Tag Archives: All-Weather Stock

FNArena Book Review: Good To Great

The story below was initially written and published on Monday 28th September, 2020 under the title "Identifying Greatness" (and sent out on that day as Weekly Insights email). It is hereby re-published to also include it as a book review on the FNArena website.

FNArena Book Review: Good To Great. Why some companies make the leap … and others don’t by Jim Collins, Random House Business Books, 300 pages, ISBN 9780712676090.

By Rudi Filapek-Vandyck

I recently finished reading Good To Great. Why some companies make the leap … and others don’t by US author/researcher Jim Collins.

Admittedly, I haven’t been exactly quick in catching up on the author’s global best-seller research.

This book was originally published in 2001 and has sold more than three million copies since.

As it was, I needed a tip-off from new FNArena team member Mark and a little respite post the August reporting season. Plus the fact that Good To Great is available in bricks and mortar book stores around my neighbourhood.

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Collins’ five-year study in what makes a small group of US companies a better breed than the majority of peers is aimed at helping entrepreneurs and business leaders to see the light. The author has since built a successful advisory & consultancy career.

But there is plenty of knowledge embedded in those 300 pages for everyday investors watching and researching opportunities among listed companies worldwide.

Truth to be told, I think many an investor would do him/herself one gigantic favour in buying this book and absorbing its content, including the finer details.

Collins’ research started in 1996, involved 21 research associates and ultimately took five years, during which 1435 Fortune 500 companies over several decades were analysed, studied, sliced and dissected, interviewed and ultimately mostly rejected. (Note: The Fortune 500 is not static in make-up but is regularly updated).

As such, the study neatly fits in with Arizona State University’s Hendrik Bessembinder’s findings that, when taking a long-term view, most listed companies turn out to be lousy performers and poor creators of lasting shareholder wealth.

Two years ago, Bessembinder found that over the long term, share market gains can be explained through as little as 4% of the best performing stocks in a study that went back in time as far as 1926.

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The latter study certainly raised a few eyebrows, to put it mildly, and I have seen a number of asset managers publishing comparable data-analyses since.

Their numbers might look a little different, but their conclusions are not: when it comes to investing in listed equities, investors better be extremely cautious, as very few companies that are successful today are able to remain successful over the next three, five, seven, ten years, or longer.

Instinctively, this has been my view over the past decade or so. While I never have done the finer data-crunching, there is plenty of evidence around for whoever has an excellent memory to rely upon, or who dares to look back in time through data-details.

BHP Group shares peaked near $50, twice, in late 2007 and in 2011. They have never managed to surpass the $42 level over the period since, spanning thirteen years during which the share price sank as low as $13.

Three of the four major banks are today trading well-off share price levels pre-GFC, and similar observations can be made for the likes of Newcrest Mining (peaked in 2011), Rio Tinto (2008), Scentre Group (2016), Suncorp Group (2007), Telstra (1999), and Woodside Petroleum (2008).

These are all ASX Top20 members in 2020; household names that feature in many investment portfolios and are broadly considered as “must have” backbone portfolio constituents by many, both retail and professional investors.

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Probably the most deceptive document that is happily passed on inside the global finance sector is the long-term price graph from Vanguard showing equity indices tend to move upwards as time goes on.

Look under the bonnet, and that’s not what most individual share prices do. AMP shares were once priced above $20 ($1.35 today). Perpetual shares have halved over the past five years.

These are not idly-piddly, teeny-weenie, micro-cap exploration companies with no revenues and nothing to sell.

Which is why, on my assessment, most investors would do well from taking notes from research published by the likes of Jim Collins and Hendrik Bessembinder, and incorporate their key findings in strategies and portfolio composition.

For example: I am regularly informed by investors “I did relatively well” or “I achieved a satisfactory return” from, say, a stock like QBE Insurance.

Below I have included the price chart for QBE Insurance shares over the past ten years (source: ASX).

Has there been another way of achieving a “good” return from these shares other than buying on persistent weakness and then quickly selling on the upswing, with the key requirement not to stay on board for too long?

(I mean, other than deluding myself into thinking I am doing well when the market in general mirrored the QBE share price in the exact opposite direction.)

It’s not as if the dividend has been growing steadily along the way down either.

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Here’s one thing I learned from many years of observing the Australian share market: “valuation”, be it “under”- or “over”-, is nothing but of short-term importance. Quality, however, is what shines beyond the immediate.

This has always been the case, but even more so during times of low growth, shorter cycles, low inflation and the emergence of new technologies that challenge most mediocre and sub-par performing businesses.

This is why buying “cheaply” and laggard “value” stocks has performed so poorly as an investment strategy over the past seven years.

Sure, they all have their moment under the sun, and sometimes the gap between “winners” and “laggards” is stretched too far, and it needs to narrow, as happened on occasion and surely it will happen again.

But once you manage to identify the truly great companies, you need to worry a lot less about what happens in the short term. Time to roll out that favourite quote from Warren Buffett himself:

“What’s your favourite holding time? Forever!”

What needs to be added is: but only for the truly great companies.

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What makes a great company?

It’s a shame Collins’ Good To Great research is nearly twenty years old. But I am also confident that if it had been updated this year, it would have identified a number of today’s “winners” as meeting the requirements to be labeled a truly great company: Microsoft, Amazon, and Merck come to mind, among others.

The true value of Collins’ research, in my view, is by spelling out the characteristics of the many not so great companies out there: hubris at the top, ill-timed and overly optimistic acquisitions, lack of structural investment, copy-cat strategy decisions, company boards filled with career yes-men, low quality products and services, holding on to yesterday’s glory,..

These are all observations investors can make themselves. No need for an Excel spreadsheet or detailed analysis of the balance sheet. Ever dealt with a Telstra support line? Talk to an IT specialist about the systems that run the banks (you will be shocked).

The inconvenient truth, one that the investment industry is all too willing to swipe under the carpet, is that mediocre companies can only achieve sustainable, great returns for investors when they are carried by extraordinary tailwinds for their industry, or through a monopoly, by law or otherwise.

The past two decades have seen Australian companies losing most cosy market dominating positions, with negative consequences for shareholders. Adaptation and successful transformation are not widely used buzzwords by corporate Australia.

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My personal point of interest is when Australian companies venture offshore. A truly great company manages to replicate its success elsewhere. Think CSL ((CSL)), of course, but also Amcor ((AMC)), Macquarie Group ((MQG)), Xero ((XRO)), Aristocrat Leisure ((ALL)), Computershare ((CPU)), even Ansell ((ANN)).

These are all truly international operators, genuine leaders in their field.

Now compare their price charts post GFC with those of Telstra, National Australia Bank, InvoCare, ANZ Bank, Cash Converters ((CCV)), et cetera.

It doesn’t feature in any of the analysis or research I have seen elsewhere, including Good To Great, but when Australian companies fail overseas it does ring an alarm bell for me, and mostly it is but a matter of time before the share price starts trending south.

Equally valid: if Good To Great was to be updated today, the research methodology would have to be amended to take into account the many changes impacting on the world, including this year’s pandemic (and related changes).

As is readily acknowledged throughout the study, great companies are not 100% safe from bad luck, negative impacts or unforeseen disasters, but they cope a lot better, and tend to always come out on top stronger.

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Good things happen to great companies. Mediocre peers need luck, lots of it, as well as lots of help and assistance.

Which takes me to my own research into All-Weather Performers on the Australian stock exchange.

During and post GFC, I didn’t know about Good To Great, and neither did I anticipate how skewed share market returns turn out to be in the long run, as laid bare by Bessembinder, but I instinctively felt investors’ core narrative and approach are flawed.

Not all companies are the same. Not all stocks should be treated in the same manner.

For too long, investors have been singularly focused on buying cheaply priced assets, while ignoring the blatant fact that certain companies are simply made from superior substance.

Admittedly, these are a small, selective group, but they do exist, and most portfolios would benefit greatly from at least having some exposure.

This is not to say that anything is destined to last forever. (Sorry, Warren). Things can and do change over time and companies that once were on their way to greatness, or achieved greatness, have subsequently lost that status, with dire consequences for loyal shareholders. Think GE, or Boeing.

In a similar fashion, the lists of stocks I have selected over the past decade have seen some changes, mostly from companies disappearing because circumstances change, or because my initial assessment wasn’t as robust.

Overall, however, the most common questions I receive is when do I intend to update my lists, or whether I should include this or that stock.

It is but a genuine signal that when it comes to selecting great companies on the stock exchange, stability in quality and performance, as reflected in lists inclusion, remains one of the stand-out characteristics.

Certainly, temporary share price weakness does detract nothing from a great company’s core quality, or from the underlying long-term trend for its share price.

Observing corporate greatness is understanding why it should be included in every long-term oriented portfolio and strategy. So, start observing, and act accordingly.

Paying subscribers at FNArena have 24/7 access to a dedicated segment on All-Weather Performers, including eBooks and eBooklets written and published since 2012.

Good To Great. Why some companies make the leap … and others don’t by Jim Collins, Random House Business Books, 300 pages, ISBN 9780712676090.

Rudi’s View: Identifying Greatness

rudi-views
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 01 2020

Identifying Greatness

By Rudi Filapek-Vandyck, Editor FNArena

I recently finished reading Good To Great. Why some companies make the leap … and others don’t by US author/researcher Jim Collins.

Admittedly, I haven’t been exactly quick in catching up on the author’s global best-seller research.

This book was originally published in 2001 and has sold more than three million copies since.

As it was, I needed a tip-off from new FNArena team member Mark and a little respite post the August reporting season. Plus the fact that Good To Great is available in bricks and mortar book stores around my neighbourhood.

****

Collins’ five-year study in what makes a small group of US companies a better breed than the majority of peers is aimed at helping entrepreneurs and business leaders to see the light. The author has since built a successful advisory & consultancy career.

But there is plenty of knowledge embedded in those 300 pages for everyday investors watching and researching opportunities among listed companies worldwide.

Truth to be told, I think many an investor would do him/herself one gigantic favour in buying this book and absorbing its content, including the finer details.

