. Public Stock Markets 1926 to 2019".
To download a brief summary: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3537838
Note: this summary contains the names of the companies that have been responsible for all the wealth that has been created via the US stock markets, in a long-term, sustainable manner.
It goes without saying, Bessembinder's research is backward-looking and it is up to investors to decide which companies are nothing more than a star from the past and which ones will continue creating wealth in the decade(s) ahead.
Investors looking to apply my research into All-Weather Performers at the international level; here is your starting point.
All-Weather Model Portfolio
Since late 2014, the FNArena/Vested Equities All-Weather Model Portfolio has been based upon my research into All-Weather stocks on the ASX.
Monthly Portfolio reviews published in 2021:
(This story was written on Monday 29th November, 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).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer 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: [email protected] or via the direct messaging system on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:
– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.
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For more info SHARE ANALYSIS: AL3 - AML3D LIMITED
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For more info SHARE ANALYSIS: ARF - ARENA REIT
For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED
For more info SHARE ANALYSIS: BAP - BAPCOR LIMITED
For more info SHARE ANALYSIS: BCB - BOWEN COKING COAL LIMITED
For more info SHARE ANALYSIS: BGL - BELLEVUE GOLD LIMITED
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For more info SHARE ANALYSIS: CDA - CODAN LIMITED
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