Rudi’s View: Seeking Quality & Growth Offshore

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 03 2023

In todays Weekly Insights:

-Confession Season... It's Baaaaaack!
-Seeking Quality & Growth Offshore

By Rudi Filapek-Vandyck, Editor

Confession Season... It's Baaaaaack!

Once upon a time the two months preceding the end of financial year, and the subsequent weeks leading into reporting season in Australia, caused more than just a little bit of anxiety among investors as market updates might well translate into that universally dreaded Profit Warning that has the potential to inflict a lot of damage to a company's share price.

Recent years have not seen much in terms of profit warnings ahead of the official results season, but early signals are this year might be different. The past week alone has seen market updates by the likes of AdBri ((ABC)), Bubs Australia ((BUB)), Cluey ((CLU)), Mirvac Group ((MGR)), Synlait Milk ((SM1)) and Insignia Financial ((IFL)) force analysts to downgrade forecasts for the financial year running.

Troubled IOUpay ((IOU)) has effectively gone out of business. Most production updates by miners and energy companies proved disappointing too, marred by project delays, weather impact, lower prices and higher operational costs.

It's not all bad news though, as share prices of Bubs, Mirvac Group and Insignia Financial had already largely accounted for what was coming. Sometimes bad news can actually free-up the next move upwards on the reasonable prospect of less-bad conditions ahead, potentially.

Regardless, investors would be wise to not simply assume today's market laggards are by default a great bargain with Synlait Milk yet again proving there's no bottom when troubles keep accumulating.

Trading around $12 in 2018 and having started the running calendar year above $4, today's share price of less than $1.50 reminds me of the old share market joke:

What's a stock that's down by -90%?

That's a stock that first fell by -80%, and then halved yet again.

It's not all negative news though with corporate market updates to date, on balance, proving more positive than negative. Notable positive surprises have been delivered by Camplify Holdings ((CHL)), Helloworld ((HLO)), Megaport ((MP1)), Perpetual ((PPT)), Reliance Worldwide ((RWC)) and Stockland Group ((SGP)).

Such profit warnings (both negative and positive) are often quite random which makes it difficult for investors to prepare or anticipate. Yet one source of potential weakness is the so-called Second Half Club; companies that need a strong second half to meet guidance or market expectations.

The February results season saw this group of companies swell to nearly 50% of all companies, suggesting there is plenty of potential for a lot more negative surprises in the weeks and months ahead.

Local market strategists at Morgan Stanley offer another potential approach; adopting a theoretical framework developed by their colleagues in Europe to establish which companies have been over-earning due to covid previously, the local strategy team has identified four sectors in Australia in danger of an earnings reset, which in practice means: be careful, here's a higher chance for negative profit warnings.

The Morgan Stanley modeling has identified energy, discretionary retail, staples and real estate as sectors most at risk.

All shall be revealed in the weeks & months ahead.

Seeking Quality & Growth Offshore

The promotors of international markets have a way of making us all feel silly and ignorant: do you realise Australian equities represent no more than 2% of the global pie? If you stay local, you are missing out on 98% of what is out there!

It is difficult to argue with the numbers, but what should equally be front of mind is that Australia is inside the Global Top Three when it comes to long-term average investment returns. At the very least this provides local investors with plenty of reasons not to make any rash decisions.

Ultimately, investing is about sustainable return and there's little value in diluting one of the best performing markets with less-returning alternatives, just for the sake of it.

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