Collins’ research started in 1996, involved 21 research associates and ultimately took five years, during which 1435 Fortune 500 companies over several decades were analysed, studied, sliced and dissected, interviewed and ultimately mostly rejected. (Note: The Fortune 500 is not static in make-up but is regularly updated).

As such, the study neatly fits in with Arizona State University’s Hendrik Bessembinder’s findings that, when taking a long-term view, most listed companies turn out to be lousy performers and poor creators of lasting shareholder wealth.

Two years ago, Bessembinder found that over the long term, share market gains can be explained through as little as 4% of the best performing stocks in a study that went back in time as far as 1926.


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Rudi’s View: Gold, Conviction Calls & Early Results

rudi-views
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 | Aug 13 2020

Dear time-constraint investor: uncertainty remains, while gold will surprise the many fans, and conviction calls changes ahead of the August reporting season

In this week's Weekly Insights:

-August 2020: Early Results
-Rudi Talks
-Gold, The Enigma
-Conviction Calls

August 2020: Early Results

By Rudi Filapek-Vandyck, Editor FNArena

The local reporting season in Australia is slowly gathering pace. Let’s remind ourselves how important financial results are for market sentiment and thus for how share prices will be treated for the weeks and months ahead.

Often, how companies are being judged is through the lense of: beat or disappointment? Black or white. Superb or poor.

That judgment is made not on the 30% profit growth, or the decision to pay out a dividend, or the heavy losses incurred during lockdowns or bushfires, but on how the financials compare to what analysts had penciled in their modeling.

The ruling narrative is companies which disappoint might see their share price underperform for up to four months, while those who manage to surprise positively are most likely rewarded with longer-lasting outperformance.

That’s one side of the story.

The other side is that sustainable, structural growers can disappoint with their market update, and all of CSL ((CSL)), Cochlear ((COH)), REA Group ((REA)), TechnologyOne ((TNE)), and others have at varying times done exactly that, with direct consequences for the share price in the immediate aftermath.

But take a longer-term view, and what do we see? Every single one of those sell-offs today looks nothing but a temporary blip in an ongoing, long-term uptrend.

And that, I like to think, is the key message investors should keep in mind when volatility hits this reporting season.

The early stage of the August reporting season saw REA Group showing off its in-built resilience, while ResMed’s result was better-than-expected but downgraded as “low quality” with cautious guidance by management not received well by flighty traders.

Clearly, day-to-day operations for healthcare bellwethers CSL, Cochlear and ResMed have been impacted by the virus and forced lockdowns, but the real question investors should be asking is whether this means these companies are running out of puff and soon will find themselves having turned ex-growth.

You know my opinion on this. All three, as well as REA Group, remain firmly embedded in my selection of All-Weather Stocks on the ASX.

Admittedly, a continuing strengthening of the Aussie dollar, as predicted by some, will complicate the outlook for foreign earners in Australia, but when it comes to forecasting FX, most experts’ track record is not something to boast about.

Shorter term, market forecasts and expectations have seldom been as wide as for FY20, including for healthcare companies with most having withdrawn guidance, leaving analysts and investors to speculate what can and should be expected.

One positive stand-out to date is Ansell ((ANN)), not a typical healthcare stock, but Credit Suisse believes this is the early stage of a structural switch that will put the company’s growth outlook on much firmer footing.

The most talked about remains, of course, Australia’s number one biotech stock, CSL. It’ll be interesting to see how much guidance management is prepared to share regarding the outlook for plasma and other parts of the business in FY21, and beyond.

CSL is too complex for most investors during less complicated times. This time around it’s anyone’s guess what will become the focus post reporting on August 19.

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Outside of the local healthcare sector, analysts are still busy assessing what might and can be revealed this month, but investors should appreciate uncertainty has seldom been at this year’s level.

For sectors including airports, airlines, accommodation, travel and leisure, and Australian banks, August comes too early; many questions will remain unanswered. Analysts anticipate companies might defer to the AGM season in November when attempting to predict what comes next.

Iron ore producers are generating lots of cash, but how cautious will company boards be when deciding how much to pay out in dividends to shareholders?

Sectors like oil and gas producers will have horror updates to make, including the scrapping of dividends and capex/expenses, while writing down the value of assets – but investors are very well aware of it all.

Meanwhile, portfolio rotation (or at least: attempts to it), currency movements and other macro factors will continue to impact on general sentiment and share prices.

FNArena will be keeping track of post-financial results updates via Australia’s one and only Corporate Results Monitor (including calendar):

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

See also:

-Coming Soon: The August Reporting Season:

-https://www.fnarena.com/index.php/2020/07/30/rudis-view-coming-soon-the-august-reporting-season/

-August 2020: Nothing Like The Past:

https://www.fnarena.com/index.php/2020/08/06/rudys-view-august-2020-nothing-like-the-past/

Equally important, for those who worry share markets are over-priced:

-Forecasts, Not Valuations:

https://www.fnarena.com/index.php/2020/07/23/forecasts-not-valuations/


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The Future Of Healthcare Has Already Arrived

Australia | Jul 22 2020

Covid-19 and lockdowns have accelerated the success of telehealth services with Australian companies among key beneficiaries

-Global pandemic has accelerated adoption of telehealth services
-ASX-listed healthcare companies among beneficiaries
-More telehealth small caps to IPO next six months

By Anastasia Santoreneos & Mark Woodruff

The covid-19 pandemic has wreaked havoc on the Australian share market, but one sector that’s skated around the major economic downturn is the health sector, thanks to the quick-thinking of medical tech companies.

The government’s swift reaction to social distancing measures meant regulatory changes came in thick and fast for companies like Cochlear ((COH)) and ResMed ((RMD)), and they could develop remote patient monitoring tools for medical professionals to continue their work without needing to physically be with the patient.

The adoption of these services was phenomenal.

As a direct result of Covid-19, the utilisation of telehealth, that is remote GP consultations, now accounts for 35% of government benefits paid for GP attendances, according to a report by Morgan Stanley.

We’re not in new territory

The shift towards remote patient monitoring isn’t new. In fact, the trend has been continuing for some time, with Cochlear and ResMed already invested in the technology to facilitate this for some time.

For example, ResMed had been involved in remote patient monitoring for around 14 years, according to Melior Investments senior analyst Julia Bailey.

“Within their sleep apnea devices, they’ve been recording patient data and relaying that back to doctors for a long time,” Bailey said.

“They now have over 11 million cloud connected devices out in the world, and they’ve made a number of acquisitions of smaller companies in that space like Propeller Health.”

Smaller players have also been in the game for many years: Pro Medicus ((PME)) was one of the first remote medical imaging software providers, which allowed radiologists to access images through their devices, Jun Bei Liu, portfolio manager at Tribeca Investment said.


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article 3 months old

Rudi’s View: What’s Wrong With CSL?

Dear time-poor investor: the debate continues about what to expect from economies and equities in the year(s) ahead, plus a glimpse into the headwinds affecting the CSL share price

In Part One of this week’s Weekly Insights:

-What’s Wrong With CSL?
-T.RowePrice: Market Optimism Is Deceiving
-Corporate Debt: New Records
-Conviction Calls

What’s Wrong With CSL?

Seldom have we seen such a lacklustre share price performance from all-around star stock CSL ((CSL)) when regular defensives including Woolworths ((WOW)), Coles ((COL)) and ResMed ((RMD)) are putting in a stellar performance.

The question is on many investors’ lips these days: what is wrong with CSL?

The answer, it seems, is two-fold. On the one hand investors now realise the virus and related lockdowns are impacting on plasma collection, in particular in the south of the USA where infection numbers are thriving (so to speak).

The offsetting factor is that a higher US unemployment rate, equally a result of the pandemic, should translate into more donors, which should boost CSL’s collection abilities.

The company is offering higher incentives to US donors to compensate for the temporary interruption, and this will put pressure on its margin.

The public debate that is currently raging behind the scenes is whether one cancels out the other, or whether we are witnessing a sequence of events, i.e. first comes the dip, then to be followed by a firm boost.

Further complicating the debate is that global demand for CSL’s flu vaccines remains robust, suggesting potential for an upward surprise.

Then there is the other matter of growing potential for increased competition with a number of biotech firms across the globe successfully trialing potential future treatments that, if successful, will eat into CSL’s core products and markets.

It is this potential future competitive threat that is possibly weighing most on the share price post-April.

Keen observers will have noticed CSL is not acting like the proverbial sitting duck, keeping the fingers crossed and hoping for the best. The company announced two acquisitions already with the latest, a gene therapy product for haemophilia B, (more) tangible proof the company is not afraid to potentially disrupt itself, according to commentary by various analysts post the announcement.

Of course, one of the major attractions for owning CSL shares is the in-house pipeline of future products under development. Here the company should have a few announcements to make in 2021.

Put it all together and the correct conclusion is probably that the market genuinely doesn’t know what to do with CSL shares at the moment.

A dilemma that is further complicated by diverging views on the direction of the US dollar, a key component for translating CSL’s profits for shareholders in Australia.

One observation stands irregardless* and that is I have seldom spotted so many professional investors declaring they are buying CSL shares with a longer-term view in mind.

From Roger Montgomery, to T.RowePrice, to UBS, and numerous others; they all declared recently they have been buying as CSL shares continue to lag the overall market, instead bobbing around the $280 level – quite the distance from the $341 seen earlier in the year.

Anyone can draw his/her own conclusions from this apparent discrepancy.

*Irregardless was recently added to the Merriam Webster dictionary, causing public uproar among those aficionados of the English language who believe just because words creep into the daily usage it doesn’t mean they should thus be officially recognised.

Irregardless looks like a merger between irrespective and regardless and, apparently, Maria Carey sang the word on her 2018 album.

In case anyone wondered: irregardless had already been recognised by the Oxford English Dictionary, and it means exactly the same as regardless.

T.RowePrice: Market Optimism Is Deceiving

Global asset manager T.RowePrice organised a webinar with Head of Australian equities, Randal Jenneke for global media last week.

Conclusion number one put forward was that investors have been too optimistic in pricing in a swift V-shaped recovery in global equity markets.

