Rudi’s View: February Focus On Resilience & Dividends

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 | Feb 15 2023

In this week's Weekly Insights:

-February: Focus On Resilience & Dividends
-February Results Thus Far
-Corporate Australia Showing Resilience
-Commodities -  Lithium & Dividends
-Consumer & Gaming Stocks
-Advertising & Media
-Research To Download: Edison Research
-Research To Download: Research as a service (RaaS)

February: Focus On Resilience & Dividends

By Rudi Filapek-Vandyck, Editor

Financial markets are supposed to be forward-looking.

This is where the ambiguity begins, and the difficulty to understand what is happening, and why.

Those among us who have been watching markets for a long while know the supposed forward-looking dynamic is far from perfect. Whether it works or not is mostly dependent on from which starting point our observation begins.

Global equities have rallied hard since September last year, but equities have, effectively, front-run corporate earnings and fundamentals. This need not be a problem as fundamentals can catch up, assuming this is what happens next.

The problem with this bullish view is that economies are slowing, and they are almost guaranteed to continue slowing as the year progresses. Central banks are still hiking rates and the real impact from last year's tightening hasn't fully impacted just yet.

Hence, it's not difficult to see why so many observers and market watchers are skeptical whether indices can hold on to their gains. Corporate profits are under pressure because economic momentum is deflating, but also because cost inflation is still very much a negative feature.

If we stick to the positive thesis, history shows share prices start anticipating the trough in earnings well before that trough is in place. This forward-looking dynamic is shown in the graphic below (courtesy of Janus Henderson).

To read the graphic: bars in orange show the time it takes for investors to de-rate share prices (via contracting PE ratios) ahead of a recession, while the bars in black show it usually takes a lot longer for corporate earnings to bottom.

The one exception shown is the adjustment post-Nasdaq meltdown that had a lot longer to run because of the unprecedented exuberance that preceded it.

So... are share prices now correctly looking forward and beyond the downturn in corporate margins and profits?

Depends on what follows next. How much weakness is yet to show up in corporate profits?

My guess is it will require central bankers to stop tightening, at the very least, before equity markets can comfortably initiate the next sustainable bull market.

In the meantime, large gaps will open up between those companies with positive momentum, and those who prove themselves as relatively resilient, and those that have neither momentum nor resilience.

That process is starting in February.

February Results Thus Far

In line with my suggestion in Weekly Insights last week (see further below), investors are difficult to please thus far in this February reporting season. The onus is on companies to provide plenty of positive newsflow so that share prices can continue the upward momentum, or else.

In most cases, the 'or else' prevails; most share prices weaken on the day of financial results releases.

But the season is still young and Monday is showing enough evidence to the contrary to keep optimism alive with all of Audinate Group ((AD8)), Carsales ((CAR)), Endeavour Group ((EDV)), and even Insurance Australia Group ((IAG)) enjoying a positive response post market update.

There is no such relief for Aurizon Holdings ((AZJ)) and Lendlease ((LLC)) with both sinking in excess of -6% despite the fact both share prices are trading near lows from the past decade.

The obvious observation to make here is that a very bad past experience provides no guarantee the future will be a lot better.

Both Aurizon and Lendlease have, on balance, been subjected to downward pressures for a long while. Both on occasion receive favourable commentary from your typical value-investor, but have proven more of a value-trap than a bargain opportunity for investors.

Both pay dividends to offer at least some offset.

In contrast, Carsales is trading near its highest price post all-time record high achieved in 2021, proving yet again that a quality business doesn't lose its lustre overnight. But let's not fool ourselves, being of High Quality does not guarantee a positive response on market update, in particular not this time around.

REA Group ((REA)) is widely regarded as one of the highest quality businesses listed on the ASX. Its half-yearly update on Friday has been generally well-received by analysts, but the share price is now falling for the second day in a row.

The challenge for investors this month will be to distinguish short-term from longer-term, and to understand there's also still a macro influence that very much remains in play.

Equally telling: on Monday, the FNArena Corporate Results Monitor stats show 8 misses against 7 beats as far as the first 28 corporate updates are concerned. This is not what is required to keep this market in a positive mood.

The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE

If you already had your free trial, why not join as a paying subscriber? CLICK HERE