No surprise thus, Jenneke’s Australian asset allocation has been directed towards a more defensive bias with “quality” and “durable profits” high on the agenda.

T.RowePrice’s strategy continues to focus on resilient earnings and structural growth stories, so no surprise the Australian equity fund has now gone overweight CSL ((CSL)).

Sectors currently held in Overweight allocations include consumer discretionary, health care (see CSL), information technology, and utilities.

Deepest Underweights are financials and banks, which is not surprising given Jenneke’s scepticism about what is currently implied and priced-in.

Underlying all of the above is T.RowePrice’s view that the world is still in the early stage of dealing with the global pandemic. And they mean early, early stage.

The most dangerous position to be in as an investor, it appears, is projecting recent share price movements for equities out much farther into the future, assuming the implied V-shaped recovery is happening and won’t be flattened or interrupted.

Jenneke cannot see the risk for an inflation outburst that some experts have been warning about, instead arguing the damage done by this year’s global recession effectively guarantees central banks will continue to fend off deflation for years to come.

He also agrees it will be extremely difficult for the Federal Reserve, and other central banks, to wind back the extreme liquidity-oriented policies with the next policy announcement from the Fed to focus on yield curve control, a la RBA and the BOJ.

Jenneke does not believe negative interest rates in the US as the next logical policy step are out of question.

Corporate Debt: New Records

We live in an era of ever-increasing debt levels, and corporates remain very much part of that story.

Corporate debt globally rose by a further 8% throughout 2019 to reach US$8.3trn, an all-time record. Fixed interest researchers at Janus Henderson note total new debt taken on board in the US by mid-year 2020 has already reached the total level of new corporate debt in 2019.

In other words: what was already happening at an accelerating pace pre-pandemic is now accelerating even faster in 2020.

Companies are making sure they will survive lockdowns and the repercussions from the virus, with total fresh debt expected to rise by a further US$1trn by year- end.

On Janus Henderson’s assessment, corporate debt has grown significantly faster than profits over the five years past.

Yet, the analysts suggest investors need not worry as central banks are supporting credit markets as much as they can in order to prevent a repeat of 2008/09.

Janus Henderson does warn a new cycle of defaults is starting here and now, which means Australian banks’ provisioning is picking up with ramifications for share buy backs and dividends for the sector overall.

Post the sudden lockdown of credit markets in March (since successfully re-opened on central banks interventions) Janus Henderson believes investors can achieve equity alike returns from owning corporate bonds of quality companies whose operations should gradually recover from the virus impact.

These returns are partially derived from spreads that currently have not fully normalised, but are expected to do so over the year(s) ahead.

With dividends from equities anticipated to remain under pressure, Janus Henderson believes corporate debt remains attractive for income-seeking investors.

That sentiment was echoed by another global asset manager specialised in corporate bonds, Neuberger Berman.

Investors worried about central banks lifting cash rates are way too early on Janus Henderson’s assessment with Head of Australian fixed interest, Jay Sivalapan suggesting cash rates are likely to stay at current (extreme) low levels for four to five years.

FNArena will be publishing a dedicated story about Janus Henderson’s latest research into global corporate debt. See the website for a follow-up story coming soon.

Conviction Calls

Portfolio strategists at Goldman Sachs have drawn the conclusion that Melbourne’s second wave lockdown will have more negative consequences than the first lockdown.

Facts supporting this assessment include:

-A much higher (apparent) level of community transmission this time;

-This second lockdown may be less successful in suppressing the virus as quickly as the first one was;

-Many of the “silver linings” from the first lockdown are unlikely to be repeated this time;

-Businesses may be significantly slower to restart on re-opening, and a higher percentage may not come back

Of course, the main offset for all of the above is that the resultant significant hit to the Australian economy also significantly increases the likelihood that the federal government in Canberra might decide to extend the provision of fiscal support.

To help investors making up their own mind, Goldman Sachs analysts have lined up some of the heaviest affected ASX-listed companies, including:

-Among retailers, Officeworks ((WES)) and JB Hi-Fi ((JBH)) are believed to have the highest exposure while 50% of Vicinity Centres’ ((VCX)) portfolio value is located in Victoria. For GPT ((GPT)) the portfolio exposure is estimated at 35%, mostly through retail assets.

Among banks, National Australia Bank ((NAB)), Bendigo & Adelaide Bank ((BEN)) and ANZ Bank ((ANZ)) are most affected through their respective mortgage books.

For insurers, Goldman Sachs estimates 29% of the personal lines premiums at Insurance Australia Group ((IAG)) and 30% at Suncorp ((SUN)) are Victoria-based.

The lockdown state represents some 29% of policies for health insurer Medibank Private ((MPL) and 22% for competitor nib Holdings ((NHF)).

Among building materials companies, CSR ((CSR)) with 25% of group revenues, and Adbri (24%) are seen as most heavily impacted.

Melbourne gaming revenue amounted to 54% of total revenue for Crown Resorts ((CWN)) in FY19. For Transurban ((TCL)), H1 saw circa 30% of all toll revenues coming from Melbourne.

Qantas ((QAN)) and Qube Holdings ((QUB)) are also heavily affected, the latter derives an estimated 16% of operating revenues from Victoria.

For online real-estate classifieds, Domain Holdings ((DHG)) will be most affected with REA Group ((REA)) having more business in Sydney and elsewhere.

Ramsay Health Care ((RHC)) is the most affected in the health care sector with circa 20% of revenues stemming from Victoria.

That ill-guided acquisition of Spotless has made Downer EDI the most exposed among services companies and contractors.

Among small caps, Lifestyle Communities ((LIC)) is 100% Victoria based, but the company might be able to catch up on sales and settlements later in the financial year, suggests Goldman Sachs.

The development business which is 50% of earnings will, however, be impacted.

Car repairer AMA Group ((AMA)) operates 35% of its sites in Victoria, with the company already declaring it remains cash flow neutral or slightly positive in the state assisted by Jobkeeper payments.

Then there is Adairs ((ADH)) whose online sales are picking up fast, while the retailer still has 44 out of its 160 physical stores in Victoria.

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Looking forward to August, stockbroker Morgans is anticipating a “difficult” reporting season ahead for diversified financials and insurers in Australia.

Headwinds vary from volatile investment markets, to extremely low bond yields and covid-19 impacting on operations, activity levels and provisions.

Morgans thinks earnings visibility will remain poor for companies including AMP ((AMP)), QBE Insurance ((QBE)), and Link Administration ((LNK)).

The broker’s favourites are (in order of preference) Zip Co ((Z1P)), Computershare ((CPU)), Link Administration, Mainstream Group Holdings ((MAI)), Kina Securities ((KSL)), MoneyMe ((MME)), then QBE Insurance.

Among those least liked, ASX ((ASX)) is the only stock currently rated Reduce (lowest rating).

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Simultaneously, a recent update by portfolio managers at stockbroker Morgans revealed Amcor ((AMC)) has been added as a defensive exposure, while additional shares in Qube Holdings ((QUB)) have been bought for the Balanced Model Portfolio.

The portfolio has sold out of Woodside Petroleum ((WPL)), while taking profits on National Australia Bank ((NAB)) shares and trimming its position in Sonic Healthcare ((SHL)).

The Growth Portfolio has equally sold out of Woodside Petroleum and taken profits on NAB, while adding Collins Foods ((CKF)) and ALS Ltd ((ALQ)).

This portfolio added additional shares in Aristocrat Leisure ((ALL)) and Lovisa Holdings ((LOV)) while reducing exposure to Megaport ((MP1)).

****

Strategists at UBS see a -$100bn fiscal cliff emerging in Q4. If consumers save more during that final quarter, and further stimulus falls short of market expectations, they predict weakness for the local share market.

For now, UBS advises investors to stay Overweight cyclicals, but be alert for trend reversal into defensives.

Stocks most preferred, for now, include Aristocrat Leisure ((ALL)), APA Group ((APA)), Aurizon Holdings ((AZJ)), CSL ((CSL)), Harvey Norman ((HVN)), Lendlease ((LLC)), Mirvac Group ((MGR)), and Woolworths ((WOW)).

UBS is cautious on Adbri ((ABC)) and JB Hi-Fi ((JBH)).

****

Over at Morgan Stanley, the conviction in a V-shaped recovery remains intact with the Australia Macro+ Model Portfolio retaining a positive skew towards financials, bulk commodities, gold and the energy sector.

The portfolio has added Ampol ((ALD)), Super Retail ((SUL)), Santos ((STO)) and Viva Energy Group ((VEA)) to further skew its exposure to cyclicals and the recovery theme, while using quality and more defensive exposures as the key funding source.

As such, Morgan Stanley has been selling out of Medibank Private ((MPL)), Xero ((XRO)) and Woolworths ((WOW)) while moving Underweight CommBank ((CBA)).

More Conviction Calls in Part II on Friday.

(This Part One story was written on Monday 13th July, 2020. 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. Part Two will be published on Friday).

(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: info@fnarena.com 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.

Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

article 3 months old

Lessons Learned From 5.5 Years Of All-Weather Portfolio

Lessons Learned From 5.5 Years All-Weather Portfolio

By Rudi Filapek-Vandyck, Editor FNArena

Excluding any unforeseen calamities with the June 30 finish line in sight, the FNArena-Vested Equities All-Weather Model Portfolio should finish financial year 2020 with a positive return of circa 4% and only a slight negative performance for those turbulent past six months.

This will be well-above the performance of the ASX200 Accumulation index over both periods, which remains deep in the negative on both accounts.

On my observation, most professional investors have found beating the index over the year past a tough challenge. In many cases the relative underperformance has now been stretched to 3-5 years, which is a long time in today’s 24 hours news cycle-driven world.

5.5 Years ago, the All-Weather Portfolio started off on the promise of an average total investment return of 7-8% and it is pleasing to note that, three mini-bear markets down the track, total return is keeping up with that promise.

For many investors, 7-8% on average over time may not sound like an extremely attractive proposition, but when the industry numbers will be released post FY20, many achieved returns over the past five years will be noticeably slimmer.

This is the point where I could pump up my chest and tell you all how fantastic my skills are in reading market sentiment and trends, but the opposite is likely more accurate.

In fact, if I compare the actions and strategy behind the All-Weather Portfolio with the ruling narratives that dominate daily news cycles in and around financial markets, the Portfolio could never possibly have done as well as it has.

For starters, there is no black box wizardry going on behind the scenes. We don’t use technical analysis. We don’t even try to assess where the next burst in positive momentum is likely taking place.

Because the Portfolio is carried by a specific focus on quality and sustainability, its composition is limited to a small group of stocks only, with resources stocks and other cyclicals off limits.

We don’t buy low and sell high. In true old Warren Buffett-style tradition, we often buy on above market average Price-Earnings ratio, and then keep the stock for many years in the Portfolio.

Buy “expensive” and hold on?

If you think about it for more than a few seconds, this should not be a Portfolio that is performing as well as it has.

So what exactly is The Secret?

I don’t think there is a “secret” as such, but below are a number of observations and conclusions I have drawn from the past 5.5 years of managing the All-Weather Portfolio.

1) Quality Beats Valuation

Too many market participants are too focused on scooping up “cheap” stocks. Sure, we all like a bargain, and a share price that falls to an extremely low price level will (at some point) rally higher, but sustainability and continuity are usually not included.

Cheap stocks, according to the value-investor’s narrative, are most beneficial entry points for long-term returns.

But when societies go through tectonic changes, and economies and business models are being disrupted on a daily basis, “cheap” looking stocks are simply the equivalent of the price discounted block of cheese at the local supermarket.

The expiry date is near. Don’t plan too far ahead. It’s a short-term fix, at best, not a long-term sustainable value creator.

Instead, it pays to identify high quality companies with a multi-year runway for growth, don’t get too spooked when valuations get temporarily a little bit bloated, and stay the course.

The best performing stocks in the Portfolio were trading on a PE multiple well above the market average when purchased, and they are still owned today.

2) Don’t Lose Your Focus Because Of Technical Analysis

I’d be homeless and roaming the streets by now with an empty coffee cup in hand, begging for change if I had to pay a dollar each time one of the stocks in Portfolio got hit by a negative trading signal stemming from technical analysis.

On my observation, technical analysis works best for low quality, highly speculative, small cap stocks. Probably because most of such stocks have nothing else going for them.

Quality, larger cap stocks can fall through the 200 moving average, or be rejected at a certain pivot, but as long as profits and fundamentals remain intact, it’s nothing but short-term market noise.

Pay attention, because so many others do, but don’t lose your focus or conviction because of short-term trading impacting on the share price. Positive fundamentals shall prevail.

Plus, of course, Quality companies surprise positively more than they do not. The latest example, as I am writing today’s story, is provided by Fisher & Paykel Healthcare ((FPH)) shares rising by more than 6% after releasing FY20 financials on a day when screens are almost universally coloured red.

3) Timing Trends Is Really Difficult

Plenty of books and newsletters out there that educate investors about cycles, changing trends and the investment clock, but putting it in practice proves a lot more difficult most of times.

At the beginning of the year the general idea was to jump on board oil and gas stocks, which then fell the hardest.

Only a few weeks ago strategists were re-weighting model portfolios towards more exposure to banks and miners.

Guess which sectors are among the weakest performers in June?

Robust, non-cyclical all-weather performers won’t keep up with those high beta, cyclical exposures when sentiment moves into Risk On mode, but on the other hand, they don’t fall as deeply when market sentiment sours either.

The latter means the Portfolio doesn’t need to make up as much to turn positive after a period of extreme volatility and heavy down-draught.

In simple terms, Quality and robust businesses are more resilient during tough times, and quicker to recover. These core characteristics are mirrored in how their share prices behave during downturns and bear markets.

This, I believe, is one of the key factors supporting the Portfolio’s performance.

A second factor lays with mega-trends; they run for many years, and create long-lasting mega waves along the way.

It’s so much easier for any management team to obtain labels of quality and excellence when their business is carried by such positive mega-trends. But every investor should be aware that the opposite very much holds true as well; irrespective of a "cheap" looking share price.

4) Accept Your Mental Barriers

Suppose you are convinced a share price has overshot to the upside, why would you not sell all your shares?

Because if the long-term growth trajectory of the company remains intact, that share price will end up a lot higher in years to come.

In other words: today’s over-valuation is but a temporary, short-term phenomenon and if the share price doesn’t pull back far enough, you won’t get back on board.

On my observation, quality companies in great shape are most likely to surprise on the upside, and they will take you by surprise shortly after you sold out.

Selling all your shares automatically creates a mental barrier, which makes it much harder to get back on board.

Taking profits in Xero ((XRO)) at $48 in September 2018 would have generated a nice profit, but today the shares are trading at $87. What if I subsequently had failed to quickly buy back in during the pullback?

I could potentially have missed out on the next 80% in additional upside (and the shares have been higher).

Many investors, on my observation, are too easily guided by short-term considerations. Of course, it’s only worth sticking around when companies deliver on their promise and potential, and there will be doubt and disappointments along the way.

One of the ways to deal with constant uncertainties is to adopt a holistic, portfolio-oriented approach. This means you can deal with falling share prices, and small disappointments, because the Portfolio as a whole is performing.

Keep the following motto in mind: for an underperforming company, it’s never too late to sell, while for a consistent, solid performer it’s seldom too late to buy.

5) Risk Management, Not Trading

Irrespective of what transpires inside or outside the share market, you will be selling and buying shares, irregularly or otherwise.

There is, however, a difference between trading the Portfolio or simple risk management.

Over the past 5.5 years I have mostly sold shares to reduce risk when the odds seemed to move in favour of a large drawdown (when Cash is King), or to skim a bit off the top of a temporary overheating market darling.

I sell out completely when I believe the future trajectory of a company has been severely damaged, or when I have to conclude that buying in was a misguided decision.

We all make errors, but the worst one is sticking around because the share price is now lower than when we joined the register.

We must accept things do not always turn out the way we envisage them. Changes are happening every day. Some cannot be anticipated; in other cases, we might have been blinded by whatever.

I tend to sell quickly, without regret, and move on.

Part of my Portfolio management also consists of getting rid of dead wood and disappointments when another bear market hits (we had three since 2015) in order to concentrate on the High-Conviction holdings.

6) Know Your Stocks

Marcus Padley once wrote a story about the one stock portfolio. The idea is to get to know everything about that one company, so you know what moves it, what is important and what is merely noise or market tribulation.

It’s a rather extreme concept, but I see a straightforward similarity as to how I keep track of the companies I own in the Portfolio.

You first select them because you believe in their growth prospect, and once you own them you keep track of them, so you get to know them better as time goes by, learning new things, discovering fresh insights.

The true value of investing with a long-term horizon is that you accumulate knowledge and insights about the investments you own. On the premise, of course, that you continue reading and paying attention to research updates and fresh developments.

As the old saying goes, you can copy somebody else’s stock tip, but you cannot copy their conviction. That conviction to not sell out when Xero shares hit $48 can only come from your own knowledge and personal insights.

7) Regrets, We All Have A Few

The best comparison for investing is a round of golf. It’s never about being perfect. It’s about making sure that the mistakes you make don’t destroy all the positive achievements.

Not being perfect also means we all end up with a few regrets, every now and then, in hindsight. In golf parlance: that’s simply par for the course.

My regret is called Macquarie Group ((MQG)), without any doubt the highest quality financial institution in this country.

When the covid-19 lockdowns arrived, and a new bear market seemed to have been thrown upon us, I sold out of Macquarie shares because I envisaged multiple years of asset write-downs and challenging deal-making conditions.

Of course, things turned around rather quickly since, and as yet another example of the human brain creating barriers, the Macquarie share price simply rallied away from me.

Regrets, we all have a few. That’s simply the nature of this game. But if the overall performance of the Portfolio isn’t too bad, we should not dwell upon them for too long.

The share market being the fragile, unpredictable and mercurial beast it is, there will be opportunities to get back on board, patience permitting.

But before that can happen, we must have Macquarie on our radar in the first place. This too is where my personal narrative differs from the ones that are dominating the general focus and commentary.

I don’t look for “cheap” stocks, and then jump on board. I have a pre-selected list of quality stocks I’d like to own. Then the story begins…

(This story was written on Monday 29th June, 2020. 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: info@fnarena.com 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.

Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

article 3 months old

Rudi’s View: Two Poles Apart

Dear time-poor investor: the share market remains split in two opposing baskets

In this week's Weekly Insights:

-Two Poles Apart
-REITs in June
-Bad News Good For Computershare
-Rudi Talks

Two Poles Apart

By Rudi Filapek-Vandyck, Editor FNArena

Most social scientists share the view that the GFC in 2008/09 played a major role in further polarising modern day societies.

To get an accurate insight into what is happening in the economies around us, we now need to separate the top 1%, while also acknowledging there are major differences between Haves and Have Nots, as well as in between generations and genders.

What is not as often acknowledged or highlighted is that, post-GFC, a similar polarisation has manifested itself in share markets.

When viewed through this prism, a far better understanding of the many waves and movements can be obtained, yet most commentators and experts continue referring to “the market” as if it still were one cohesive bundle of Australian companies reflecting the health and direction of the Australian and the global economy, as well as representing sentiment and investor views about it.

I guess it’s way too difficult for mainstream media to explain to their less-familiar audience why shares in CommBank, BHP Group, CSL ((CSL)) and Goodman Group ((GMG)) are rather seldom moving in synchronicity these days.

But the industry itself is equally guilty. Apart from not taking on the task too difficult (as it requires extra explanation), many professionals are, above anything, bottom-up stock pickers.

Most importantly, this extreme post-GFC polarisation is still quite young, in the bigger scheme of things, and all humans are creatures of habit and loyal servants of history, the long haul. We carry a built-in resistance to change.

Yet, share markets have changed, and quite dramatically so. In the US, the leading indicator for so many things, the pendulum swung in favour of what today is casually been referred to as Big Tech shortly after the recovery out of the GFC.

The Australian share market only caught up post the euro-crisis of 2011/12, with the emerging schism only gradually revealing itself. It still took a few years before the gap in investor enthusiasm started showing up in market research and on performance tables.

By now, one would hope, we are all too familiar with CSL, Goodman Group, Charter Hall ((CHC)) and Afterpay ((APT)) having separated from old economy-stalwarts like Scentre Group, Lendlease, Bank of Queensland and Ardent Leisure.

The gap in performance between these two opposite groups of companies has been nothing short of phenomenal in recent years, which easily explains why so many investors, both professional and retail, have found it impossible to keep up.

No bigger sin has been committed in the share market than through the accumulation of cheap looking stocks that subsequently revealed themselves as perennial underperformers, if not a true-blue value trap.

The difficulty with investing is that none of this ever moves in a straight line. There are times when Lendlease does beat CSL and when the rally in Ardent Leisure shares leaves most others in the dust, but bigger picture, the strong have shown their strength whereas the weak and vulnerable could not.

I do realise, most Australian investors do not easily accept terms like “weak” and “lower quality” when the conversation turns to long-held favourite Blue Chips like banks, insurers and major property owners, but that’s what automatically comes to mind when viewing the share market through the prism of Haves and Have Nots.

And investment returns from the post-2012 era have supported this assessment.

****

There are multiple reasons as to why the gap between Winners and Losers in the share market has opened up and continued to widen.

There is the ascendancy of new technologies combined with demographic shifts, on top of extremely low interest rates and shorter business cycles that require regular propping up through central bank stimulus.

These tectonic forces are by now so deeply embedded into today’s societies, not even the one in a hundred years covid-19 pandemic has been able to close the gap in the share market.

This is the one remarkable observation that simply needs to be highlighted: history shows this type of deep economic shock combined with a Bear Market period for equities usually breaks the trends that were prevailing prior.

In other words: these events are the trend-breakers that reverse Winners into Laggards and turn Losers into Winners. Such trend reversals were all too obvious post the Nasdaq crashing in 2000 as well as post-GFC.

But not this time.

This time the gap between the two opposing baskets of stocks in the share market has simply widened even further.

This may be hard to swallow for investors whose attention is focused on banks, QBE Insurance, Telstra, Unibail Rodamco Westfield, and the like but Ansell ((ANN)) is today trading near an all-time record high.

So is Afterpay. And NextDC ((NXT)). And Objective Corp ((OCL)), plus many others.

Admittedly, the gap between both poles in the share market is not solely due to differences in operational health and business performances; investor sentiment plays its part as well.

But positive sentiment is only adding to the differences in growth trajectories. It cannot be blamed for all the wrong reasons.

****

Dividing the share market in two opposing baskets of stocks can be quite illuminating, with different observations leading to different conclusions from what quickly becomes common perception.

At face value, it seems like investors decided after March 23rd shares had been weakened to the extreme and value was up for grabs for the brave and those who held their nerves when many others weren’t.

In reality, however, most funds flowed into the top performing basket that holds companies that were not affected by lockdowns or the pandemic, or whose longer-term growth trajectory would only suffer a mere blip.

Investors can easily check this. Open up a price chart of, say, CSL and everybody can see it mirrors the recovery in the ASX200 from late March and into April.

This is why I haven’t been worried about share markets revisiting the March low anytime soon. The sharp recovery has very little to do with ignorant or overly optimistic investors, but everything with the smart money jumping on the most secure and conservative options available.

Similar observations can be made about US equities.

Market updates by CSL, and others, since have proven these buyers correct. CSL shares near $260 (and lower) were an absolute steal. And so was ResMed below $20. And Cochlear at $140 (though that one has been more controversial).

Investors also quickly decided high quality technology Winners including Afterpay, Altium ((ALU)), Appen ((APX)) and Xero ((XRO)) might still be impacted, somewhat, but it won’t derail their longer-term growth potential. These share prices were thus equally quick to recover.

It pays to take a brief pause and reflect on what factually happened in the month after March 23. Investors were not adopting an optimistic view about what might happen with economies and businesses hit by lockdowns and the pandemic – in reality they did the exact opposite.

It’s not a view you might encounter when reading through the many analyses and share market commentaries by experts who take guidance from broad indices or technical price charts.

The irony here is the broadly carried (misguided) perception of markets being “bullish” and “positive” has since carried over into the opposing basket of share market laggards, allowing many more stocks to join in with a noticeable recovery.

In terms of further share market upside, the secondary impact to date has been rather benign, less than 100 points for the ASX200 compared with the three peaks registered in April.

This is equally an important observation that deserves to be highlighted: amidst a general perception that equity markets are on a continuous winning streak, some are even talking about a new bull market, leading indices in Australia have hardly made any real gains over the past month.

This market is essentially trotting sideways. Admittedly, underneath the surface there is more movement than the human eye can possibly register with share prices swinging up and down on a daily basis.

Bigger picture, it is only now that investors are starting to move higher up the risk scale by buying into less secure and more operationally challenged, cheaper priced stocks that will ultimately require a more positive outcome once the lockdowns are finished.

It seems but logical to conclude that from here onwards the share market will become more vulnerable to less optimistic outcomes, and thus to pull backs, or worse.

This is now also the view of US equity strategists at Citi whose proprietary Panic/Euphoria indicator is currently placing investor sentiment in Euphoria territory, and rising, lifting the odds for a general share market pullback to 70% over the next twelve months.

Citi’s modeling of investor sentiment uses a series of indicators including US margin debt data, investor sentiment surveys, retail money flows, the put/call ratio and the price of gasoline in the US.

This indicator has built up a relatively high percentage of accuracy when its signal moves in either of the two extremes.

This is one reason as to why I pay attention. The second reason is the conclusion drawn by Citi’s indicator corroborates my own analysis.

Investors worried should note the Euphoria status of investor sentiment is to date the only factor that troubles Citi strategists. They have no problem with where share markets are, and neither with valuations or earnings forecasts.

****

Whenever share markets arrive at the cross-roads, as they have since mid-April, investors start frantically searching for the next big opportunity.

This is when having performed well during the early recovery phase can turn into a temporary disadvantage. The quick money will leave and seek higher returns elsewhere.

And so it is that share prices of supermarket owners Woolworths ((WOW)) and Coles ((COL)), of super-performer a2 Milk ((A2M)) and of healthcare sector leaders CSL and ResMed ((RMD)) have trended lower recently.

This is not the share market indicating bad news is coming up next. This is merely the result of investors (potentially) seeing more profitable opportunities elsewhere.

Understanding where the next opportunities are begins with understanding one’s own strategy and horizon.

Viewing the market through the dynamics of the two opposing baskets certainly helps me with identifying the temporary on and off sentiment switches between the two share market extremes.

Investors should understand today’s laggards and cheap looking ‘value’ opportunities need a vaccine or a quicker-than-anticipated recovery post lockdowns, while sentiment will switch back to Woolworths and the like whenever such optimism becomes less feasible.

My personal view is probably best illustrated through the fact the FNArena/Vested Equities All-Weather Model Portfolio has been adding additional exposure to CSL, Woolworths and Coles recently, while also adding Charter Hall and Aristocrat Leisure ((ALL)).

Earlier, upon the pullback from all-time record highs, we added Fisher & Paykel Healthcare ((FPH)).

REITs in June

June is about to be thrust upon us and this means, above many other things, boards at listed real estate trusts must make a decision about June-half dividends for shareholders.

But lockdowns are only gradually lifting while prior guidances have been withdrawn and talks with renters are still ongoing.

Decisions. Decisions. Decisions.

Many an investor will be on tenterhooks given the banks and many other dividend payers in the Australian share market have gone MIA, at least for the time being.

One of the complicating matters is that landlords such as GPT ((GPT)) will only be receiving April sales data from tenants around… now, indicating covid-19 rent relief discussions probably won’t be finalised before the end of June.

Sector analysts at Morgan Stanley suggest REITs may delay the traditional June 30th record date. There is no legal or any other obligation to stick to that date, unless for the matter of tradition.

Accountancy inconveniences, however, could be triggered and the analysts report several property companies are currently reviewing and debating the issue.

Some might decide it’s better to provide investors with a rough estimate, even if this proves incorrect later on.

Only three members of the listed property sector have to date not withdrawn their distribution guidance: Goodman Group, Charter Hall, and National Storage ((NSR)).

Bad News Good For Computershare

Under the label of “things that caught my attention” recently, analysts at Goldman Sachs and Morgan Stanley pointed out Computershare ((CPU)) might well turn into a beneficiary of rising unemployment in the US.

Traditionally, investors treat Computershare as a beneficiary from bull markets when M&A is all the rage, though fresh capital raisings might equally boost the bottom line for the world’s number one share registry, as do class actions and bankruptcies.

Morgan Stanley points out now that the company has diversified into mortgage loans services in the US and the UK, a higher take-up of forbearances (payment holidays) this year, is likely to turn into a positive next year.

In the short term, explain the analysts, forbearances act as a strain on the company’s cash, but they think overall the impact should remain “manageable”.

Next year should see the positive impact from restructuring and foreclosure fees, which come with increased delinquencies (non-performing loans).

For the time being, the US has a moratorium on foreclosures until June 30th, which may be extended.

Rudi Talks

I was recently interviewed by Peter Switzer. The video was added to the FNArena website:

https://www.fnarena.com/index.php/fnarena-talks/2020/05/19/your-editor-on-switzer-where-to-find-sustainable-dividends/

I also appeared on Elio D’Amato’s Spotee program on TickerTV:

https://spotee.com.au/ticker/green-shoots-from-the-ag-sector/

Here’s my audio interview with Christopher Hall for Finer Market Points:

https://www.youtube.com/watch?v=RHKbHD9z92w

(This story was written on Monday 25th May, 2020. 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: info@fnarena.com 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.

Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

article 3 months old

Rudi’s View: Cheap Quality & Conviction Calls

Dear time-poor reader:  Cheap Quality stocks and Conviction Calls for (re)building portfolios

In today's Rudi's View:

-Joke Of The Day
-Higher, Lower; The Public Debate Continues
-Great Businesses For Sale
-It's Dividend Cuts Galore
-High Quality Shines
-The Mighty 23


Joke Of The Day

It is a slow day in an old outback town and streets are deserted. Times are tough, everybody is in debt, and living on credit.

A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night.

As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.

The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel owner.

The hotel proprietor then places the $100 back on the counter so the traveller will not suspect anything.

At that moment the traveller comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything. No one earned anything.......

However, the whole town is now out of debt and looks to the future with optimism.

*And that, ladies and gentlemen is how a Stimulus package works*

Higher, Lower; The Public Debate Continues

By Rudi Filapek-Vandyck, Editor FNArena

It's a Bear Market but this doesn't mean all the fun remains reserved for the more bearish experts and commentators. Thus far in April, it's the Bulls who seem to have all the fun, or at least the upper hand in the share market.

Market strategists at UBS have tried to shed more light on that eternally important question, post day-to-day optimism and despair: what will earnings growth look like and what should investors be prepared to pay for it?

A six months hibernation for Australia translates into a fall in average earnings per share (EPS) of around -35%, estimates UBS. While downgrades to estimates have been accelerating over the past two-three months, the expected retreat is still no more than -3% or so, note the strategists. Clearly analysts are not yet prepared to go all the way down that rabbit hole.

-30% or so, excluding capital raisings, is the number investors are looking for in case they were wondering what happened during the GFC. Back then banks didn't reduce dividend payments until 2010, when all the bad news had been left behind and Australia had technically escaped a recession on the back of the Rudd government's timely spending program.

This time the support measures announced by the Morrison government won't be enough to hold off the 2020 economic recession, even though this year's stimulus program will end up being multiple times larger. It goes without saying, this time around the problems are a lot bigger, and more complex too.

Economists at the above mentioned UBS recently calculated Australia's GDP might have already printed a negative outcome in the March quarter. That's on the back of the bushfires, but with social distancing and corporate hibernating only just having started. But I digress.

The market's average Price-Earnings (PE) ratio during Bear Markets and economic recessions in Australia usually sinks to 16x at the trough, but UBS sees multiple reasons as to why "this time should be different".

For starters, and I personally will definitely remember this one, CSL ((CSL)) is now the market's largest constituent and it is casually trading on above-average PE multiples. Insofar that UBS calculates CSL alone adds 100 basis points to the market's average PE multiple.

So on a apples-for-apples comparison with trough multiples from the past, this year's PE for the Australian share market should not fall below 17x.

But then, that's considered too low as well, given multiple supportive factors in play:

-interest rates are exceptionally low plus central banks, including the RBA, are adding unlimited QE
-governments, including in Australia, are launching extremely large fiscal stimulus programs (and we most likely haven't seen the end of it)
-the recovery from the economic recession is likely to be quicker given the above



At face value, the local share market is now trading on a PE multiple below the 14.4x long term average, though that is changing rapidly as the market continues to add more gains with every day passing. By mid-week, UBS estimated the market multiple had risen to 14.7x, above the long term average.

However, if we take guidance from UBS's -35% trough-forecast, then the real PE for the market is 22x. The strategists have added in an extra 5% in capital raisings. In other words: this market is not cheap at all.

Hope springs eternal?

On Monday, in my Weekly Insights, I highlighted how deep recession forecasts among economists are currently clashing with much more benign adjustments made by stock analysts, both here as well as in the USA. Only one of these two diverging estimates can be correct, one presumes.

Which is why the upcoming quarterly results reporting in the US could become quite important. We know the economic data will be awful from here onwards, but because of the built-in delays, they still won't show us the true extent of what is occurring on the ground. Maybe US companies can provide investors with more detailed insights?

In the meantime, UBS's Model Portfolio is sticking with a defensive bias, preferring stocks like APA Group ((APA)) and Aurizon Holdings ((AZJ)), Woolworths ((WOW)) and a2 Milk ((A2M)), as well as CSL and ResMed ((RMD)). The Portfolio doesn't like discretionary retailers or "Other Financials".

Probably fair to say other market participants and forecasters are hoping Australia's lockdown will last a lot shorter than the six months in UBS's projections, which should also keep the overall damage a lot less.

To read some of the other forecasts, this week's Weekly Insights "How Deep, How Long, How Far?" was published on the website on Thursday morning, 8 April 2020:

https://www.fnarena.com/index.php/2020/04/09/how-deep-how-long-how-far/

Great Businesses For Sale

The Australian share market offers exposure to a number of Great Businesses, exclaimed analysts at Wilsons recently. I could not agree more with that statement.

In line with my own recent writings, Wilsons is of the view investors should use this year's opportunity (Bear Market) to obtain exposure to those Great Businesses. They'll thank themselves for it in years to come.

Wilsons has lined up the following Great Businesses on the ASX that today can be added to portfolios at much cheaper share prices:

-Cochlear ((COH))
-ResMed
-Transurban ((TCL))
-Xero ((XRO))
-Amcor ((AMC))
-BHP Group ((BHP))
-Rio Tinto ((RIO))
-Aristrocrat Leisure ((ALL))
-JB Hi-Fi ((JBH))
-Wesfarmers ((WES))
-Woolworths
-Magellan Financial ((MFG))
-Macquarie Group ((MQG))
-CommBank ((CBA))
-Goodman Group ((GMG))

Those familiar with my own research and market analyses will notice a large overlap with my selection of All-Weather Performers, which can be accessed via the website:

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

It's Dividend Cuts Galore

It started raining dividend reductions in 2019, remember? Australia was one of few countries that saw total dividends paid to shareholders contract on a twelve months view.

The more optimistic market participants believed it would prove a one-off despite a shaky looking economic environment. We will never know as the covid-19 pandemic and related recession have put all doubts aside: Australia is in a deep dividend recession.

2020 is going to end up a lot worse than 2019, that much already is a certainty.

What about resources stocks? Can they remain a beacon of hope amidst dividend deferrals, reductions and removals that are now taking place on an almost daily basis on the Australian share market?

Analysts suggest the odds are that both BHP Group and Rio Tinto might opt for the more prudent approach too, but both should still maintain relatively high payouts, potentially without any more buybacks and bonuses, for the time being.

Company boards still have a few months ahead of them before making decisions, but the resources research team at UBS has nevertheless decided to lower dividend forecasts for Newcrest Mining ((NCM)), Fortescue Metals ((FMG)), Whitehaven Coal ((WHC)) and Coronado Global Resources ((CRN)), and also for BHP.

While acknowledging they might be jumping the gun here, no payout is expected this year from Northern Star ((NST)), Western Areas ((WSA)), or OZ Minerals ((OZL)).

High Quality Shines

A Bear Market does not treat every stock in the same fashion, compare NextDC with Ardent Leisure for example, but plenty of High Quality businesses see their share price fall nevertheless. This is when savvy investors receive an invitation to grab the Bear Market opportunity.

Morgan Stanley has a long-standing tradition for keeping a watchful eye on the Higher Quality names in global markets, but unfortunately for Australian investors, its research never includes Australian shares, not even CSL (which does appear on other offshore experts' lists).

Cyclical "value" stocks will eventually lead the market higher when the current economic and healthcare misery have been put to bed, report the analysts, but there is still sufficient uncertainty out there to add more of the Quality companies whose share price has equally weakened.

As said, no ASX-listed stocks are on the analysts' radar, with the list of suggestions instead pointing towards Adobe, Alibaba Group, Alphabet (Google's parent), Apple, Mastercard, Microsoft, Schneider Electric, TSMC, Nike and Vivendi instead.

The colleagues at RBC Capital recently updated their Top 30 Global Ideas to own in 2020, and here we do have one Australian representative, in a Russel Crowe sort of way, since New Zealand born Xero ((XRO)) remains included. RBC Capital's list has some overlap with the Quality assessment from Morgan Stanley but it's selection is far less Wall Street-oriented.

Among the RBC chosen ones we find Barrick Gold, Crowdstrike Holdings, Diageo, Gilead Sciences, ING Groep, LVMH, Pfizer, Siemens, Visa and -acquired taste no doubt- Uber Technologies.

RBA Capital keeps a separate list specifically for Global Mining Ideas and here the focus has shifted to precious metals and fertilisers. Interestingly, portfolio weight for bulk commodities has been scaled back, as too happened to base metals. Australian representatives in this sector are BHP Group among the bulks, IGO ((IGO)) for base metals, and Gold Road Resources ((GOR)), Kirkland Lake Gold ((KLA)) and Saracen Mineral Holdings ((SAR)) in gold. Northern Star ((NST)) was included earlier but has now been removed.

Analysts at Jefferies equally compiled a list of what they regard are the strongest businesses franchises in Asia. Here too, we find a number of ASX-listed names; CSL, Goodman Group, Macquarie Group, Rio Tinto, Transurban and Woolworths are standing side-by-side with Alibaba Group, Kweichow Mouta-a, Tencent, Tata Consultancy, Nintendo, and Sony Corp.

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Market strategists at stockbroker Morgans simply refuse to darken the mood, instead cheering up their clientele with evergreen declarations such as "no crisis lasts forever" and "what has worked over the past 12-18 months will not suffice in an environment that has raised more questions than answers".

Morgans is hopeful the worst of the global pandemic should be over in a few months' time, after which economies can start their healing from the lockdowns and the virus casualties.

On that note, the strategists observe the ASX200 index seems to be finding support in the vicinity of 4,800, which was the support level in the selloff in 2016 and the peak of prices in 2011. At that level, Morgans is willing to stick its neck out and declare the Australian share market undervalued on a long-term view.

On that basis, Morgans has a clear preference for Defensives such as consumer staples, healthcare, telcos and infrastructure and utilities. Favourite names include Coles ((COL)), Freedom Foods ((FNP)), a2 Milk, Sonic Healthcare ((SHL)), ResMed, Pro Medicus ((PME)), Telstra ((TLS)), NextDC ((NXT)), APA Group ((APA)), Spark Infrastructure ((SKI)), AGL Energy ((AGL)), Transurban, and Sydney Airport ((SYD)).

Also preferred are Online Media with REA Group ((REA)) and Iress ((IRE)) the two sector favourites while Agriculture is also liked with Elders ((ELD)) the sector favourite.

A more Neutral stance has been given to Industrials and Resources. Here the favourites are Amcor and Aurizon Holdings, and Rio Tinto, BHP Group, OZ Minerals, Woodside Petroleum ((WPL)) and Beach Energy ((BPT)).

Least preferred segments of the local share market are consumer discretionary and anything financial. Among the consumer stocks, Morgans likes Domino's Pizza ((DMP)), JB Hi-Fi ((JBH)), and Aristocrat Leisure. Among financials, the favourites (or should that be least disliked?) are Westpac ((WBC)), Macquarie Group, and Magellan Financial.

Special Note: Morgans still sticks with its valuation based rankings for banks, of which it believes a lot of bad news still lays ahead. When ignoring valuations and focusing instead on respective assessments of risk, then CommBank becomes most preferred in the sector.

My five cents worth: ignore valuations and consider CBA the best among the best in the sector. Not only will CBA's dividend to shareholders remain the most resilient, its total investment return has proved superior over the past two decades, both during the good times and the bad times. I find it incredibly hard to see how this will change. For this reason alone, I do not understand every analyst and his dog's fixation with "valuation".

CommBank is the superior choice. That's why you pay a premium. Full stop. How difficult to understand is this, really?

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Analysts at Morningstar, which many among you will still remember as Ian Huntley's, have identified four industrial companies in Australia that should remain relatively immune amidst covid-19 impact.

On Morningstar's assessment, the global economy is en route for a GDP contraction of -1.5% this calendar year, hence a robust and reliable business model cannot possibly be valued enough in such an environment.

The analysts preference lays with defensive revenues, undeniably strong balance sheet metrics and preferably accompanied by some sort of economic moat and a still undervalued share price. As such, the analysts have chosen Amcor, Brambles ((BXB)), Orora ((ORA)), and Cleanaway Waste Management ((CWY)).

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Technology analysts at Credit Suisse readily admit the local sector will not prove immune from covid-19 disruption, but overall, predict the analysts, most local tech names should be able to report comparatively stronger results in the coming reporting cycles than many other segments of the share market.

This Bear Market offers opportunity thus and Credit Suisse's sector favourites are (in order of preference) Xero, Infomedia ((IFM)), Appen ((APX)), and Life360 ((360)).

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Macquarie has been advocating investor portfolios retain a defensive bias while the world tries to figure out how exactly this year's pandemic will play out and impact on the global economy.

Macquarie's 14 best ideas for the forthcoming recovery are:

-Aristocrat Leisure
-Amcor
-Cochlear
-Cleanaway Waste Management
-Fortescue Metals
-Goodman Group
-Harvey Norman ((HVN))
-Northen Star Resources
-Medibank Private ((MPL))
-Pushpay Holdings ((PPH))
-REA Group
-Steadfast Group ((SDF))
-TechnologyOne ((TNE))
-Transurban

The Mighty 23

Richard "Coppo" Coppleson wrote himself into local legendary status when at Goldman Sachs. He has found a second career at Bell Potter nowadays where he still produces a daily end-of-the-day market summation that is still popular around the tarps, and beyond.

This week The Coppo Report revealed there were 23 stocks in the ASX200 whose share price is up since January 1st. Those 23 names are:

-NextDC
-Elders
-Fisher & Paykel Healthcare ((FPH))
-a2 Milk
-CSL
-ResMed
-Ansell ((ANN))
-Fortescue Metals
-Saracen Mineral Holdings
-Evolution Mining ((EVN))
-Silver Lake Resources
-Chorus ((CNU))
-Coles
-Metcash ((MTS))
-TPG Telecom ((TPM))
-Costa Group ((CGC))
-Bega Cheese ((BGA))
-Gold Road Resources
-Northern Star
-AusNet Services ((AST))
-Spark New Zealand ((SPK))
-Graincorp ((GNC))
-Pro Medicus ((PME))

The list provides a nice overview of what the market has decided is solidly defensive in the current pandemic plus economic recession context: food, cloud and communication, (parts of) healthcare, (certain) utilities, and gold miners.

(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.)  

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article 3 months old

Rudi’s View: All-Weather Stocks & Cash

Dear time-poor reader: this Bear Market is changing the world, literally, in front of our eyes

In This Week's Weekly Insights:

-All-Weather Stocks & Cash
-The Bear Market That Changes The World
-Watch Balance Sheets, Re-Financing Risks
-The Cancellation We Had To Have


All-Weather Stocks & Cash

By Rudi Filapek-Vandyck, Editor FNArena

Bear markets are brutal. They take no prisoners. Shoot first, then shoot again, and maybe, just maybe, that's when they might start asking questions. Bear markets punish mistakes instantly and irrevocably.

Bear markets are also excellent teachers, at least for those investors and analysts who are ready to learn invaluable lessons. For years now we have all been reading analysts and funds managers predicting the next economic recession annex global bear market for risk assets would herald the end of growth and the money moment for largely ignored value stocks.

Guess what just happened in the past few weeks? Value stocks have been ab-so-lu-te-ly trashed to smithereens. Sure, many of them will come good and present excellent buying opportunities, but probably not just yet, except for that special kind of investor with an iron stomach who can confidently focus on the future, and ignore wild share market gyrations in the meantime.

Instead, many of the stocks that have relatively held up well throughout this global share market meltdown (let's call a spade a spade) are the ones most hated by your typical professional fund manager; "expensively" priced stalwarts such as CSL ((CSL)), Xero ((XRO)), and Woolworths ((WOW)).

There is no secret ingredient waiting to be unveiled here: these stocks represent less risk than your average bank, oil & gas producer or mining services provider. To be fair, many of the previously popular High PE names have not been spared either post January. While, understandably, if you really want to check up on true share market carnage, try travel agents, airlines and tourism operators.

Or simply look up Ardent Leisure ((ALG)). Clearly, investors have taken the view this badly managed owner of Dreamworld on the Gold Coast and Main Event in the US, originally born as Macquarie Leisure Trust, is not going to survive in its present constitution.

Want more horror stories? Check out Seven West Media ((SWM)), or Regis Healthcare ((REG)). Or simply look up Bitcoin in USD.

Having said so, owning quality sustainable growers with less operational risks only gets you so far when the Big Bad Bear is gripping its claws around global risk assets. Some days everything goes out with the bathwater. Other days the market might just target those relative outperformers because that's the only place where there are still some trading profits left.

The one Major change in a Bear Market is that cash instantaneously becomes an invaluable asset. It does not earn anything tangible in terms of an actual return, but cash helps keeping both short-term losses and the nerves in check.

The FNArena-Vested Equities All-Weather Model Portfolio did not sell out of the market at the very first sign of trouble in February, but we've gradually increased the level of cash as it dawned upon us that what is happening in global financial markets this year is far more serious than what we have experienced at any other time post the Global Financial Crisis.

As at Friday, the 13th of March 2020, total performance ex-fees for the running financial year (from 1st July 2019 onwards) stood at a negative -3% against the ASX200 at -13.56%.

Granted, the All-Weather Portfolio carried an extra cushion of circa 4% leading into this share market rout, as that's how much the portfolio returned in excess of the ASX200 in the second half of last year, but it still indicates significant outperformance over the past six weeks of extreme volatility, mostly to the downside.

I think we can all agree there are at least two lessons to draw from this experience thus far: if you are holding the right kind of shares you have a lot less to worry about, but reducing risk through shedding riskier stocks and disappointing investments, while keeping a healthy portion of the portfolio in cash simply cannot be beaten during times like these.

The second segment below was separately published as a story on the FNArena website, and elsewhere, on Tuesday morning this week. Weekly Insights continues further below with the two remaining segments.

The Bear Market That Changes The World

Take a step back from the day-to-day share price movements and news flow, and what we are experiencing is truly a watershed moment. Eleven-twelve years ago, I sat down one afternoon and wrote we are all experiencing a seminal moment in modern history.

As things unfolded, that was certainly an accurate description. We've seen studies and books since, and a few Hollywood movies and documentaries. Everybody now knows the "GFC".

What I did not foresee at that time, is that Bear Stearns, Centro Properties, Lehman Brothers, Allco Finance and CFDs would merely turn into the warm up act of a much bigger event twelve years later.

Yet here we are, it's 2020. We've had three mini-Bear Markets every 2-4 years, but also steadily growing debt (just about everywhere), record low interest rates, government bonds in negative yield territory, businesses that borrow money to buy in their own stock, a sharply widening gap between Haves and Not Haves in society, and a prolonged era of fragile and slow global growth. Not to mention the demographic changes, the technological disruption and the significant growth in easily accessible passive investment instruments.

The bottom line is that if we combine all these factors together, we end up with an increasingly fragile system. One that continuously runs the risk of falling apart. Which is why central banks have intervened so many times over the decade past.

We cannot genuinely blame them. There seemed no other option available back in 2008. And neither was there a reasonable way out in the twelve years since as the situation required more and more liquidity and ever lower cash rates and bond yields.

One of the inescapable observations is that central bank interventions are requiring more extreme actions at every point of the system threatening to break down.

This week the US Federal Reserve pretty much went all-in. Interest rates are at unimaginably low level; the cuts have been massive, fast, and unprecedented. And other central banks will be following the Fed's example. Won't be long before the RBA is buying bonds and mortgage-backed securities, and controlling the yield curve in a similar manner as has been happening in Japan for years now.

And yet, it won't be sufficient. We know this, because that's what financial markets are telling us. Of course, central bankers will continue to put in their best to prevent the world from melting down, but this year's problem is not one of credit and liquidity. That's just the sideshow.

This coronavirus pandemic is creating problems both on the demand side of economies -as consumers are hoarding and staying inside- as well as on the supply side where businesses have stopped operating or cannot get anything across the border.

A significant intervention from elected governments (i.e. fiscal stimulus) is thus required. So far they are getting the message, slowly, and coming to the table, though it's not yet with that same urgency as we have witnessed from central bankers. Let's hope this is about to change, and soon too.

Repeating the voice of many other experts: this is not an opportune time to act cautiously and with hesitation. This emergency requires bold and significant action. Governments need to be prepared to go all-in too. Financial markets are not simply a reflection of what is happening in economies around the world; they equally have an impact on these economies and on the businesses and consumers within.

Won't be long, I reckon, before we read about government bailouts for badly hurt, too big to fail, crucial businesses. Lower rates and increased liquidity don't create demand for, say, airplanes. That's up to airlines, and they are in deep trouble. No customers, no demand, no cash flow. Many might go out of business. How many will still be making payments to Boeing?

Visions of 2007 and 2008 are starting to re-appear. This time it won't be just banks. But equally so, governments won't be able to save everyone.

And yet, ultimately the global recession that is causing this Bear Market cannot be fixed without containing the virus pandemic. Here, I believe, the biggest problem is potentially the US, the world's largest economy. There still is a lot of confusion about covid-19, but we do know it can quickly spread exponentially.

What has become crystal clear already is that in countries where governments and citizens are quick on their feet to take precautions (other than hoarding toilet paper) the spread of the virus remains limited and hospitals are not at risk of overcrowding.

Both Singapore and Hong Kong had experience with SARS, so no coincidence they have both managed to avoid extreme lock down and overcrowding-situations with deadly casualties as is the case in Italy, Spain and, increasingly, in other countries throughout Europe.

We yet have to find out how effective the approach to date in Australia will turn out, but thus far indications are we are nowhere near the same limited growth curve of covid-19 spreading as has happened in Singapore and Hong Kong.

The real worry is the situation looks a lot less promising for the US.

The simple truth is authorities in the world's largest economy are unprepared for what is happening around the world. Do note I said unprepared. Not ill prepared.

The US is unprepared. Which should hardly come as a surprise. I don't care about anyone's political colour or preferences, but if you haven't figured out yet this President is incompetent, all bluster and no substance, then there is seriously something wrong with you.

He cannot even read properly from the autocue when speaking to the nation. Last Friday, the US President was mailing out price charts of the US stock market with his signature on it. The latest scandal is Trump offered to buy "exclusive" access to a covid-19 vaccine developed by German biotech CureVac.

The heart shudders to think of the many devastating consequences of what will happen to the US population and its economy if the spreading pandemic leads to similar crises as we are witnessing in Italy, and before that in China. Once upon a time the US had experts in charge of infrastructure to deal with pandemic outbreaks. Not any more.

Revered writer of financial and contemporary chronicles, Michael Lewis, wrote The Fifth Risk in 2018. It reveals how the Trump administration has consistently undermined, emptied and underfunded essential government services since taking over from Obama in early 2017. That is going to show up big time when the proverbial hits the fan.

They say in politics every population gets the leaders it deserves. That's definitely one thing the world can throw back at America: hey, you voted for the guy, now you're going to have to deal with the consequences.

The problem here is that the rest of the world did not vote for the guy, but there won't be any escaping the consequences if, as I suspect, the spreading coronavirus is yet to fully take off inside the world's largest economy.

Recessions are no fun. Neither are Bear Markets. Which is why Market Rule Number Ten by Wall Street legend Bob Farrell reads "Bull markets are more fun than bear markets".

Incidentally, Bob Farrell's Ten Timeless Rules For Investors also identified three stages for the typical Bear Market. First there is the savage sell-down, then comes the Sucker's Rally, the final stage is the tortuous grind to ever lower levels.

Central bankers around the world are trying really hard to pull this Bear Market into phase two. But they will need governments to cooperate and coordinate.

Gosh, the thought that global wealth and health now lies in the hands of this administration in Washington makes me genuinely depressed. Let's hope I am just being silly.

But let there be no mistake: the answer to the question of how do we ever get out of this mess is still the same: with more money. Loads of more money. This time governments around the world will join in with central banks. This is why this Bear Market is changing the world in front of our eyes.

All of us ain't seen nothing yet.

Watch Balance Sheets, Re-Financing Risks

One of the wisest observations I came across this week is that many a share price is starting to look like a bargain on a 12 to 18 months horizon, but investors better make sure that companies are able to bridge that gap.

It's simply another way of saying: when hit with a crisis of this magnitude, you don't want to own shares in companies with weak balance sheets, not enough cash and too much debt that needs to be paid off or refinanced soon.

Analysts at Macquarie have identified four industrial companies listed on the ASX whose refinancing comes up within the coming twelve months and which represents more than 15% of their market capitalisation. It should be no surprise, the shares in these companies have fallen more than many others.

The four companies identified are Wagners Holding Company ((WGN)), ALE Property Group ((LEP)), Worley ((WOR)) and Downer EDI ((DOW)).

It gets worse. Outside of the ASX100 Macquarie has identified three companies whose refinancing over the coming three years exceeds their total market capitalisation. These are Seven West Media, oOh!media ((OML)), and Southern Cross Media Group ((SXL)).

Other stocks to highlight are Unibail-Rodamco-Westfield ((URW)), Link Administration ((LNK)), LendLease ((LLC)), Incitec Pivot ((IPL)), and Qantas ((QAN)) as these companies all have substantial three-year refinancing awaiting in the next three years (each in excess of 35% of their market cap).

The Cancellation We Had To Have

In light of developments, I have decided to cancel this month's Special Event at the Royal Exchange in Sydney. We'll resume at a more appropriate time.

(This story was written on Monday 16th March, 2020. 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: 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?)
- 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)
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article 3 months old

Rudi’s View: This Crisis Ain’t Over

On Saturday, FNArena Editor Rudi Filapek-Vandyck sent out the following message to subscribers:

Dear Subscriber,

It looks like Friday might have been the bottom in this share market rout, at least in the short term, and on Monday Australian shares might try to emulate at least part of the strong rally that occurred on US equity markets last night.

My message to you is nevertheless to contain your enthusiasm. This is not the end of the crisis. It's simply further evidence that, as I wrote in the week past, volatility works both ways. In this case, we are witnessing volatility showing itself to the upside.

To understand what is happening this month is understanding why share markets are bouncing higher. The fall-out from the spreading pandemic was putting global credit under immense pressure. Central banks around the world identified what was happening and they have used their liquidity taps to prevent another Lehman Bros moment for the global financial system.

This has triggered the relief rally around the world on Friday.

Let's not make the mistake to assume everything will now revert back to pre-February normal. There is still a pandemic that needs to be taken care of. And the impact on businesses and economies is yet to reveal itself.

Simply put: Friday's relief rally doesn't tell us anything about where share prices will be in 3, 6, 9, 12 months from today. My advice to you is therefore the same as over the past few weeks: keep looking for High Quality companies with the least risk of issuing a profit warning.

But also: keep as much in cash as what allows you to sleep at night.

I know that many among you have been paying attention to my research into All-Weather Performers. This morning I have updated the lists on the dedicated section on the website. Amcor ((AMC)) has moved to the section with Question Marks (under attack from a short seller), while I have removed the Question Mark for both Wesfarmers ((WES)) and Woolworths ((WOW)).

The section Emerging New Business Models has lost half of the stocks as I want you to now focus on the most solid, least risky business models with the least question marks surrounding.

I remain convinced that my research has identified some of the strongest and most dependable business models listed on the ASX. History only adds to my conviction these companies will take good care of your precious money. As you will observe when you conduct your own research, many of these share prices have not weakened as much as many others during the recent rout.

There is an incredibly important message in this observation. For investors, as opposed to short term traders and speculators, the best value opportunities are most likely not among the shares that have fallen the most. This remains a time to de-risk. In many ways, the crowd out there has already done this for us. It has shown which stocks are riskier and more vulnerable than others.

I won't make this message too long. There will be more to read and to consider in Monday's Weekly Insights. But I will highlight two more points:

CSL ((CSL)) is a fan-ta-bu-lous company, and it is listed right here on the ASX. It is also one of the few that even at the depth of selling pressure on Friday was still UP for the calendar year. It was one of the first to rally on Friday, and it ended up 11.88% on the day. If this stock still isn't in your portfolio, then I am sorry, I no longer understand what you are trying to achieve.

Secondly, I have not been a fan of Australian banks, and I still am not. I do know many among you own banks because you want yield/income. What is not well understood, I think, is that zero interest rates and all kinds of central bank controls and market interventions lay ahead, plus bad debts are almost certainly to rise from here.

Businesses will go bankrupt, both listed and unlisted.

The combination of these exogenous forces make it probable that Australian banks will need to further announce dividend cuts in the year(s) ahead. The most important message that comes out of Bear Markets is that a lower share price does not remove any of the operational risks. Quite to the contrary. Be mindful of this.

If you must own a bank in Australia, pick CommBank ((CBA)). Its share price has fallen significantly less than its peers. There is that message again. Don't ignore it. Macquarie Group ((MQG)) is an even better choice.

In terms of yield/income stocks, I very much prefer less risky propositions such as APA Group ((APA)), Dexus Property ((DXS)), Transurban ((TCL)), Atlas Arteria ((ALX)) and Viva Energy REIT ((VVR)), to name a few alternatives.

Let there be no misunderstanding: all companies and business models are now at risk of lower earnings this year and next. There are no exceptions. But some companies are more at risk than others, that's what should be everybody's focus from here onwards.

Like: do you really want to be in oil and gas when Russia and Saudi Arabia have declared war on US frackers? Hint: oil and gas equities were the worst performer prior to the massive sell-off. Again: don't ignore the message.

For those who want more ideas than my lists under All-Weather Performers, I suggest you re-read the stories I wrote in recent weeks. Each of "Lose The Losers, Back The Winners" and "Bear Market Lessons And Observations" contains additional lists and suggestions.

I assume you are all aware there is a dedicated section on the website, Rudi's Views, where my stories from the past are grouped together.

As per always, stay sane. Don't lose your nerve. Do not feel pressured. Do lots of reading and thinking. That's exactly what I am about to do for the remainder of this weekend.

To be continued on Monday, see Weekly Insights, and beyond.

All the best,

Your Editor

(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.)  

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